THERE is a direct link between growing poverty and the distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes. The lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax, petroleum surcharge etc has pushed an overwhelming majority of citezens towards the poverty line.
According to a study conducted by the Centre for Research on Poverty and Income Distribution (CRPID), there are 63 per cent of poor in the category of ‘transitory poor’. The State Bank of Pakistan (SBP) annual report 2004-05 states that the standard definition of ‘transitory poor’ includes those households that are below the poverty line for most of the time but not always during a defined period. The rest of 32 and five per cent of the population that subsist below the poverty line were found to be ‘chronic’ and ‘extremely poor’, respectively.
Chronic and extremely poor are households that are always below the poverty line, all the time during a defined period. Similarly on the other side, 13 and 21 per cent of total non-poor (above the poverty line) were classified as ‘transitory vulnerable’ and ‘transitory non-poor’, respectively. This portrays an alarming situation as more and more people are moving from transitory category to chronic category, courtesy regressive tax system that is not concerned with redistributive social justice.
Neither the CRPID nor the SBP has inter-linked growing poverty with taxation system. The unfair tax system is widening the existing divide between the rich and the poor. The sole stress on indirect taxation [even under the garb of income taxation through presumptive tax regime on goods and services] without evaluating its impact on the economy and the life of poor masses is a serious cause for concern. The contribution of direct taxes as percentage of GDP was merely 3.01 per cent in 2003-2004, whereas in 2002-2003 it was 3.15 per cent. The pathetic state of affairs in respect of tax-to-GDP ratio from 1990-2000 to 2003-04 is highlighted in Table.
Exorbitant rate of GST [on an imported article of public consumption, the effective rate of indirect tax before any further supply is 42 per cent and nowhere in the world is such a high rate of tax prevalent on imported goods] and ever-growing price acceleration in POL products has crippled the purchasing power of the people. Resultantly, a large segment of the middle class is being pushed into lower middle class category while the total number of persons living below the poverty line is also increasing at an alarming pace.
The priority of our rulers – military and civil alike – poised on achieving revenue targets, fixed ambitiously every year in utter disregard of how taxation measures will affect the economy and lives of common people, is the main problem.
The total amount of income tax collected for financial year 2003-04, according to the Central Board of Revenue (CBR), was Rs157,448 million. If we subtract tax collected at source on goods (Rs.22,829 million) and services/contracts/supplies (Rs24,959 million) which being full and final discharge is in substance indirect levy, the collection comes to Rs109,703 million. In fact, the collection of direct taxes as percentage of total revenue is only 21.06 per cent and not 31.73 per cent as claimed at page 15 of CBR year book 2003-04.
Resultantly, direct tax-to-GDP ratio for 2003-04 is dismally low at 2.1 per cent and not 3.02 per cent as claimed by the CBR. The tax system is directly contributing to rising poverty as people who possess enormous income and wealth, are not been adequately subjected to income taxation.
Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated. In 2004, the government of Sweden collected taxes at 50 per cent of GDP, almost twice as high as the total tax revenue of America and Japan, with both collecting around 25 per cent of GDP. In the Euro area, tax revenue, on average, reaches 40 per cent of GDP.
The CBR has been single-handedly destroying trade and industry and contributing to rising poverty by:
* levying exorbitant sales tax and forcing the importers for self-assumed value addition even before actual sales; imposing indirect taxes on goods and services under the presumptive tax regime in the garb of Income Tax Law, which is in violation of the Constitution; imposing withholding tax obligations without any facilitation and taking punitive action or using the same as revenue collection tool; withholding undisputed refunds payable to taxpayers; * making excessive tax demands; and, resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets.
These actions of the tax machinery are detrimental for economy, social justice, business and industry. If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability-to-pay principle views tax policy issues in isolation to incidence of public expenditure.
The existing tax system itself is a worst expression of colonial heritage as is highly unjust. It protects the establishment and elements that have monopoly over economic resources. There is no political will to tax the privileged classes.
The common man is subjected to sales tax of 15 per cent (tax incidence is 42 per cent on finished imported goods after applicable customs duty, 15 per cent sales tax and mandatory value addition of 10 and six per cent income tax) on essential commodities.
In a country where billions of rupees have been made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low [just nine per cent in fiscal year 2004-05], the government is least bothered to tax undocumented economy and benami {name-lender) transactions. The real tax potential remains untapped.
Our tax-to-GDP ratio can rise to 20 per cent in one year if we tax speculative dealings in real estate and bring black economy into tax net.
During the 10 years’ period (1991-2000), tax burden on the poorest households was estimated to have increased by 7.4 per cent, while it declined by 15.9 per cent on the richest households.
GST claims 9.3 per cent of the income of the poorest 10 per cent of households, but only 5.9 per cent of the income of the richest 10 per cent. In other words, the burden of GST on the lowest deciles is 58 per cent higher than the highest deciles. Thus CED is the most aggressive tax, with the burden on the lowest deciles being 100 per cent higher than on the highest deciles. The customs duties are the least regressive with the burden on the lowest deciles being 28 per cent higher as compared to that of the highest deciles. Policymakers have exempted selected food items like wheat and rice from GST rate.
However, this does not imply zero-rating of GST on account of the fact that the inputs that go into the production of these items are subject to tax. That is why the nominal tax rate of these items is zero, the effective tax rate amounts to about seven per cent. The average burden of direct taxes is 0.3 per cent, while the burden of indirect taxes is 13 per cent. The average burden of personal income tax on household incomes halved from 0.6 per cent in 1987-88 to 0.3 per cent in 2001-02 and the progressivity of the tax also declined over the period.
This can be discerned from the fact that while the burden of personal income tax as a percentage of household income has doubled from 0.1 to 0.2 per cent for the 7th deciles, the corresponding burden for the 10th deciles has declined by half from 4.3 to 2.1 per cent. “The preceding incidence analysis of the tax regime shows that the richest 10 per cent of households bear the least burden of indirect taxation and that their relative advantage with respect to direct taxes has further improved over the last decade and a half”.
In the report, the impact of presumptive taxes on goods and services under the garb of the income tax law has not been taken into account. Had it been done, the ratio of direct taxes would have shown a further declining trend. The incidence of such taxes, which are imposed under income tax (sic), is borne directly by the consumers and the worst hit are the poor. They have to pay GST on supplies of iodized salt which is sold under brand names.
In terms of the share of federal taxes, indirect taxes account for 68.3 per cent in 2004-05, and if presumptive taxes on goods and services levied under income tax are included it touches 79 per cent.
