TAX reforms initiated in 2000 have started yielding more revenues but have failed in improving the tax-to-GDP ratio. The collection by the Central Board of Revenue (CBR) last fiscal exceeded the revised target of Rs690 billion by over Rs10 billion. It is an all-time record.

However, the higher collection was largely due to import-based taxes which accounted for 48 per cent of the share in the overall tax revenue.

Analysts have been expressing serious concern about narrow tax-base, lower tax-to-GDP ratio and increasing tax burden on the poor. Pakistan needs to strive very hard to be at par with many developing countries in achieving a desirable tax-to-GDP ratio of over 15 per cent. Now the ratio is dismally low at 9.5 per cent.

Some radical changes – like broadening of tax base and reduction of exorbitant sales tax rate, simpler and fairer tax codes – are required to encourage savings and investments.

Pakistan needs to re-prioritise its tax goals for fiscal year 2006-07 to improve tax-to-GDP ratio, attain better compliance and collections that move up with the rapid industrial and business growth.

While billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low. The government is least bothered about taxing the informal economy and ‘benami’ transactions.

The CBR should be given full autonomy to tax the privileged class, the absentee landlords, military rulers and their hand picked members of the Parliament. They should also be divested of all the exemptions enjoyed under various tax codes.

There is massive sales tax evasion coupled with non-reporting of income. CBR needs to enhance sales tax collection and broaden income tax base. The people should be given tax benefit/incentive which will help expand tax base, improve documentation and ensure better collection.

A well-thought-out scheme is required that should not only check leakages in sales tax collection but also encourage the people to file their income tax returns. The dual aim of expanding tax base and combating tax evasion should be achieved.

At present every person, making taxable supplies, is required to charge sales tax at the rate of 15 per cent on the value of goods and is required to deposit the same into government treasury after adjusting input tax paid by him. But registered persons are not depositing full amount of sales tax recovered from the end users.

By not depositing sales tax into government treasury, they deprived the national exchequer of: (a) sales tax which the end users are paying to registered persons and (b) income tax which a registered person should pay on his income since that portion of sales is not recorded in their income tax affairs.

As the CBR has now developed an online mechanism of checking registration of persons, government can announce the following scheme:

* Anybody who pays sales tax in a financial year should be entitled to claim refund of 20 per cent of the amount paid.

The procedure for claiming refund should be simple. He should send invoices to sales tax department, which will authorise refund from a nearest branch of National Bank, after verification of genuineness of the invoice (by checking sellers’ registration number).

In this way, the CBR can develop data base about sales of all registered persons and then cross verify the same with the particulars declared by them in their sales/income tax returns; or

* Any person who pays sales tax can claim credit of part of sales tax paid say, 20 per cent against his income tax liability by producing all sales tax invoices obtained by him throughout the year. Detailed mechanism can be devised to cater the situation where income tax liability is less than amount of credit of sales tax.

In this scheme, the people may choose not to claim full credit of sales tax paid by them since they could not justify sources of their full expenses. To overcome this situation, the government can announce immunity for three years from scrutiny of their expenses declared through sales tax invoices.

This scheme will encourage people to obtain sales tax invoice for each transaction, which is presently not being insisted. The evasion of sales tax is mutually beneficial. If payer is given the above incentive, he will insist for sales tax invoice and the government without expending any money or making extra efforts will be able to expand tax net.

The CBR needs a “radical camp” (or at least a “prudent” camp) because the “traditional camp” has failed to broaden the tax net and accelerate the pace of tax reform ensuring tax-to-GDP ratio at a respectable level.

This ratio cannot be improved with the present income taxpayers (roughly 1.5 million) and just over 100,000 registered sales tax persons. The tendency to squeeze more and more from the existing taxpayers and giving a free hand to non-filers has eroded the tax base to the extent where voluntary compliance and tax enforcement have lost their relevance.

The rule of law must be applied to assessment and enforcement of taxes. Faith in the system will never be restored unless rule of law is enforced both for the tax machinery as well as the taxpayers. How to achieve tax compliance is the main challenge before the government.

The state must remember that if taxation is viewed as being unfair or favouring some taxpayers, it remains counter productive in the long run.

The crisis is that general acceptance of tax system is undermined. Special efforts and rational policies are needed to restructure the tax system and restore public confidence in the tax officials. There is an immediate need to improve both the tax system and the human fabric that controls it.

The tax system must provide:

* rule of law and predictability of the authority to tax; principles of proportionality, efficiency, effectiveness, flexibility, continuity, reciprocity, fairness and equity; tax harmonization; no double taxation or intentional non-taxation; non-discrimination and; strict anti-tax evasion rules.

The present tax system imposes disproportionate burden on the poor and middle-class people (e.g. 15 per cent GST takes larger portion of low-income groups compared to high- income groups). The rich enjoy complete tax exemption as their colossal agricultural income and enormous profits made through speculative transactions made in real estate and on the money/share market are outside tax net.

Since they are not paying a single penny as tax, the vast majority of citizens argue that why should they be subjected to exorbitant and multiple taxes? In 2006, we have even made property income chargeable to tax at five per cent giving great benefit to rich classes.

Our tax-to-GDP ratio can rise to 20 per cent in one year unless we tax speculative dealings in real estate (this will also help in promoting construction industry as prices of land will come down) and bring black economy into tax net.

Instead of performing its prime duty, that is levy of tax where it is due, the CBR is busy in constituting committees to ponder over many issues relating to tax policy and administrative reforms, which are in fact the job of Parliament. It appears that the CBR is more eager to do the job of legislators rather than performing its primary function of levy and collection of taxes.

Some time back a ‘task force’ was formed by CBR to suggest measures for improvement in the taxation structure by speeding up sales tax refund payment to the business community and analysing the scope of expansion in the GST net to cover more services.

The task force was given a mandate to analyse performance of the existing tax system with particular emphasis on broadening the tax base. In the past, CBR wasted a lot of time and money in the formation of many such task forces, committees and what not, but the result has always been nill.

This is indeed a sorry state of affairs. The root cause is CBR’s unwillingness to do what is its duty and indulgence in activities that fall outside its mandate or domain.