CBR high-ups intend to apprise the President of political interference in tax matters, including unwarranted attempts to maneuver transfers and postings of tax officials at their favourite stations.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Jan 22 - 28, 2007

In response to the directive of President General Pervez Musharraf for a detailed briefing on tax reforms and measures to enhance revenues the Central Board of Revenue (CBR) has come up with a blue print of comprehensive tax reforms which would shortly be presented to the President for approval. Among other measures, it is likely to propose taxing agriculture in a very scientific manner.

Reportedly it contains many other proposals for increasing tax revenues and improving tax-GDP ratio, which at present is lowest in the region. CBR Chairman M. Abdullah Yusuf is likely to give the presentation within this month. Various wings of the CBR are giving final touches to the presentation with up-to-date data on custom, sales tax, income tax and federal excise duty to brief the President about the current pace of revenue collection in 2006-07.

The country and the government need a lot more revenues. The IMF, World Bank and the Asian Development Bank are constantly prodding the government to achieve that. The World Bank is only modestly satisfied with the progress of the reform program and says it wants the CBR to make far more efforts to make the total reform package a success. It wants the cabinet committee on fiscal reforms to meet regularly once a quarter or on a half yearly basis regularly to monitor the implementation of the fiscal reforms. It particularly wants distinct improvements in project management as otherwise the good reform work done so far can slide back.

On the other side the CBR headed by Abdullah Yusuf is talking of a relentless drive to eliminate corruption from the ranks of its senior officers. Five or six big fish in the customs, income tax and sales tax divisions are to be eliminated despite the big political pull they claim. The Integrity Management Policy is to be applied against them with the approval of the President and the Prime Minister. The CBR Chairman has also been talking of political interference in postings and transfers of senior officers to serve the political interests of the ruling party leaders and his efforts to resist such political meddling. There is also a move to reduce the posting period of senior officers of the CBR to two years at the end of which they will be automatically transferred. Senior officers with proven corruption record will be removed from service under the Removal from Service Ordinance. If adequate evidence is available against them they may even be sent to jail or be referred to the National Accountability Bureau.

The new package, which forms part of a presentation to be given to the President, includes measures to bring other potential sectors under the tax net from the next fiscal year. CBR has finalized the presentation at a special council meeting held in Islamabad last week. The focus of the new strategy is to broaden the country's tax base to enhance the tax to GDP ratio, which is one of lowest in the region. CBR high ups intend to apprise the President of 'political' interference in tax matters, including unwarranted attempts to maneuver transfers and postings of tax officials at their favourite stations.

Taxing agricultural income has been a subject of heated debate in the country over the decades, with the powerful agriculture lobby's close links to heavyweights, arguing that most of the agricultural holdings are too small to generate taxable surpluses of income. However, the argument is countered by the pro-tax lobby, which bases its position on the universal principle that it would be unfair and illogical to make a distinction between agricultural and non-agricultural income for the purpose of taxation. According to available data, agriculture accounts for 21.6 of Pakistan's GDP, which puts it ahead of all other sectors of the economy. Further, agriculture contributes to the country's GDP growth as a supplier of raw materials to industry as well as a market of industrial products, and is a main source of our foreign exchange earnings.

There should be no complication with regard to the imposition of income tax on agriculture. There are many reasons to support this view. First, just as incomes below a certain level are exempted from tax in non-agricultural sectors for purposes of taxation, the same principle should be applied to agricultural income. Some pro-tax analysts have justified taxing agriculture on the ground of horizontal equity, i.e. Individuals in equal economic position should be taxed equally. Second, income tax is imposed on personal income, and not on sectors as a whole., Many sectors of the economy often experience bad times, but this does not mean that persons belonging to these sectors should be exempted from paying taxes, if indeed, they do have income above the tax free threshold. The principle of 'horizontal equity' must therefore be applicable to all types of income, regardless of the source. Third, exemption of agriculture from income tax serves a as a disincentive to those who pay taxes, and raises the possibility of tax evasion and fraud by showing income from non agricultural sources as agricultural income. Fourth, despite poor financial position of many subsistence farmers, a large number of individuals connected to agriculture earn huge personal incomes, and there are no legal or ethical grounds not to tax their income. Further, there is said to be considerable evasion of income tax by those having both agricultural and non agricultural incomes, as a part of their non agricultural income is often shown by them as accruing from agriculture, Fifth, the tax to GDP ratio in Pakistan, which stands at about 9 percent, is one of the lowest in the world. (It is 20 percent in the US and about 34 percent in Britain).

The main causes of a low tax to GDP ratio in Pakistan, as identified by CBR, include a narrow tax base, poor compliance by taxpayers, too many exemptions (the most notable being agriculture), the presence of a huge underground economy, and a mismatch between sectoral contributions in the tax to GDP ratio. What is quite astonishing is that successive governments in Pakistan have failed to levy agricultural income tax, which only goes to show the huge clout the feudal lobby wields in the country. Keeping the economy's foremost sector out of the income tax net for decades altogether is a feat that might not be achieved in many Third World oligarchies. It is hoped that President Musharraf, who took over the reigns of power to set the system right, will do something about it.