“WE, as a nation, have not been successful in mobilising revenues,” regretted Finance Minister Dr Hafeez Shaikh while presenting taxation proposals in his budget speech to the National Assembly on Friday amidst noisy Opposition protests and scuffles.
And Mr Shaikh counted the reasons for the sorry state of affairs: only about three millions citizens pay income tax, hardly half of the registered corporate taxpayers file tax returns, a mere 100,000 persons are registered under sales tax, and under-invoicing and undervaluation have become a norm in business practices.
Above all, millions of dollars were spent on reforming the tax machinery, but collusion between the taxpayers and tax officials nullified possible affects of the reforms, admitted the finance minister. As a result, the tax-to-GDP ratio stagnated.
For next year, the tax-to-GDP ratio has been projected at 10.3 per cent. To achieve this, an ambitious revenue target of Rs2,381 billion has been set for 2012-13 against the current year’s target of Rs1, 952 billion — an increase of 18 per cent.
But many are skeptical of these numbers. Even tax officials privately admit that the target has been imposed on the FBR and it did not reflect the real revenue potential in an economy under severe distress. The task of the FBR officials have been made more difficult with government giving away billions of rupees in tax exemptions, incentives and relief. And the basic reality — that some sectors are under-taxed and a few important segments are not taxed at all — has not changed.
In fact, under this policy of exemptions, the independent power producers were given income tax exemptions worth a whopping Rs46.939 billion in 2011-12.This was a raise of 5,295.2 per cent from the exemptions of Rs0.870 billion in 2010-11. Many other sectors were also been given similar exemptions.
Moreover, an additional Rs31.22 billion exemption-cum-relief in tax rates has been given in the budget 2012-13 to the industrialists and business elite – who are a significant part of revenue generating group with bulk amount of Rs24.5 billion provided by the income tax segment.
Not surprisingly, taxations proposals have been dictated by political consideration rather than economic reasons. In an election year, the ruling PPP would like to be seen providing relief to the middle and low-income people, while not being harsh to the rich. The rich are expected to be major financers in the next election and carry significant clout with the government. The major relief in income-tax is for the salaried classes, pensioners and association of persons. To compensate for the loss, officials hope that the new income tax measures will help raise Rs34 billion additional revenue. For example, the FBR will raise Rs2 billion from the levy of the flat rate of two per cent capital value tax in the Islamabad Capital Territory on purchase of property. And the capital gains tax (CGT) levied on property will raise Rs5 billion.
The CVT is already imposed in provinces but without any positive outcome. With virtually no FBR homework done on CGT, it seems a wishful thinking that the FBR will be able to meet the target.
Another Rs15 billion collection is targeted through manufacturers allowed to collect one per cent tax against sales to dealers, traders and distributors which will be adjustable against income tax. Another Rs2 billion is to be raised through higher taxation of transport and goods vehicles.
Contrary to this, the tax system is plagued by the payment of fake refunds against illegal input tax adjustments. Now, the FBR has come up with a novel idea of exempting important sectors like supplies against international tenders, and zero rating of certain items like re-meltable scrap and sprinkler from the sales tax. They have projected that this measure will stop an illegal payment of Rs16-18 billion refunds every year.
There is full or partial tax exemption; for example, sugar industry has been paying half general sales tax; five export sectors—— like textile, carpets, sports, surgical and leather—- are paying five per cent tax on domestic sales. These are untouchable sectors, which have been spared in the budget again. Nowhere in the world ,domestic sales of the export industries are eligible for full or partial exemptions.A marginal change in the structure of cigarettes prices will yield an additional revenue of Rs10 billion but at the same time filter rod used in the cigarettes have been exempted from the federal excise duty. Further reduction in excise duty on cement was announced but the industry was increasing prices instead of reducing it. The government has projected to raise an additional revenue of Rs29 billion from sales tax and excise measures. No such measures are visible in the budget documents.
There are Rs136 billion revenue stuck as arrears, which the FBR is eyeing to collect. For example in the recent amnesty scheme, the FBR collected Rs10 billion in May.
The low tax-to-GDP ratio can only be increased substantially if the major contributors to GDP growth, not included in the tax net, can be brought into the tax next.