HOW TO IMPROVE TAX TO GDP RATIO?
SHAMIM AHMED RIZVI
Jan 05 - 18, 2009
A sort of mini budget is being prepared to enhance tax revenues for meeting the spending targets of the Government for the ongoing financial year 2008-09, behind closed doors jointly by a team representing Finance Ministry and the Federal Board of Revenue (FBR), PAGE learnt from its sources in the relevant circles.
It may be announced during the next week. Imposition of new taxes and enhancement of the existing taxes and levies cannot be ruled out, but more focus is on to enhance revenue by removing tax anomalies, withdrawing tax exemptions and unfair advantages, sources confided.
When FBR Chairman, Ahmed Waqar was approached for comments, he said you cannot call it a mini budget but an exercise is on in the over all context of tax reform and measures to enhance Government revenues.
The exercise being carried out by experts and senior tax officials has been split into three parts; short terms measures to meet the requirements of the current financial year, long term corrective measures aimed to reform the tax systems and to improve the tax to GDP ratio from the presently highly low level of about 10%, he added.
In the wake of IMF's 23 month standby arrangement for Pakistan of US$7.6 billion a number of conditions have been imposed by the lender, of which, the foremost demand is to levy new taxes to raise revenues by about Rs.100 billion over the target of Rs.1250 billion for the financial year 2008-09.
The IMF team which visited Pakistan last week also held meetings with high officials of the Federal Board of Revenue (FBR) besides advisor on Finance, to discuss the imposition of new taxes and bringing more people into tax net.
Expecting the pressure from the IMF the FBR had earlier held a 3 days International Conference on "Tax Policy Options for Pakistan" in Lahore. The Conference which was attended by leading national and international experts was expected to identify and generate concrete tax policy options for achieving broad micro and macro economic objectives.
The Conference was inaugurated by PM advisor on Finance Shaukat Tarin. In his augural speech Mr. Tarin said low tax-to-GDP ratio was the root cause of our economic ills. We have to improve this ratio by at least 5% to overcome our problems. The public sector plays a central role in providing key social welfare and infrastructure services to meet the needs of a growing economy.
However, the most desirable way of meeting the cost of such services is through an equitable system of taxation, he said adding that generally, countries with comparable level of development background mobilize tax revenues that are about 18 per cent of GDP. In the last fiscal year, Pakistan mobilized only 9.6 per cent of GDP in taxes. This is not an acceptable level of tax effort. Indeed, it is significantly below the effort that was registered in the 1980s and 1990s when it hovered around 13 per cent, he added. The PM's adviser said the ill-effects of a poor tax effort pervaded the whole economic landscape and no reform effort to correct the economy could succeed without putting the public finances on sound foundations.
He emphasized that the tax treatment of income must be uniform and non-discrimination without regard of its origin. Moreover, he said there should be no exemption in taxes on income and consumption except for income of charitable trust or consumption of food stuff.
Replying to a question he pointedly said that income from agriculture should also brought under tax net. Under intense pressure from the feudal lobby, overwhelmingly represented in the National and Provincial assemblies, Financial Advisor Shaukat Tarin had to back out from his earlier announcement that Agriculture will be among the sectors whose income would be taxed as a part of new measures to boost revenue badly needed to meet the financial difficulties presently faced by the nation.
As scribe mentioned in last article that "Tarin who, perhaps, had no previous experience of dealing with these powerful sacred cows had made a genuine and just statement before the media that all income generating sectors including farm income will have to be taxed to enhance revenues to tide over the ongoing financial difficulties. He did no not know that country's feudal lobby which dominates the legislatures has never allowed the State to touch their fabulous unearned income from their vast lands ploughed by the Harris and Muzzaras.
A few attempts were made in the past as well but all failed. Perhaps the only objective of these rich feudal to come to the assemblies is to protect their vested interests. They may belong to different parties with conflicting interest and programs but they demonstrate rare unity in the house when their vested interests are even remotely threatened by any non feudal/member.
This time Shaukat Tarin, a non feudal met the same fate. Faced with a stiff resistance in both National and Punjab assemblies, as demonstrated by a rare unity among members of all the political parties opposing the move, he announced that the government has no plans to tax agriculture and such a step, if taken, would come after 23 months of IMF program.
The powerful lands gentry seemed determined not to let it happen even at the risk of scrapping of the IMF support program. Perhaps IMF was also aware of this fact. That is why they did not particularly mentioned tax on agriculture income in their conditionality."
The November 25 communique of the IMF executive board, however, briefly states that fiscal adjustment will be primarily achieved by phasing out energy subsidies and strengthening revenue mobilization through tax policy and administrative measures. The thrust of the program - and its conditionality - is primarily based on the targets and measures that Islamabad has set for the next two years.
There are no two opinions that the tax to GDP ratio has to be improved. The real question is how to improve tax-to-GDP ratio which is dismally low at 9.5% despite levying of irrational withholding and presumptive taxes. The issue is not that of increasing number of taxpayers (the gap is due to non-registration of all taxpayers by FBR) but how to rationalize tax incidence and bring the rich and mighty into the tax net. And at the same time how to cut the monstrous size of unproductive government spending.
The IMF is insisting for changes in the tax structure to increase general sales tax (GST) by Rs.50 billion in the current fiscal year (FY09). Do they know that its real brunt will be on the poor of Pakistan? Why are they not recommending withdrawal of concessions and exemptions given to the rich? Why are they not insisting for tax on colossal untaxed and unreported wealth? Why is no condition imposed for asset-seizure legislation for untaxed assets?
The ever fattening black economy is another impediment in raising the tax GDP ratio and enhancement of Government revenues. According to the experts the size of informal (black and untaxed) economy has acquired a mammoth size in Pakistan. According to them it is over 51% of total GDP and is inflicting a colossal loss to state revenue.
Obviously it cannot happen without rampant corruption in our tax collecting agencies. According to the experts cross-border smuggling from Afghanistan under the guise of Afghan transit trade (ATT) in particular, has fuelled the already powerful black economy which is estimated to have swelled from Rs.15billion in 1980 to 1.25trillion by 2000 with its share in GDP from 20% to almost 50%.
Under the circumstances, no exercise to enhance state revenue or improve tax to GDP ratio will prove meaningful unless a government is courageous enough to lay on big fishes controlling the black economy and the strong and powerful feudal lobby and bring them into tax net by eliminating corruption from FBR and its attached departments.