INCREASE IN TAX: NOT A REAL GROWTH INDEED

SHAMIM RIZVI
(feedback@pgeconomist.com)

Sep 12 - 18, 2011

Taxation experts are showing concerns over constant decline in tax to GDP ratio despite significant increase in the annual collection of revenues especially during the last four years, under the PPP-led coalition government. According to them, the economic planners must differentiate between the tax base and increment in revenues. Presently, the increase in revenue is not keeping pace with the increase in the number of the taxpayers.

The present scenario indicates that those already paying taxes are being further burdened and the informal economy or the tax dodgers go scot-free.

Experts do not accept such a scenario as a sign of sound and real growth.

The tax to GDP ratio, which was 13.2 percent in the 1998-99, was reduced to 11 percent in 2007-08 and revenue increased from Rs800 billion to Rs1100 billion.

During the next four years, the revenue increased to Rs1650 billion, but the tax to GDP ratio declined to about nine percent-the lowest in the world.

In the meanwhile, however, the size of informal economy and number of tax evaders has increased to an alarming level. All the previous governments lacked the political will to bring the tax evading sectors into the tax net. Some of these governments, which were very strong, did make some beginning in this direction but soon backed out under political pressure.

The incumbent PPP-led government has been the biggest supporter of the tax evaders despite facing the worst economic crises in Pakistan's history. The federal budget 2010-11 showing a whopping deficit of Rs685 billion between projected revenue and expenditure was passed by the national assembly without touching the main tax evading sector-income from agriculture-as the landed aristocracy which virtually controlled the parliament did not like that their fabulous income should be touched. The then governor of State Bank of Pakistan and an eminent economist, Shahid Kardar, had strongly emphasized the need to broaden the tax net by bringing the untaxed sectors such as agriculture into the tax net.

Mr. Kardar who was rightly worried by a structural shift of income towards the untaxed sectors from the tax paying sectors was of the strong view that income from agriculture must be brought under tax net like other types of income.

At the time of current year budget (2011-12), he again made similar recommendations but was again overruled and he preferred to resign from his post.

According to the experts, the trend of rising budget deficit will ruin the economy of the country. It is high time the government takes serious measures to improve the tax to GDP ratio to 18 to 20 percent at least, which would still be in the lower range according to world standard.

By bringing agriculture into the tax net, our tax to GDP will rise to about 15 percent and would generate enough revenue to meet our normal expenses. Even otherwise, the tax treatment of income must be uniform and nondiscriminatory without regard of its origin.

There should be no exemption in taxes on income and consumption except for income from charitable trust or consumption of food stuff. All other types of income should be equitably taxed besides dealing with all types of tax evaders with an iron hand.

Imposition of tax on agriculture sector has been an issue since inception of Pakistan but grouping amongst the feudal lords, civil and military bureaucrats have successfully kept these incomes out of trajectory of taxation mechanism. In this respect, India and China remained fortunate as both countries disallowed their citizens to keep agriculture land beyond a specific limit through a well planned land reforms program and thereby eliminated feudalism once for all from their respective countries. But, in Pakistan every voice demanding land reforms or imposition of agriculture tax has been muted by force or other despicable tactics.

Independent economists of world repute have been advising the economic managers of Pakistan that they, instead of increasing the tax rates, should focus on revamping tax collection systems and making it more effective by closing all loopholes in the system in order to increase revenue collection. The rising size of black economy, tax evasion, and corruption in the tax collection machinery should be controlled. The only new tax, which needs to be imposed without loss of any further time, is the tax on income from agriculture at the normal rates of taxation as applicable to the salaried class.

In a good taxation system, there is more focus on direct taxes than the indirect taxes. In Pakistan, more burdens are put on the poor class than the rich. Shamefully, only about three million out of over 180 million pay taxes and this is perhaps the biggest scandal of our revenue generation system. Issues of corruption, graft, and kickbacks pale into insignificance compared to tax evasion especially by the Pakistani rich.

A recent report revealed that the prime minister and more than 25 members in his cabinet had not paid any income tax for the last 5 years.

The size of the black economy is constantly on the rise as the system provides many avenues for parking of illegal money. The vehicle for whitening such money is also available in the system. Anyone desiring to get his illegal money legalized can unrestrictedly get moneychanger arrange remittances from abroad. This tendency has facilitated many large business houses, smugglers, hoarders and tricksters to openly display wealth without any fear of being probed.