August Issue 2015

At a time when the parallel economy is booming and influential groups and sectors appear as untouchable as ever, government efforts to document the economy have once again fallen prey to the business lobby. The most recent example of this was the imposition of a 0.6 per cent withholding tax on those who do not file their taxes. Just before Eid, however, the government accepted the demands of traders and halved the tax to 0.3 per cent. But a withholding tax is not the answer to our tax collection problem.

Rather than continually imposing new taxes, the government needs to start collecting taxes from those who dodge it. Doing this alone would increase revenue collection by almost Rs 500 billion to Rs 750 billion per annum. Our inability to do this has meant that federal development expenditures were cut before the end of the fiscal year by almost Rs 50 billion to cope with the fiscal deficit. Were tax collection to improve there would be ample funds for development projects, health, education and the social sector. Instead we have had to swallow the bitter pill of taking another 6.7 billion dollars from the International Monetary Fund.

The parallel economy thrives on extortion, under- and over-invoicing, misdeclaration and smuggling of goods and, above all, corruption. As always, the agricultural sector — which makes up 20 per cent of the economy — has been left untaxed. This means the service sector ends up  bearing the brunt of the taxes.

That the machinery of tax collection needs to be overhauled is not in doubt. The million-dollar question is, who will be able to do it? A trust deficit persists among taxpayers who argue that the government misuses revenue and keeps imposing further taxes on the salaried class who are already taxed at source. To erase this deficit the government needs to keep in mind the old saying about the honeybee which only takes a little nectar from the flower and ensures that it does not wither.

Taha Javed Khan, the head of research at Elixir securities, says, “It is rather unfortunate that successive governments in Pakistan, including the new government, are unable to take concrete steps to broaden the tax base and we continue to rely on a minute segment of the economy while keeping the bigger sectors out of the tax net.” Taking a look at each sector of the economy, we see that apart from the manufacturing sector, other key sectors such as agriculture, wholesale and retail and transport continue to stay out of the tax net, though their contribution to the GDP is around 50 per cent. As a result the country continues to have a fiscal deficit and is subsequently falling in a debt trap.

“In order to make up for the flawed taxation policy, the government relies heavily on indirect taxes such as the general sales tax, federal excise duty, petroleum levy etc. which at the end of the day affects the common man’s household budget more than the elites,” says Khan.

For the last couple of years, the Federal Board of Revenue has been boasting about how, with the help of Nadra, it has identified about 20 lakh people who live a lavish lifestyle but don’t pay any taxes. Till now, no credible action has been taken to bring these people into the tax net and talk of action against tax evaders has amounted to mere lip service. The problem is not in tracking them down since in today’s electronic world it has become increasingly difficult to hide assets. A lack of will is all that is thwarting the government.

Fawad Khan, head of research at KASB Securities, maintains that Pakistan’s low tax to GDP ratio and small tax base can only be addressed by broadening the tax net in relatively lightly taxed areas like agriculture and services. The GDP contribution of these two segments has been around 70 per cent but direct tax collection is abysmally low mainly due to lack of commitment by the provincial governments which have the authority to tax both these segments under the 18th Amendment.  A unified and coherent tax policy, evolved through the consensus of all political parties, is crucial to remove resistance and tax inequity among various sectors, he added.

“One way the government is trying to improve tax collection is by gradually removing tax concessions given to various sectors and businesses,” says Umair Naseer, senior research analyst at Topline Securities. They have also started sending notices from last year to people who did not pay income tax. In the budget for the next fiscal year, the government estimates it will collect Rs 253 billion from additional taxation measures. It is also imposing higher taxes on non-filers.

In order to broaden the tax net, the government will have to impose taxes on the sectors that are out of the tax net, such as agriculture. Incidentally, teachers running tuition centres and doctors running private clinics pay minimal to no taxes. So, financial managers will have to try to force all segments to pay taxes and increase documentation of the economy.

However, Zeeshan Afzal, head of research at Taurus Securities, expresses concern over the tax collection figures and recommends that the government impose new taxes such as a levy on remittances, and that real estate transactions be executed through banking channels and the FBR should be allowed to purchase any new property by paying 25 to 50 per cent above the disclosed market value to prevent cheating.

This article was originally published in Newsline’s August 2015 issue.