No one has ever heard of tax without tears. But when the burden is unevenly distributed, the woes of those who have to bear the brunt is understandable. In Pakistan just 1.3 million in a population of 150 million fall into the income tax net. The powerful feudals who sit in the government pay only a rupee for a thousand earned from farm income. So who is the most taxed? One, the well-documented corporate sector that has to forgo 57 per cent of gross income earned. Two, the salaried class that finds slabs raised and tax deducted at source. Finally, consider that as much as 85 per cent of the revenue is generated through indirect taxes that are universally believed to be regressive in nature. Stocks have dipped and the industrial wheel is grinding slowly, for everyone watches nervously as ahead are the:

In this pre-budget special report, the Dawn team has tried to demystify the taxation structure and put it in proper perspective. An attempt has been made to identify the loopholes and inconsistencies and reason out the high level of reluctance in society to fulfil the crucial national obligation.

KARACHI: The Finance Bill for the fiscal 2007 will be announced on June 5. Most people will yawn halfway through the long discourse by the minister, who will read out the real and imaginary ‘accomplishments’ of the government during the previous year. Of interest will be just be the last part of the budget that will spell out who is going to pay up how much more in taxation.

Even without having the faintest idea of whether the documents are ready, it is quite easy to tell that it would be all the same again. Agricultural income, to which landowners club together income from other sources, will remain out of the tax net. For all the rhetorics about documentation, the hidden income of services sector and apparently appearing to be small business shops that make millions in income will not be touched and most of the 30,000 unlisted private limited companies and partnership firms will be able to dodge the taxman.

The onus for increasing revenue for the government, which it will need to fill the gaping hole in the form of fiscal deficit, will fall on the corporate sector and the salaried class. But more than them, the common man on the street will have to bear the brunt under indirect taxes. But who cares for the common citizen?

President Musharraf says he does. He has declared he is determined to cut prices of kitchen items by 50 per cent. A noble wish, specially when, according to the government’s own figures, per capita income is around $800 or $2.2 a day. That is barely above the internationally accepted ‘poverty line’ of $2 a day. For the family of five that minimum converts to Rs18,000 a month. That calculation of per capita, like most other figures dished out by the government will remain a mystery. What to talk of rural Pakistan, even in large cities less than a quarter of the population can be earning an income of that kind. The galloping inflation at 10pc further erodes the purchasing power of the people and leaves them on the edge. Much time and energy of the majority are spent on making the ends meet.

The president’s statement can be a part of traditional pre-election rhetoric. Even if we believe he means business, the question then is how will the government go about cutting prices of essentials by half? Should we expect an ordinance directing that prices of all inventories of everyday use be slashed by 50 per cent? Who will bear the burden of such a move (retailers, suppliers, wholesalers, transporters, producers or the government)?

In a market economy this is not doable. But there is another way. Relief can be provided to distressed by reducing taxes (particularly indirect taxes) being borne by them. This will offer them an economic space without upsetting the apple cart.

Let the government take a revolutionary step to exempt from tax the income of people living on or below the poverty line. This will mean that families drawing monthly income of Rs18,000 or an annual income of Rs216,000 should be exempted.

As this will leave a bigger hole in the deficit, it can be filled by increasing the component of direct tax on higher income groups, plugging loopholes in taxation regime, making filing of returns simple, broadening the tax net and improving the service delivery. Improvement in the government’s own image as a people-friendly institution is necessary for commanding the moral authority to ask people for tax compliance. As long as people provide for their own security, dig wells or buy water, depend on private generators for uninterrupted power supply, the case for tax compliance will remain weak.

According to an intelligent estimate, salaried people earning less than or equivalent to Grade 17 civil servant pay two months’ salaries in taxes in a year. (This includes both income and all other indirect taxes on consumer items as well as levies that are charged with utility bills). This means that one sixth of earnings of salaried class is reclaimed by the government to support itself. Out of two months’ salary paid in taxes, a little less than a month’s salary is deducted at source as direct tax (income tax) while the balance is eaten up by indirect taxes (central excise duty, sales tax custom duties and government levies in petrol and bills of utilities).

Even non-salaried poor are not free riders and pay higher proportion of their income in taxes than do the elite in Pakistan. These people tend to consume all they earn. There is a tax on almost anything and everything they purchase. From matchboxes to edibles to soaps to utility bills to fares of transport, all contain a component of indirect taxes.

Incidentally, the country’s tax regime is such that tax incidence actually reduces as one moves up the social ladder. The more you earn the less you pay as proportion of your income. In an economy where income disparity is on the rise, this is hardly a desirable situation.

How the elite in Pakistan dodge the taxman with the help of tax consultants is a fine art in itself. Complexities in taxation regime and thousands of amendments introduced is mind-boggling. This, however, does ensure extra scope and additional income for tax practitioners in the country. Tax avoidance, however, is not limited to Pakistan. It is an international practice. It is prevalent even in most advanced societies of the world. The tax season is colder than coldest winters in the West.

Then there are tax evaders who abhor documentation and resist any attempt by the government to this end. It is not just the socially undesirable elements that fall in this category, tax evaders include self-employed citizens from small shop owners to reputed doctors, lawyers, traders, teachers, engineers and consultants of all shades and variety. They declare much less than what they earn and there is no way to know their actual income as it is not documented.

In Pakistan, agricultural income is out of the tax net. Every time the issue is brought up in the parliament or media, the subject is brushed aside as a provincial subject. The income tax exemption on agriculture tempt people in the top 20 per cent income bracket to buy agricultural land, set up factories and club income from all sources together and show it as the exempted farm income.

In contrast to agriculture, the corporate Pakistan is taxed at such a high rate that its expansion capacity is impaired and competitive edge is blunted. According to a World Bank Group ‘Doing Business’ that ranks economies according to their business friendliness on the basis of some standard indicators, Pakistan is ranked 133rd on a scale of 155 countries, reviewed on the basis of data provided by those countries. According to the report on Pakistan the tax payable by the corporate Pakistan is high at 57 per cent of the gross profit. In India it is 43.2pc and in US it is 21.5pc.

No wonder that businessmen are shy of putting up factories. There are many factors but the high corporate tax rate must also be a component of higher cost of production in Pakistan. Besides, if tax burden is evenly spread, it is likely to cause slightly less hurt and be paid without shedding much tears.