KARACHI: Lack of a level playing field, no equitable sharing between the taxpayers and non-payers and increasing burden on genuine taxpayers can be attributed as the main reasons for increasing tax evasion.

In the current system of collection, genuine taxpayer businessmen, industrialists, traders and the salaried class feel increasing pressure of being heavily taxed while a large number of people avoid paying taxes.

Only 1.3 million people are taxed out of the population of 160 million and the government squeezes the same group of taxpayers to pay more every year to cover shortfall. It indicates lack of any fair and transparent system of netting taxes.

It is only the captive taxpayers who have to bear the brunt of targeted tax. A very big segment of highly placed people having enormous wealth, lucrative occupations and enjoying highly luxurious living, such as high-profile professionals, corrupt bureaucrats and state functionaries, feudal lords and agriculturists, and people who have made huge real estate and stock market deals, are almost out of the tax net.

Wholesalers, traders and transporters, who play a large role in the gross domestic product, have a very minimal contribution to taxes.

“The imbalance in our tax collection system is basically responsible for generating tax evasion activities,” Site Association of Industry Chairman Ameen Bandukda says.

Wherever income was generated, it should be taxed in order to have a level playing field, he said. There was a need to increase the number of direct taxpayers to two million and then gradually to three million by 2009.

The tax-to-GDP ratio was only nine per cent in Pakistan. Agriculture constituted 23 per cent of the GDP but its share in taxes was zero. The ratio would remain low until the anomaly was addressed, he said.

He said the maximum rate of income tax was 35 per cent, which might be brought down to 25 per cent, while corporate tax on private companies was also too high, which encouraged tax evasion. It should be brought down to 25 per cent.

“When all the people of the society will pay equal taxes then there will be less tax evasion,” Mr Bandukda said.

On the other hand, the high indirect taxes, which the government has bound the manufacturers to collect at source instead of collecting them directly from the consumers, makes a direct impact on the rising cost of living and ultimately the poor people have to face the dire consequences. High indirect taxes also lead to inflation.

“The government should increase the base of direct tax in order to cover the revenue shortfall,” he said.

He said there was also a shortfall on the government side. It did not fully utilise the taxes in improving infrastructure, education and health facilities and other essential requirements.

For example, Site pays Rs140 billion to the national kitty annually in terms of taxes but the infrastructure situation in the area is getting pathetic day by day.

Chairman of the F.B. Area Association of Trade and Industry (FBATI), Rehan Zeeshan, offers a different view, saying that tax evasion has been on the decline in the organised or big industry as everything is documented from production to distribution of the goods.

He said there might be tax evasion in small-scale industries which did not want to get into the tax net owing to some fear.

“If one has been evading tax for years in connivance with tax officials then he cannot change his posture in future no matter how effective a collection system comes into force,” he said.

He was of the view that tax evasion, especially at the big level, had somewhat reduced since the government had reduced the intervention of customs officials in the industrial units.

However, under-invoicing has still been rampant at the import stage owing to which products, especially Chinese items, sell at lower rates in the markets as against their actual value in their respective countries.

To some extent, there is a drawback in the tax collecting system, like putting burden on existing taxpayers instead of bringing non-payers into the net.

President of the Karachi Chamber of Commerce and Industry (KCCI), Haroon Farooqi, says that flaws in tax collection system, improper enforcement of policies and discretionary powers of tax officials pave the way for people to resort to tax evasion.

The problems are on the decline but it will take time. There is a need to focus on reducing tax rate.

In general sales tax, there has been compliance in the organised sector, while problems exist in the un-organised sector due to fear of being harassed or lengthy and cumbersome procedure.

On customs duty side, there might be tax evasion when rate was high. There might be some people involved in under-invoicing on imports but tax evasion in customs duty has reduced.

In income tax, the KCCI chief said, there had hardly been any evasion as it was a matter of correct declaration. However, there was a need for rationalisation of rate of tax in the banking and corporate sectors.

The government, he said, should remove the bottlenecks as profit margins were going down and cost of doing business was going up. There were many people who evaded taxes under some compulsion, he said. — ASK