ECONOMIC & POLICY ISSUES — TAXES & BUDGETS
Tools & techniques should go hand-in-hand...
June 04 - 10, 2007
IMPORTANCE OF TAXES
Taxes are the major source of revenue for government. For a state to run efficiently, individuals who fall within the tax bracket should pay taxes honestly and regularly to ensure that the government has sufficient cash balances for the progress and welfare of the nation.
TAXES & BUDGETS
Many would agree, others would not, that budget is a form of burden on the government in the form of subsidiaries that are provided to the general public (by means of price ceiling) and for manufacturers by sheltering the prices of their respective inputs. Along side, the infrastructural and non-infrastructural projects also require extensive financing. All forms of taxes, therefore, act as the capital input for these projects. However, people having different view points and theories, avoid taxes for several reason. Of these several reasons, the most regularly encountered ones are the psychological excuse and the economic excuse.
EXCUSES FOR NOT PAYING TAXES
The debate about misuse/abuse of taxes collected etc. 'Defence' etc. (Cost / Benefit ratio)
Taxation system is not cohesive with our religion. We are absolved by paying Zakat. The 'sin' is not paying taxes. There is no religious or moral pressure.
There has never been a taxation on income in this region prior to colonialisation — It is 'An Anglo Saxon' concept alien to our culture
Extra cost to the business that makes the business economically non-viable in relation to other alternative. Man next door is not paying tax.
Entry into the system would lead to harassment, extortion, corruption by tax administration.
Continuity of Tax Policy Excuse
Tax policies favoring certain sectors and also being inconsistent. Non-stable government
RELEVANCE OF TAX-EXCUSE
Through rationally visualizing the situation, it can be well seen that these issues and excuses are relevant in one form or the other. A correction in the system may only take place when strategies are developed and implemented to overcome these excuses. These strategies need to be developed at the grass root level, starting from probably the basic and most effective modes of communication, for instance Friday Prayers; if the prayer leaders lay stress on tax payments as a means to deliver Huqooq ul Ibad, there can be several changes in attitudes of individuals, and there can be several more courses of action with distinct outcomes. But there is another side of the picture that has more shaky consequences, which is more consistent demonstration by our taxation policies that there are ways and means, and all being legal, to evade and or avoid due taxes, without any accountability. This includes implied whitening and shortcuts.
60 YEARS MESH STRUCTURE
In the past 60 years of the country's creation, there has been a mess around which would definitely take a while to clean up. Notwithstanding the administration side, the following actions in the past have seriously eroded the very basis of a vibrant taxation system:
* Non-Development of proper 'Valuation Systems' at the customs stage.
* Irrational Self-Assessment Schemes in past, 1979 period. Dr. Mahboobul Haque's legacy.
* The fallacy of 'Presumptive Taxation'.
* Implied Whitening Schemes.
* Stock Markets and Real Estates.
The beauty is that all these aspects are inter-linked. It appears that someone very diligently had designed the system in a manner that trading activities in this country should prosper at the cost of industrial growth.
A SUCCESS STORY: 1999-2007
Irrespective of the political affiliations, the historian of economics of Pakistan would have to state that in the fiscal policy and administration the period 1999-2007 is a success story. It does not mean that we have achieved the goal. It is my view, that direction and course adopted is correct. However time has now come for the government to take certain fundamental bold decisions for the sustained growth. The reason for this success is clear thinking, objective result oriented approach and comparatively improved transparency at the policy level.
ILLUSTRATION OF POLICY LOOPHOLE
Following is the illustrations of the weaknesses in the system:
1. Fair Value $ 10 Rs. 60
2. Under Valuation (say 40 percent) $6 Rs 36
3. Tax to Duty Liability : Custom 5% Income Tax 6%
4. Rs 4 only. Equal to 4 percent of cost
5. Actual Sale Price Rs. 90
6. Effective Tax plus duty Rate on profit (Around 11 percent of profit) (Rs 40 profit of Rs 30)
7. The other tragedy is that if this Rs 90 is increased (fictitiously) to say Rs. 180 to whiten the black money there is no increase in tax liability as tax liability is related to import price. The only check is sales tax on supplies for which now a new concept of deemed value addition is providing a disguised protection.
This is a dilemma as well as a tragedy. Can we ask any one to establish industry in Pakistan versus trading of the same product where margin is thin? This is a big subject which needs deliberation. We have to look into economics rather than legal books to resolve this issue. It is appreciated that all these legacies have been inherited by this government and it will take time to have a paradigm shift. Here it is also important to note that there are arguments in favor of presumptive tax regimes. These are:
1. lack of documentation;
2. Improper resources at the CBR to handle such cases; and
3. The perceived notion of guaranteed recovery at import stage by way of withholding and its contribution to total tax collection.
All these factors are relevant; however, time has come to tackle the matter of valuation issue at custom's stage and reviewing the taxation (sales tax and income tax regime) for imports. If we would do not take immediate action then our small and medium sized manufacturing sector would die as a result of onslaught by trade. This raises the issue of employment and poverty alleviation. etc. The question is how many laborer we can employee in a trading concerns as against an industry?
INTERNATIONAL BEST PRACTICES
If the problems faced are analyzed, it would be realized that a substantial part of the problems have arisen for the reason that we had tried to develop 'Home Grown' recipes. There is a perception that we are different and that documentation of economy and Corporatisation are the concepts which are alien and can never flourish in Pakistan. At times, the level of education in the country is given as an excuse for non-documentation. In this regard Sri Lanka could be one of the best example. In Sri Lanka education is almost 100 percent however there is rampant non-documentation. They even adopted our tax immunity scheme. The message is that tendency towards non-documentation is a paradigm and mindset. There is no excuse, and if there are, well, the Accountants can be well blamed for this for not producing or providing any form of simple books of account or accounting mechanism. It should be our policy that in the matter of Tax Legislation and Tax Business Processes, there should be adaptation of the international best practices which are all well tested. There is no need to reinvent the wheel. Even in the matter of Tax Policy there should not be major variation from international best practices. We should however endeavor to provide incentive in policy matter only in those situations where we expect investment in industrial sector.
INTEGRATED BUSINESS APPROACH
One of the main themes of tax reform is to provide integrated service to the taxpayers. This does not only mean that all tax officers should sit in one place then that integration would be achieved. It has been observed that there is substantial diversion and disintegrations amongst person sitting on same floor in LTUs. The other aspect for the same is the integration on the policy side. Whenever any tax incidence is reviewed on policy side, all aspects including customs, income tax and sales tax be examined in toto. This represents coordinated policy integration. There has been substantial improvement in this field however further sectorial analysis is needed.
TAX POLICY VS ADMINISTRATION
The success story of 1999-2007 relates primarily to improvement in Tax Administration and Business Process which was never taken as a subject in the past. Nevertheless the issues which still need consideration are:
* Paradigm shift in the mindset of field officers;
* Capacity Building in CBR including Salaries of the Officers and Statues of CBR (Pakistan Revenue Service);
* Do we understand 'Tax Audit'? Can we do it? If not, don't do it. 'Bad Audit' is worst than no audit; and
* Have we come out of 'Assessment' mindset?
Conclusively, it can be well stated that the path adopted at present is the right one and should be pursued further. Consistency and simplicity of approach needs to be maintained. There is a need to pursue further on data collection, integration, and automation of processes and least tinkering with the law.