Even after levying all kinds of oppressive taxes and expanding the scope of withholding taxes to an insane level, the federal government has failed to bridge the ever-increasing fiscal deficit that is leading towards a greater debt burden. At present, 65 per cent of tax revenues are going towards debt servicing alone.
Provinces are also critical of inefficiencies on the part of the Federal Board of Revenue (FBR) due to which their share in the overall divisible pool is insufficient to meet their annual budgetary requirements. Since the share of every province in federal taxes under the National Finance Commission (NFC) depends on how efficiently taxes are collected by FBR, it is important that the centre and federating units actively participate in tax collection apparatus/processes/efforts.
No serious debate has ever been initiated on the issue as to how we should increase the size of the cake for both the centre and provinces.
The most important factor that discourages compliance with intricate tax laws is the extremely complicated and cumbersome nature of procedure involved in being registered with the revenue authorities. Even the corporate and educated class finds it difficult to follow and observe the simultaneously applicable innumerable legal obligations, what to talk of the ordinary man on the street.
If a survey is conducted with respect to merely the advance tax provisions (almost 75 in number), it would reveal how a person is supposed to be aware of so many avenues where either tax is being withheld or he is himself paying income tax and the consequences of these taxes, the credit of which he may or may not be allowed to take while filing his return. In the first instance, a highly meticulous record of all such transactions that invoke taxes would have to be maintained and secondly, an even higher level of grasp over the law would be required to apply it.
Revenue officers are trained to look suspiciously at every registered taxpayer—their motto being “guilty until proven innocent.” Tax law should be redrafted and re-enacted for achieving simplicity. Taxpayer should be provided guidance and assistance. Presently they are compelled to engage a tax consultant who, if professionally unethical, is capable of causing much more financial damage to his client than the amount of tax in question.
The tax system that will work smoothly for Pakistan must be a flat-rate with no compliance hassles. All taxes should be merged into one single tax with complete assurance to the masses that they would be free from any kind of harassment; and money collected would be spent towards their welfare.
The agenda of fair taxation cannot succeed if wastage of public funds and its abuse by the rulers continue unabated. The quid pro quo for paying taxes is as important as the system employed for collecting them. Where the public is blamed for not paying their due share, public authorities are equally, if not more, responsible for indulging in corrupt means.
The provinces should also work for better and efficient tax collection. Presently, they are isolated and rely on distribution from the divisible pool whereas FBR annually collects less than the assigned revenue target. The responsibility to collect revenues should be joint giving a participative sense to all federating units.
It is imperative to abolish the present tax laws and enact new ones. Collection of taxes should be through a single National Tax Agency (NTA). National and provincial assemblies should pass a law agreeing on establishment of NTA responsible for collecting all taxes imposed by the federal and provincial governments. This would facilitate people to deal with a single revenue authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under the Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
The NTA should consist of officers and staff representing the federation of Pakistan as in taxes, both the centre and provinces have equal stakes. If the size of the pie grows, every federating unit will get more and the Centre will also have more money at its disposal. For NTA, an all Pakistan Tax Service should be established. Recruitment for All Pakistan Tax Service must be independent of the present Central Superior Services structure. Competent people having knowledge in accounting, law, IT and administration should be selected through a special board, comprising members from the existing Federal and Provincial Public Service Commissions.
The need of the hour is establishment of a Tax Intelligence System. This system should send quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations.
The tax base with respect to direct tax vis-à-vis fair distribution of incidence can be achieved by imposing 10 per cent flat rate tax on net income of individuals and reducing corporate tax rate to 20 per cent. This kind of simple taxation would induce voluntary compliance provided citizens are aware that competent tax machinery exists.
Without this deterrence, even the new system which is a great deal simpler, will become unworkable. Nowhere in the world is proper collection of taxes possible without a strong enforcement apparatus.
According to the available data, the total number of persons having taxable income of more than Rs400,000 is between 10 to 12 million and tax base is around Rs50 trillion (after taking into account informal economy). Flat rate taxation of just 10 per cent with strong enforcement system will yield Rs5 trillion under income tax alone. If amnesty for earlier years is given, not less than further Rs3 trillion can also be collected.
As far as sales tax is concerned, it has been emphasised time and again by us that Pakistan needs lower rate harmonised sales tax (HST). More details can be seen in our paper, Towards Flat, Low-rate, Broad and Predictable Taxes, available at http: //primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf
All existing indirect taxes should be replaced both at the federal and provincial levels with Harmonised Sales Tax (HST). There are multiple tax collection authorities now, rendering the life of businessmen miserable since they are unable to comprehend complex laws without having to pay heavily to professionals.
If the present indirect taxation is replaced with HST as in a comparable federation like Canada, it would not only improve revenue collection but would also help alleviate sufferings of taxpayers who have to deal with multiple tax authorities. In the Pakistani milieu if 5% HST is levied, it would yield at least Rs3 trillion giving substantial fiscal space to both federal and provincial governments.