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Direct vs indirect tax

January 08, 2014

MORE reforms are needed to overcome the low income-tax-to-GDP ratio, lower tax base, tax evasion and lack of new source of taxable income. There are too many concessions and exemptions, either permanently notified or extended through SROs.

Moreover, when it comes to taxing the rich, leaders have resisted obeying democratic norms. Income tax forms the major share of direct taxes and is the ultimate source of a balanced and developed society, whereas indirect taxes contribute the chunk of source of revenues.

During the last financial year, the share in the GDP of direct taxes in the national tax revenue was 3.50pc and of indirect taxes 6.40pc.

Big companies pay billions in taxes which are collected from customers through the supply chain, as companies merely act as collectors and consolidators of those tax sums.

About 25 pc tax revenue is collected through direct taxes and the remaining 75 pc through indirect taxes.

Noble Laureate Joseph Stiglitz in his recent book The Price of Inequality has argued that big corporations abuse market mechanism to shift their corporate tax burden to others. A major reason for the market abuse is the asymmetric relationship between well-informed and well-organised business giants and ill-informed and unorganised consumers.

Consumers mostly do not know as to whose burden they are made to carry. Even if some of them realise it, the individual burden is so small that they do not consider it worthwhile to mount a challenge socially or legally.

Thus, there is a need to examine inadequacies of tax administration which require strategic deviation from the comfort zone to a realistic and equitable approach in taxing taxpayers.

Muhammad Azam Shaikh

Advocate, High Court &

General Secretary

Tax Bar Association