Taxation System of Pakistan and Policy Reforms

Taxation System of Pakistan and Policy Reforms

Written By : Mr. Kashif Mateen Ansari
Just a few weeks ago I was a part of a dialogue between parliamentarians, think tanks and representatives from the corporate sectors.
During the discussion a number of points came out; here I would like to submit my humble views that were brought to the table.

  • In Pakistan one of the big problem is the shrinking base of active taxpayers. As we know that the active taxpayers are those who file their returns and properly account for their income. Their number stands a nudge below a million taxpayers today. Almost a decade ago the it was a million plus tax payers filing their returns, that means over a period of these years we have lost a few hundred thousand tax payers instead of increasing them. On the other hand FBR is under increasing pressure from the government to increase the revenues and it is evident from the figures that FBR has consistently been chasing, ever increasing targets in the last decade. Now in view of a dwindling taxpayer base a handy way to increase the revenue is to rely on the indirect taxation.

  • For the benefit of our readers we will just say a few words about direct taxation and indirect taxation. Direct taxation is a taxation method whose incidence is directly on the person earning the income and it is directly related on the income generated by any source, may it be salary, may it be business, may it be capital gains on the stock or on the real state. On the other hand indirect taxation is a consumption based tax where based on the consumption of anything, taxation is levied and it does not see the difference between a rich consumer and a poor consumer. Actually it hits the poor a lot more than the rich. I we look at the items of daily usage which are under the umbrella of sales tax, any person irrespective of his or her income has to pay the sales tax whenever that product is consumed, this is indirect taxation and as it does not bring in to account the income levels of consumers so it hits very hard the poor section of the society. Whose consumption of the daily usage items/necessities consumes the most part of their income. So a sales tax of 15% for them means 15% on their total disposable income. On the other hand the rich may be spending only few percent of their income on necessities so their incidence of sales tax rate will be only on that part of the income that is consumed on taxed items, the rest of their income remains free to be saved, multiplied and spent on items that are not in the ambit of sales tax. In view of all this we can easily say that indirect taxation is regressive taxation, it penalizes the poor more than the rich and it is unjust.

  • Given the failure of FBR to bring the people at large in the ambit of tax, the real policy decision lies that how do we want to collect our revenue; either through regressive means which are an injustice to the poor or by broadening our tax base and bringing the rich and mighty in the domain of tax so that they pay according to their ability.

  • As we just talked about the withholding tax it would not be out of the place to mention that they are more than sixty types of withholding taxes and essentially that give rise to another complexity that when it comes to somebody trying to become a proper tax filer that person has to fill in a tax return form, which has to cater for all sixty types of withholding taxes as these have to be adjusted in the tax liability of any person. This means any tax return form will be a multipage interconnected complex document. The very sight of that will create a feeling of discomfort and helplessness in the heart of any common person. Either they rely of consultants and pay their fees or risk filling a form they hardly understand better than a page written in Greek. This is just a glimpse of the complexity of our tax system or the tip an iceberg. The policy view should be that we should make a taxation system as follows:-

    1. It should be make just, equitable so that those who earn more have to pay more taxes and those who are barely meeting their ends meet they must not be penalized. Reliance on indirect taxation must be minimized.

    2. If we want to increase the tax payers we have to do two things, one is to reduce the complexity of taxation mechanism as pointed out if we have more than sixty types of withholding taxes inevitably we will never be able to simplify our tax return forms. Secondly the business people do not shrink from paying the government its dues but what they loathe is getting into a net, which is complex, which has lot of lacunas and loopholes thus giving rise to a lot of discretionary powers of the taxation officer who in turn might also do a lot of corruption. So in order to bell the cat, we need to make the taxation system fair and simple, the simplicity can start from reducing reliance on the withholding taxes and if FBR still cannot find itself up to the task to gather the tax by itself and rely on the withholding agents which are businesses at large then it must try to make it a uniform system of withholding taxes so that in the income tax returns they don’t have to cater for multiple type of withholding taxes to be adjusted in the final income.

    3. It will not be out of place to mention that many countries in the developed world have come to a simpler solution of having a uniform taxation rate on all types of income. When I delve into that let me point out that why our policy makers do not see that a hundred rupees of income in the hands of a salaried person has to be taxed more and the same hundred rupees of income in the hands of a real estate tycoon will be taxed at a lower rate. It would be rather very simple and just arrangement that we have a uniform rate of taxation for all the types of income instead of taxing one type of income more than the other. Let all incomes be seen as equal. At the moment to quote George Orwell "All are equal but some are more equal."

    4. What do we get in return? A common question which every taxpayers asks without getting a proper answer apart from some rhetoric and clichés about national responsibility. This is very important point that has to be addressed at the policy level : the return of paying taxes. There are many taxpayers who wonder that after paying out taxes what do they get in return. The government has announced many schemes, which ultimately became only a laughing stock, like the taxpayer card for those who pay a lot of tax, these cards carry no value even at the airports or the public places. On the other hand a member of the parliament or a government servant of a particular grade will get the protocol which will never be matched by any tax payer card. If government really wants to encourage the broadening of the tax base and also making a good example for those who are paying huge amounts of taxes then it must institute real incentives instead of cosmetic actions.

    5. Why cannot we have a unified tax authority that collects from the taxpayers across the country on behalf of the federal and provincial governments? Any business that is working in more than one provincial jurisdiction in Pakistan has to face a number of tax authiorities. Every province has its own revenue authority, which is levying at least a sales tax on various services and goods, and then there is a federal tax authority. If we try to calculate the number of returns, which any taxpayer, a business or an organization has to make, they would be more than fifty in a year. That adds to real cost of doing any business and creates undue lot of complexity. Businessmen would not like to get into this trouble even if they have to pay 20-30% of their tax amount as facilitation money. If they are safeguarded from all these complexity of compliance with the law they would rather pay the facilitation money (please read bribe) and keep out this net.