THE continuous revenue and current account deficits have forced the country to rely more and more on external and internal borrowings. The persistence of large fiscal deficits, among other reasons, is one of the primary causes for the rise in public debt and the major source of macro-economic imbalances over the last two decades, says the Economic Surver,2005-2006.

The government is facing a dilemma in meeting the huge current account deficit (while an unprecedented surge in taxable imports of luxury goods have enhanced tax revenues to the tune of Rs710 billon in fiscal year 2005-06) because of its inability to balance productive and non-productive expenditure as well as the growing overall spending.

There is no serious effort to use taxation as a catalyst for economic development and industrial growth, the sole emphasis is on presumptive taxes which are regressive and counter productive.

The amendments made in various tax codes through various Finance Acts testify to a myopic outlook, as a result of which, imports of finished goods (due to low tax incidence and placing the entire burden on consumers) have increased and new industrial activity has almost ceased.

Despite the illogical policies and unjust withholding taxes, the CBR has failed to improve the tax-GDP ratio. It remains below the level of 10 per cent of the GDP for the last six years.

On the other hand, the burden of ever-increasing presumptive taxes (which are nothing but indirect taxes), levied under the garb of income tax, has shifted incidence of taxation from income earners to consumers and clients. These presumptive taxes have distorted the whole tax system, destroyed the economic growth and made the consumer/client the ultimate sufferers.

These short-term revenue-oriented measures have failed to overcome the fiscal deficit. Since the main source of CBR revenue collection is now import-based, our current account deficit has reached all time high. The current account deficit during FY2005-06 reached a precarious 4.7 per cent ($5.683 billion) of the GDP.

The presumptive taxes were levied in the federal budget 1991, when the fiscal deficit was just Rs80 billion. In FY 2005-2006, our fiscal deficit rose to Rs274 billion, proving beyond any doubt that irrational taxes (if even collection touched Rs700 billion mark) did not solve our fiscal management, rather forced us to borrow more money from external and internal sources.

Irrational tax measures have always played a decisive role in destroying civic society and paved the way for retarding the economic growth. A deeper analysis of the amendments in tax codes during the last five years shows that the time-honoured canons of fiscal laws—stability, simplification, flexibility and fairness have been grossly violated just to show higher figures of collection.

The commercial importers (the mighty traders who do not want to pay their taxes) and powerful contractors (who get contracts by bribing officials) are passing on their tax burden to others, courtesy presumptive taxation in income tax law which increased the revenue from Rs40 in FY 1991-92 to Rs225 billion in FY 2005-06.

The right to levy taxes on goods and services always vests with federating units within their territorial jurisdictions (USA and India are notable examples). In utter violation of this principle, the federal government levies such taxes under the garb of Income Tax. This is one of the worst examples of “federal highhandedness” where the victims are the poor people of the less privileged provinces. The constitutional responsibility of distributive justice and social equality was altered, just to show higher collection of taxes. Indeed it is the most unfair act one can think of in a federation.

The presumptive taxes on goods, contracts and services have not only been retained and many more receipts like rental income and interest on deposits and government bonds etc have been added through Finance Act 2006.

An estimated 90 per cent of income tax is now indirect tax; traders have to pay fix tax on turnover and even companies are made liable to presumptive taxation on inter-corporate dividend as a separate block of income without deduction of any expenses, just to mention a few.

Prime Minister Shaukat Aziz is on record to have claimed that time and again that presumptive taxes are being reduced, but the scope has now been enlarged to cover almost all kinds of incomes.

The rich who do not pay taxes, are the real culprits. The exemptions and concessions that exist in our tax laws (The whole of Second Schedule in the Income Tax Ordinance, 2001, most of the items of Sixth Schedule of Sales Tax Act, 1990 and innumerable SROs relating to Customs and Excise) should be done away with. There should be a level playground for everybody.

Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within two year’s time provided that a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation. The policy of ad-hocism due to which we have already suffered a lot will not work. A fair and equitable tax system is needed.