The federal government has sought feedback and input from stakeholders across the country to put the somewhat incorrigible taxation system to more intense scrutiny. Federal Finance Minister Ishaq Dar has already formed Tax Reforms Commission (TRC) to review and rationalise direct, indirect taxes, other tariffs and duties in the country. It will also review the autonomy and administrative structure of the Federal Bureau of Revenue (FBR) and creation of a border force to deal with illegal movement of persons and good across international borders besides other related issues.
However, the reforms drive, as many think, seems to be making very little headway due to ever-diminishing public trust in institutions tasked with collection of taxes in an unviable financial environment in the country.
During background interviews, most of the stakeholders, including traders, professionals and industrialists, advocated drastic reforms in taxes such as sales tax, income tax and levies that are directly affecting the general public. Many of them supported the idea of doing away with the refund and readjustment phenomena that often lead to rampant corruption in tax collecting agencies, tax non-compliance and an imminent breakdown of the tax culture in the country.
The working paper of the TRC seeking stakeholders’ input has itself admitted that the country’s low and declining revenue yield has been attributed to wide-ranging concessions and exemptions, large-scale tax evasion, and a slack and corrupt tax administration that has led to the perception of a virtual breakdown of tax compliance in the country. It has also led to a continuous decline in the tax to Grass Domestic Product (GDP) ratio over the last two years.
The working paper also mentioned that the federal taxes account for the bulk of revenues, with a share approaching 95 per cent in 2011/12. The largest federal tax is the sales tax, which generates 39 per cent of total tax revenues, followed by income tax at 35 per cent. Customs duties and excise duties contribute 10 per cent and 6 per cent, respectively.
The share of provincial taxes is very small at only 5 per cent, which is low in relation to countries like India where the share of state taxes is over 35 per cent. The sales tax on services has emerged as the largest provincial tax, followed by stamp duties.
It said the overall tax-to-GDP ratio, inclusive of federal and provincial taxes, surcharges, and levies, was 10 per cent in 2011/12. During the last decade, the tax-to-GDP ratio has shown a declining trend, falling from a peak of 11.5 per cent in 2002/03 and the FBR revenues also declined by about 0.5 per cent of the GDP during this period. The country, as put in the working paper, appears to rely heavily on indirect taxes, especially on taxes on goods and services having the lowest tax-to-GDP ratio among 13 selected developing countries.
The centrally collected tax-to-GDP ratio of India and Pakistan is more or less the same, but the contribution of sub-national taxes is substantially larger in India. The average tax-to-GDP ratio of the 13 countries is 14 per cent compared to less than 10 per cent for Pakistan. This is the first (crude) estimate of the “tax gap” in Pakistan, the paper said.
The tax rate is also being considered one of the reasons of irrational tax system in the country. The working paper of the Finance Ministry said that the tax rates were brought down sharply by the previous military government and the maximum income tax rate on individuals and associations of persons (AOPs) was scaled down from 35 to 25 per cent in the Finance Bill of 2006/07. Tax rates were reduced substantially for small companies (from 45 to 25 per cent) and for banking companies (from 50 to 35 percent), in a staggered manner.
The corporate tax rate on large companies is relatively high at 35 per cent as opposed to the average of 27 per cent in the 13 selected countries. However, the maximum individual income tax rate appears to be relatively low at 25 per cent, while the standard sales tax rate is on the higher side warranting changes in tax rates.
It also underscores the rampant tax evasion as one of the factors that led to the further narrowing of the tax base, saying only one in 100 persons in the country pays income tax. Similarly, there is misconceived emphasis on personal income tax evasion. It is likely that more revenues could be generated by focusing on corporate tax evasion. The numbers are striking as out of the 52,800 or so companies registered with the Securities Exchange Commission of Pakistan, less than a third file returns and out of those who do, only a fifth actually declare taxable profits.
The income tax net is thus wider than perceived due to the presence of a large number of deductions at source.
Member Khyber Pakhtunkhwa Board of Investment and Trade (KPBOI) Muhammad Ishaq, president Khyber Pakhtunkhwa Chamber of Commerce and Industry (KPCCI) Fuad Ishaq and member KPCCI tax committee Zahid Shinwari presented almost identical proposals as input for the government tax reforms agenda.
Fuad Ishaq said, “Though it has become a cliché now, even then I would say the government should broaden the tax net in place of increasing the rate of direct taxes such as income tax and sales tax. The incidence of taxes should be reduced drastically and that of the sales tax should be brought down between one to three per cent,” he said and added that it should be a final liability and one-time payment by the manufacturer.
The reform commission should also look into the matter of refund and readjustment as it has become a major source of corruption in the tax collecting agencies, Fuad maintained. The punitive tax method should also be done away with as tax evaders usually bribe the collecting agencies personnel to get rid of all liabilities instead of paying punitive taxes, he said. While salaried class is the worst of victim of the income tax levy so income tax rate for salaried class should also be reduced.
Member Khyber Pakhtunkhwa Board of Investment and Trade (KPBOIT) Muhammad Ishaq said that if the government was serious in its tax reform effort it would have to reform the sales tax regime altogether. However, he said it should do away with multiple slabs of sales tax with two only and the rate of sales tax should be brought down to 8 per cent for industrial importers and 12 per cent for the commercial importers with condition that the same will neither be adjustable nor refundable and will be final discharged of liability.
For the industries produce based on indigenous raw-material the rate of sales tax should be eight percent, Ishaq said.
Ishaq said that for eliminating corruption in tax collecting entities, the sales tax audit should be conducted of those tax-payers whose e-filing profile compliance is less than 70 per cent.
Zahid Shinwari, who is expected to represent the KPCCI at TRC forthcoming meeting, said the entire tax regime was complicated because of a number of anomalies and distortions. “It is in no way tax-payers’ friendly. Like all previous tenures this time too, the advance withholding tax remains to be the mainstay of the Ishaq Dar’s tax doctrine, which is a regressive tax that ultimately passes burden of payment onto the consumers.
He said the government should also restructure the tax collecting agencies such as the Federal Board of Revenue (FBR) to successfully implement the required changes in tax regime and policy to check non-compliance and corruption.