Apr 18 - 24, 2011

A documented economy helps promote tax culture, besides checking tax evasion. The documentation of the economy is still a critical issue in Pakistan. The objectives of broadening tax-base, generation of revenue and independent economic policy formulation are associated with documentation of the economy. Unfortunately, we have a taxation system that burdens the fixed-income people paying tax at source and exempts filthy rich big-fish hiding behind exemptions and political clout. We have a system, which allows tax evasion by flourishing the corrupt tax collectors. Lack of documentation has over the years helped growth of an underworld economy or an economy of black market where no economic transaction, activity, deal or business is officially documented.

The black market economy runs parallel to the official economy in Pakistan. The funds transfer through non-official channels like Hundi may be cited in this regard. Federal Board of Revenue (FBR) has been unable to bring considerably new taxpayers into tax net over the past three years. The introduction of universal self-assessment scheme (USAS), a scheme to allow taxpayers to determine their tax themselves without being questioned by the tax officials and in the absence of income tax audits, is among the reasons for the low level of tax payment in the country. Around 1.6 million out of 1.7 million taxpayers pay about Rs21,000 each as income tax every year in Pakistan, according to the statistics compiled by the FBR. All of these people fall into the lowest tax bracket where their annual income tax is less than half million rupees.

True tax potential of the country has not yet fully been tapped due to lack of documentation. There is a dire need for enhancing tax to GDP ratio to help sustainable economic development in the country. The tax to GDP ratio can be increased up to 15 percent from the current 10 percent, lowest in the world, in next couple of years if the government takes serious measures to bring about tax reforms and more sectors of economy are brought into the tax net.

Presently, the country is heavily dependent on foreign loans, which have reached over $58 billion. The government is compelled to follow IMF diktat, which has further worsened the situation by holding back its next tranche of loan since May last year. The government continuously borrows from the central and commercial banks to keep afloat the non productive Public Sector Enterprises (PSE), which has led to accumulation of circular debt. The donor counties have already indicated that their taxpayers are no more able to take the burden of Pakistan's taxpayers who are continuously avoiding tax payments leaving their government to depend on aid and grants from donors.

The government has not yet come up with a clear-cut decision on taxing Agriculture in a bid to broaden the country's tax base. It is worth mentioning that under the regime of late Zulfikar Ali Bhutto a tax on agricultural income through an ordinance in 1977 was imposed, but it could not be enforced, as Gen Ziaul Haq took over. Zia suspended the tax and left it to the provinces, which yield negligible revenue from levy on agricultural income. There have never been concrete plans under successive governments for taxing the income of landlords and property owners for generating additional revenue. There has been massive evasion of tax in the agriculture sector, while the provincial governments have been reluctant to tax the income of the big landlords. Under land reforms, the 50-acre land holding has been set as the benchmark for income tax exemption. The landlords evade taxes by transferring ownership on paper to their relatives taking advantage of the 50-acre land holding mechanism.

Officials believe that enforcement of Reformed General Sales Tax (RGST)- which is a precondition of the IMF for possible release of $1.7 billion tranche - will lead to the documentation of the economy. IMF wants the country to use the RGST to raise its tax-to-GDP ratio by 3 to 4 percent.

Critics say that RGST would have an inflationary impact and prices of consumer items would go up due to withdrawal of exemptions under the RGST regime. About 22 categories in the food group and agriculture, which were currently exempted from general sales tax, would be brought under the RGST net. The withdrawal of exemptions under the proposed RGST is estimated to increase prices of over 122 major categories, including food items, by 15-17 per cent, depending on the tax rate and yield about Rs150 billion in additional revenue to the exchequer.

Last month, the government imposed more taxes through Presidential ordinances to raise Rs53 billion during the remaining period of the current fiscal year. The new taxes will aggravate the economic crisis by accelerating inflation and retarding economic growth and will add to the economic hardships already being faced by the people.

There are number of issues including current global trends, emerging challenges and success factors involved in implementing VAT. The establishment of an institutional framework with reference to multiple options for policy, enforcement, and relationship between various stakeholders is considered as the most serious challenge at the time of introducing RGST on lines of value added tax (VAT). Some analysts believe that implementing the Chinese VAT model can help achieve aims of the government and the donor agencies without creating any friction with taxpayers. China has a multiple rate tax structure, with 17 per cent basic tax rate, and lower slabs of 3, 6, and 13 per cent tax rates. While exports attract zero VAT in China, the agriculture, forestry, products of animal husbandry, aquatic products, edible vegetable and grain duplicates, tap water, heating and cooling equipments attract 13 per cent VAT.

Tax reforms are essential for documentation of the economy, as there are a million rich people in big cities like Karachi and, Lahore who are out of the tax net and paying nothing in the form of taxes. Reforms in tax machinery and simplification of taxation system demands political will on the part of government. It is a stark reality that the rich in Pakistan have by and large lived comfortably at the expense of the salaried class and the poor. The salaried class has so far been the bulk of the tax paying citizens.