March 27, 2006	Monday	Safar 26, 1427

THE World Bank and the IMF have been telling Pakistan that its tax-GDP ratio is too low and it ought to make larger and more vigorous efforts to collect far more revenues and they are ready to assist in any manner needed. The counselling became more insistent in the period in which the GDP growth rate was high, as during last year (8.4 per cent) but the tax GDP ratio fell to its lowest ever of 10.1 per cent.

The international financial institutions (IFIs) want the federal revenues to reflect the high growth rate and evident prosperity all round with the very rich enjoying their new wealth ostentatiously.

In 1995-96 when the growth rate was 6.6 per cent, the tax-GDP ratio was the highest ever, 14.6 per cent, but in 1984-85, when the growth rate was 8.7 per cent, the highest ever, the tax-GDP ratio was only 10.1 per cent.

When the economic growth rate is high, the government should have its share of national prosperity. The people too should be able to enjoy a sizeable part of the fruits of the evident prosperity.

The tax collection is now on course. For the July-February, taxes of Rs409.2 billion were collected against the target of Rs408.7 billion, Rs68.217 billion more than the collection in the same period last year. But that is not enough for the international lenders or the government with its heavy spending and hefty borrowing.

Encouraged by rising revenues, the government is proposing to mobilize a tax revenue of Rs825—850 billion next year instead of the current years target of Rs690 billion. In fact, the CBR hopes to collect Rs708 billion by June 30 this year, an increase of Rs18 billion over the target figure. This can be very helpful to the government at a time of record domestic borrowing.

The visiting IMF team to which these figures were conveyed by the CBR officials would certainly want the government collect far more revenues at a time when the government is trumpeting its economic success with a great deal of vigour.

If far larger revenues in harmony with the economic growth are not being collected, there are very valid reasons for that. To begin with the largest production sector, agriculture is exempt from income tax. Procurement and support prices are being raised constantly and the loans to the farmers are increasing rapidly. And yet the contribution of this sector, which has a 23 per cent share in the GDP, to the federal tax revenues is insignificant.

The sugarcane may sell for Rs40 for 40 kilos or Rs70 or sugar sells at Rs50, the CBR is not the gainer for that.

The export sector, as else where in the world is exempted from income tax, in spite of numerous concessions given to it, particularly in respect of sales tax. The exporters are flourishing and not the government for that. President Musharraf says exports this year will be $18 billion instead of the targeted $17 billion.

The service sector which is truly large and has a share of 52 per cent in the GDP evades taxes massively except in the areas of banking and insurance. The unorganized part of the service sector is indeed very large but it avoids sales tax which is the largest single source of revenue. Most of the time the people pay the sales tax but the government does not get that. It goes in to the pockets of the traders or GST collectors.

Importers avoid paying import duties by under invoicing the value of their goods, even though the average rate of import duties has been coming down and is now 25 per cent. Importers pay duty on chalk while they import cheese. Under- invoicing is an old age curse which the customs have not been able to stamp out partly due to their own collaboration.

Two of the most profitable areas for taxation in recent times have been the real estate, the prices of which have shot up too high, particularly in posh areas and the stock exchanges where share prices have touched the roof and the sky is set to be the limit.

There have been rumours that a new law was being formulated for taxing the large real estate income, but they have been promptly denied by the CBR.

There have been reports of capital gains tax on the hefty incomes from the soaring share market prices that too has been denied by CBR, although the Karachi Stock Exchange-100 index, which had briefly crashed through the ten thousand index, is again above 11000.

There have been reports of sweeping tax reforms in a comprehensive package called Nexus. The report said the CBR would be collecting information about investment made in shares, credit cards and booking in five-star hotels and some hundred to a 100—150 leading tax payers would be chosen for a test run.

That report has also been denied by the CBR. What is obvious is the vested interest cannot be taxed as they are in the government and in the assemblies. Many of the opposition leaders are also feudal lords or tribal chiefs and there is a compact between them in upholding the privileges of the special interests, beginning with those of the rural rich and ending with the urban elite.

The tax-GDP ratio would have been better than 10.1 per cent as recorded last year if the provincial taxes as well as the tax collected by district governments and local bodies are taken in to account, but unlike in the West that is not done in Pakistan.

The tax paid on petroleum products and gas is treated as a development surcharge instead of tax revenue, which is wrong.

If these two kinds of tax revenues are taken in account the tax-GDP ratio may rise up to two per cent. Nevertheless, the overall tax-GDP ratio is very low and the government ought to make vigorous and sustained efforts to collect larger taxes in stead of shielding the vested interests galore.