October 16, 2006	Monday	Ramazan 22, 1427

THE shrinking share of direct taxes in overall tax revenue should be a cause of concern for our policymakers. It is the lack of judicious balance between direct and indirect taxes that has pushed an overwhelming majority of people towards the poverty line.

In the last quarterly report( April-June 2006) released on October 11, the Central Board of Revenue claimed that “ the share of income tax in total taxes stands around 30 per cent though it has increased from 18 per cent in the early 1990s…….”. This claim is questionable.

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 [Page 23, CBR Year Book 2003-04]. The pathetic state of affairs in respect of tax-to-GDP ratio from 1990-2000 to 2003-04 is highlighted in the Table.

The total amount of income tax collected for 2003-04, according to the 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 in CBR Year Book. After the adjustment, direct tax-to-GDP ratio for 2003-04 is dismally low at 2.1 and not 3.02 per cent as claimed by the CBR.

Those who posses enormous income and wealth are not taxed adequately. 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 higher ratio for the industrialised countries is primarily due to the higher level of revenue from social security, payroll taxes, corporate taxes and taxes on domestic consumption while the taxes from international trade and non-tax revenue are lower.

In the developing countries, the major portion of revenue comes from the indirect taxes, particularly the taxes on international trade and domestic consumption, while the direct taxes have a lower share. Pakistan GDP-tax -ratio is even below than Sri Lanka and Thailand.

Anticipating higher growth in economy, the government has fixed the budgetary tax revenue target for 2006-07 at Rs835 billion, showing an increase of 17.2 per cent over the collection of Rs712.5 billion of last year. CBR projections anticipate that the share of direct taxes in total CBR collection will be 31.7 per cent — higher than last year, and within indirect taxes, the shares of sales tax, excise, and CD will be 60.3, 12.1 and 27.6 per cent, respectively.

Interestingly, the share of income tax is calculated without deducting indirect taxes that have been levied as presumptive taxes and collected at source being full and final discharge of liability. These cannot be, under any rule of classification, called direct taxes.

Even in the indirect taxes, the base is so narrow that Central Board of the CBR raised 79 per cent of the total gross receipts of indirect taxes — customs, sales tax and federal excise duty —from only 17 commodities during the 2006.

The CBR figures show that more than half of this collection emanates from six items that include petroleum products, automobile sector (vehicles and parts), electrical and mechanical machinery, cigarettes, telecom sector and iron and steel. It also highlights the pitfall of relying on these few items.

It should be obvious that any contingency faced by these 17 industries can cast a debilitating effect on tax receipts. CBR figures show that the remaining 23 per cent share come from all other products. Product-wise analysis showed that tax authorities had raised Rs105.1 billion as indirect taxes from petroleum sector during the FY06 as against Rs67.1 billion the previous year, showing an increase of 56.8 per cent.

The burden of all these indirect taxes has been passed on the consumers. The stress on indirect taxation [even in 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 lamentable policy.