NEED OF REVAMPING TAX COLLECTION SYSTEM

SHAMIM RIZVI
(feedback@pgeconomist.com)
Aug 16 - 22, 20
10

It is really shocking that Pakistan's tax to GDP ratio which was already amongst lowest in the world further declined in the financial year 2009-10. It came down from nine percent recorded last year to 8.9 percent during 2009-10 against the target of 9.2 percent.

Chairman Federal Board of Revenue admitted at a press briefing last week that the tax GDP ratio could not be improved due to lower revenue collection because of the country's fragile economy. The revenue target fixed by the IMF under standby arrangement for the last financial year were also missed, FBR Chairman said. Pakistan's tax to GDP collection remains among the lowest in the world due to rampant tax evasion and corrupt and poor collection system. Missing IMF target means tougher conditions by the global donor agencies which wanted Pakistan to mobilise its resources to contain its budget deficit at around 5.1 percent; but it swelled to six percent in the last financial year despite increase in its taxation rates.

Independent economists of world repute have been advising the economic managers of Pakistan that they instead of increasing tax rates should focus on revamping of tax collection systems and making it more effective by closing all loopholes in the system in order to increase the revenue collection.

The rising size of black economy, tax evasion and corruption in the tax collection machinery should be effectively controlled. The only new tax which needs to be imposed without any lose of further time is the tax on income from agriculture.

The finance minister should try to find out why he could not come up to the expectations to raise tax-GDP ratio from 11 to 15 percent. On the contrary, it has come down to 8.9 percent from over 10 percent two years back. The decline in the tax-GDP ratio has converged on accumulating public debt, fueled cost push inflation and increased fiscal deficit. In order to minimise the negative impact of all these factors, it is essential to revamp the tax collection system.

Former vice president of the World Bank and a Pakistani economist of international repute Shahid Javed Burki while talking informally to the newsmen in Islamabad a few months back said that IMF had expressed concern over Pakistani highly low tax base. According to him, the low tax base posed a real challenge and it was imperative to bring non-taxpayers into tax net. The size of the black economy is rising as the system provides many avenues for parking illegal money in the country including the property sector.

Another economist present on the occasion said the avenues were available for parking illegal money in the country including the property sector and the capital market. He said the vehicle for whitening the money is also available in the system. He said anyone desiring to get his money legalised can simply go to a money changer and arrange remittance from abroad. He said this tendency has facilitated many large business houses and many smugglers, hoarders to openly display their wealth without fear of being probed.

Another expert said the smuggling, under-invoicing or under filing is due to the weakness of the institutions that regulate them. He said smuggling occurs because the institutions monitoring border movements are either not competent or some elements in the institution are corrupt. He said under-invoicing occurs due to the connivance of the importer and the custom official.

A large segment of the society comprising of landlords is completely exempted from payment as there is no tax on farm income. Tackling twin menace of black money and tax evasion has always been a failure in Pakistan. Successive governments, instead of dealing with these issues with an iron hand, have been pardoning the corrupt and appeasing tax evaders through various laws and amnesty schemes. The result is obvious. There is an ever-growing informal economy undermining national growth and promoting lack of transparency in all spheres of life. Political culture is fraught with favors to those having money power and control over economy.

The government has been repeatedly assuring international donor agencies and the public at large about increasing tax to GDP ratio but it has not been able to show any improvement. Instead the ratio is falling. Winning public confidence by good governance, eradicating corruption, checking tax evasion by an iron hand and perusing equitable tax policies are essential for revamping tax collection system. Unless some strong and concrete measure are taken on these lines, the anxiety about not being able to pull the economy out of mounting debts and public expenditure will linger on.