LET NOT IT BE A SMOKE SCREEN
DOCUMENTATION OF ECONOMY IS A GENUINE ISSUE AND AN EFFECTIVE FIREWALL AGAINST TAX AVOIDANCE.
Apr 18 - 24, 2011
The unorganized informal sector of an economy can be a potential trigger to augment revenue generation. The pitfall, however, is the 'deadweight loss' to the economy. The informal sector contributes to the economy in many ways. By taxing it blindly, we can retard its growth or even force a section of it out of business. Taxation, besides being equitable and progressive, needs to be supportive of the entrepreneurial efforts. Unfortunately, our tax administration has been trained to collect (rather extort) taxes from the tax payers and thus take care of the 'cost' side alone without caring for the 'benefit' side. Taxpayers pay the cost and expect to receive benefits, which include ease of doing business and provision of infrastructure and utilities.
While documentation of economy must be undertaken in earnest, it must also be ensured that no sector of the economy manages to stay out of the tax net. Broadening of tax base has prompted the federal board of revenue (FBR) to develop a sizeable list of nontax payers. This is a welcome move which should not be allowed to serve as a 'smoke screen' to the feudal landlords who must be feeling uncomfortable after those Hillary Clinton's scathing remarks about the piles of untaxed wealth. She said, last year 'Countries that will not tax their elite who expect us to come in and help them serve their people are just not going to get the kind of help from us that historically they may have. Pakistan cannot have a tax rate of 9 percent of GDP when landowners and all the other elites do not pay anything or pay so little, it is laughable. And then where there's a problem everybody expects the US and others to come in and help.'
One of our parliamentarians and the Minister of State promptly confirmed that 'laughable' point of Mrs. Clinton's remarks. Defending the parliamentarians, she said that all parliamentarians pay tax as the same is deducted from their salaries. Such explanations from parliamentarians are an insult to the intellect of those who cause them to become a parliamentarian - their voters. When feudal parliamentarians are criticized for non-payment of tax, the target is the pile of their agro income and not their paltry salary they are getting for holding the post.
Spurred by the Clinton remarks, the SBP has also awakened to the situation by expressing its concern for the 'structural shift of incomes towards the untaxed sectors'. The SBP Governor has recently said 'with this shift of incomes away from the tax paying sectors to non-tax paying sectors, the tax to GDP ratio is structurally destined to be hovering around lower levels.' He further said that Pakistan's economy has shown signs of recovery and to sustain this improvement, quick steps are needed to broaden the tax base to benefit from the growth in the untaxed sectors such as agriculture.
According to an estimate, the agro income size has peaked to Rs3 trillion. If tax is charged at half the rate applied to the corporate sector, a cool Rs525 billion additional revenue can be booked. The improvement in economy is mainly triggered by increased consumer spending reflected in higher sales of autos, electric and electronic appliances, etc. The analysts are of the view that the higher agro commodity prices during recent periods have resulted in flow of extra incomes from urban to the rural sector. A portion of that extra income has found its way back to the consumer market. The trend is bound to cause urban-rural divide unless the affluent sections of rural population are brought into the tax net. In fact, through the demand for agro tax imposition, no one tries to target the powerless and impoverished majority of the rural populace. The tax, if introduced, will certainly be on the basis of ability to pay and according to the size of land holding. It will have nothing to do with the sharecroppers. If urban populace is exempted from tax up to a certain limit, the exemption will hold good for the small farmers as well. In this way, not only the low agro income groups but the middle-income groups too will automatically stand exempted. So, the demand to tax agriculture essentially presupposes effective land reforms to bring into the tax net the high income groups and the top notch feudalists who are economic burden on the society. As a result of these reforms, resource reallocation will take place and the lower cadres of agro society will benefit. Similarly, all moves to block this demand are essentially aimed at providing cover to the exploitative feudalists and their decades-old system. Let's ensure that the issue of documentation does not provide an escape route to the influential elites and the feudal.
The myth of 'tax to GDP ratio' also needs to be examined in the light of cost and benefit theory. Simply asking to improve the ratio explains nothing. Increasing indirect taxes and ignoring potential direct taxpayers will not only fuel inflation but will also create social unrest by pitting one segment of the society against the other. Further, tax to GDP ratio should always be viewed in conjunction with the social sector and development spending. A proportionate spending on these heads meets the requirement of cost and benefit philosophy. Higher revenue generation just to fund government's lavish non-development spending is as bad as low revenue generation leading to a higher fiscal deficit. The oil-rich countries generally have a low tax to GDP ratio. A low tax to GDP ratio is therefore no stigma so long as the economy operates under a low inflation rate and the masses are the recipient of substantial social benefits.
WORLDWIDE TAX TO GDP RATIO
|COUNTRY||TAX TO GDP %||COUNTRY||TAX TO GDP %||COUNTRY||TAX TO GDP %|
|Source: Countries A - N (Heritage Foundation); Countries O - V (OECD un-weighted average 2008)|