THE finance bill for the fiscal year 2014-15 proposes significant changes in federal taxes. The idea said to be behind the suggested changes is to facilitate investments in the economy, broaden the narrow tax base, document the undocumented sectors, improve compliance, boost direct tax revenues, remove exemptions to certain sectors, punish tax dodgers and curb evasion.

Eminent tax experts and economists term the proposed changes as ‘less regressive’ than the ones introduced in the Nawaz Sharif government’s first budget last year.

Sayem Ali, an economist at Standard Chartered Bank, was pleased to note that the implementation of indirect taxes, which burden the majority of people, was avoided in the new budget. Hence, the new taxation is less regressive than the previous one.

Still, many are dissatisfied by its strategy to continue its dependence on ‘direct taxation in indirect mode,’ arguing that it will keep the government from collecting taxes of Rs2.81 trillion it is targeting to raise during the next financial year.

Many are dissatisfied by the government’s strategy to continue its dependence on ‘direct

taxation in indirect mode’, arguing that it will keep the government from collecting taxes of Rs2.81 trillion it is targeting to raise during the next financial year

Economist Asad Sayeed contends that the reason governments resort to this is that the tax machinery is incompetent and lacks credibility. “This is one way of not attempting to reform the Federal Board of Revenue and get some taxes. The consequence is forgone tax collection.”

The proposed new taxes and withdrawal of sales tax exemptions will generate revenues of Rs231 billion — or equal to 0.80pc of domestic output. The scrapping of exemptions will yield Rs103 billion, and new taxes Rs128 billion. “The new measures will boost the share of the direct taxes in tax revenues,” Finance Minister Ishaq Dar claimed in his budget speech. “The measures will target those who either don’t pay taxes or file returns.”

Sayem is not optimistic about the government’s estimates of expanding the narrow tax base through the proposed measures. Nor is he very hopeful of an increase in tax revenue as a ratio of domestic output, which stands at 9.5pc — one of the lowest in the world.

“Where are the 3m wealthy people the government planned to tax,” he asked. The government, it appears, has scrapped its plan to bring the people, who it says live in luxury but don’t file tax returns or pay taxes, into the tax net.

The minister didn’t speak of tax exemptions and concessions of Rs477 billion given to various powerful and rich lobbies during the present year — double the amount of exemptions and concessions of Rs239.5 billion allowed last year; something that has disappointed tax experts like Ikram-ul-Haq.

“It is disturbing to see the government lacking the will to tax the rich. Major taxation proposals show the poor will face more misery, while the powerful have managed to escape proper personal taxation on their colossal incomes and wealth,” he pointed out.

He is of the view that the imbalance between direct and indirect taxes — the share of indirect taxes is not less than 75pc if presumptive taxes are excluded from income tax — is increasing. “The rich are not paying direct taxes, as the total number of individuals showing income tax liability exceeding Rs1 million in tax year 2013 was less than 15,000,” Ikram concluded.

The Institute for Policy Reforms (IPR), a new Lahore-based think tank, finds that the budget documents do not support the government’s estimates of growth in tax collection or increase in the tax-to-GDP ratio and contribution of direct taxes and decline in fiscal deficit.

“The government may feel satisfied at the 16pc growth rate for tax collection (in 2013-14 to revised target), but it falls well below its target growth rate of 27pc. Despite the rhetoric about tax reforms, there is little change in the tax-to-GDP ratio and especially in the abysmally low contribution of direct taxes to the total revenues,” it says.

“The government’s professed objective of increase in contribution of direct taxes aside, the finance bill does not propose any major measure for its enhancement. Last year, finding resistance among some key constituents, the government quickly gave up its objective to broaden the tax base. This year, the government did not even consider it worth a mention,” argues the IPR analysis of the budget.

In his critique on tax policy, Asad terms it as unimaginative and routine. “There’s no break from the past and no realisation that the task is enormous, given the exceptionally low tax-to-GDP ratio.”

He is of the opinion that the “bang for the buck in taxation is going to come from effectively taxing services. This entails wholesale and retail trade, construction and professional services. Also, only 21pc of the firms registered with the SECP pay tax. This is scandalous. The issue is there is no tax policy as such. If there was a policy which laid out goals and objectives of the government, it would be easier to judge them by it.”

Published in Dawn, June 9th, 2014