June 05, 2006	Monday	Jumadi-ul-Awwal 8, 1427

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 common man is a serious cause for concern. The contribution of direct taxes as percentage of the GDP was merely 3.01 per cent in 2003-2004, whereas in 2002-2003 it was 3.15 per cent

IN a meeting of the National Assembly Standing Committee on Finance on May 28, the State Minister for Finance, Omar Ayub was criticised by the opposition members for not sharing information with them on the next year’s budget. The opposition wondered as to why the meeting had been called, if the participants were not to be taken into confidence.

The meeting, much delayed according to the opposition, was called to discuss the budget proposals. The critics maintained that how could the government accommodate their proposals when they had already finalised the budget? The committee members were annoyed for being ignored. They termed Omar’s request to give their suggestions simply as a useless exercise.

In every civilized and democratic society, it is the sole prerogative of elected members to initiate the process of law-making and devise national policies after taking public input. No law or policy should be made unless a thorough debate is held in the parliament.

In Pakistan the rulers, military and civilian alike, always try to bypass parliamentary processes and then complain about lack of “democratic behaviour and culture” on the part of opposition. Every year budget-making exercise is entrusted to bureaucrats and the role of Parliament is to rubber stamp the Finance Bill.

As a result of non-participation of public representatives in budget-making, the financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances. Their interest in the number game and collecting the taxes where these are not due, is a direct link between growing poverty and distortion in tax base since 1991, when major tax burden was shifted on the consumers by introducing presumptive taxes in income tax law.

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 people towards the poverty line. Since the fiscal policy has not been devised by the parliament but by IMF-World Bank-imposed financial wizards, the priority has never been to tax the rich and give relief to 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 in 2003-2004, whereas in 2002-2003 it was 3.15 per cent [Page 23, CBR YEAR BOOK 2003-04].

The total amount of income tax collected for financial year 2003-04, according to CBR, was Rs157,448 million. If we subtract tax collected at source on goods (Rs22,829 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 and not 31.73 per cent as claimed at page 15 of CBR YEAR BOOK 2003-04. The tax system is directly contributing to rising poverty as people who possess enormous income and wealth are not been subjected to income taxation.

Thus, the very purpose of redistribution of wealth as the main object of taxation is being defeated. It is pertinent to mention here that 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 present tax policies are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The ability-to-pay principle is regarded as the most equitable and just method of taxation.

It is emphasized primarily for its redistributive role. In Pakistan, our rulers have completely deviated from this principle, which is, in fact, a constitutional obligation.

The existing tax system protects 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 [even salt sold under brand names is subjected to 15 per cent sales tax] but the mighty segments of society such as big industrialists, landed aristocracy, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes.

In a country where billions of rupees are being 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] and the government is least bothered to tax undocumented economy and benami {name-lender) transactions.

Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit and improving tax-to-GDP ratio to 25 per cent within two year’s time provided a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation. A fair and equitable tax system, which should be devised and supervised by a bi-partisan committee of Parliament and not by handpicked IMF-World Bank experts is the need of the hour.