PAKISTANIS who cannot afford the cost of a private education pay as much in taxes as a percentage of their earnings as perhaps those who compete for the number of private planes they own.

The distressed citizen who struggles for a decent living in a hostile economic environment gets penalised by indirect taxes.

The mid-career urban salaried class contributes the most, as a percentage of its income, to the national kitty, reveals an analysis of the impact of the taxation structure and the regressive tax incidence on various segments of the economy and the people.

Does the government intend to address this anomaly in the forthcoming budget? The answer seems to be uncertain, but past record shows no significant adjustments are made.

Teachers, government servants, bankers, office secretaries, accountants, lawyers, engineers and managers earning Rs70,000-1,83,000 a month share the cost of running the government by paying more than a quarter of their hard earned income in taxes.

According to the taxation regime details available on the Federal Board of Revenue’s (FBR) website, people earning Rs800,000-2,200,000 annually fall in income slabs 4-6, with their income tax rate ranging between 10 to 15pc. Their income tax is deducted at source.

The focus is on raising money without upsetting the special interest groups. The preferable mode of taxation is indirect, where the burden can be spread across society

Most of this class of people cannot afford to save. They spend almost all, and in some cases more than, their income by eating into their assets. The spending is primarily on consumer items. There is a 17pc sales tax that buyers pay on a wide range of products. Some essential kitchen items like vegetables, fruits, meat etc are tax free.

This class is also comparatively the most compliant in paying utility bills. These bills are again loaded with government levies and surcharges.

Therefore, when considering the cumulative impact of the income tax, the sales tax and the levies charged on utility bills, the tax incidence for these people adds up to 25-35pc of their gross income.

Now compare this with the highest income slab (12) in the income tax schedule, which specifies that when “the taxable income exceeds Rs7,000,000, the rate of tax would be Rs1,412,500 + 30pc of the amount exceeding Rs7,000,000”.

The executive class earns, in extreme cases, double the highest annual income slab per month. But its contribution in terms of percentage is the same or even less than someone who earns a tiny fraction of this monthly salary in a year. The riches of the landed aristocracy, brokers and big business, and the mass scale tax evasion, has not been discussed here.

The impact of the incidence of indirect taxes on the rich and the mighty is dismally low because they consume a small share of their income and the bulk is saved and invested. Their spending-to-income ratio is low, and so is the burden of indirect tax.

FBR sources told Dawn that they were not aware of any serious exercise to review the impact of the incidence of taxes across sectors or income groups.

“Yes, the incidence of taxes is studied in all its aspects in many countries to ensure fairness. Here, the focus is on raising money without upsetting the vocal special interest groups. The preferable mode of taxation is indirect, where the burden can be spread across the society with little regard to the high income disparity. The axe, therefore, often falls on the middle class,” an officer commented.

Tax practitioners and experts in Karachi, Lahore and Islamabad endorsed the projection that the tax incidence rate is perhaps the highest on the country’s middle class.

“The estimation of tax incidence on different incomes generally constitutes the basis of the formulation of a progressive tax policy. But the issue does not get the attention it deserves in the relevant quarters,” Eijaz Hussain Rathore, a senior member of the Institute of Chartered Accountants of Pakistan (ICAP), told this scribe.

“The responsibility rests with the policymakers and the planning division, who are supposed to set the policy direction, and not with the FBR, which should only be responsible for implementing the taxation regime,” he said.

“The case of the middle class being disproportionately burdened with taxes appears logical. The matter should be studied and adjustments be made,” concluded Rathore, who is involved in various tax-related government committees.

Rashid Ibrahim, another tax consultant, remarked that “taxation policy adjustments are often stopgap arrangements, where no proper time and energy has been spent to assess their implications. There is no dearth of committees in the FBR, including those on reforms, but the absence of any work on the assessment of tax incidence is a sad commentary on those responsible for the tax system”.

Commenting on the argument that the middle class is unfairly taxed, Mansoor Ali Khan, another corporate tax consultant from Lahore, responded: “it is a very interesting angle and the case of the middle class is convincing. Someone needs to work in detail on the concept. The government needs to resist the temptation to resort to short cuts like introducing one-time taxes, and instead broaden the tax net and stop penalising citizens for the inefficiency of the tax collectors”.

Published in Dawn, Economic & Business, June 1st, 2015

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