ISLAMABAD, Feb 26: A study shows that textile and food processing sectors’ contribution in taxes is fairly negligible though these sectors have a relatively larger share in manufacturing sector.

The study concludes there is a great mismatch between sectoral share in GDP and taxes. The agriculture is nearly tax exempt. The services sector is lightly taxed and the tax contribution of the manufacturing sector is disproportionate to its contribution to GDP.

The researchers - Member and Chief Fiscal Research and Statistics CBR Dr Ather Maqsood Ahmed and Mrs Robina Ather Ahmed - recommend that there is tremendous scope for raising revenues as there is no scarcity of sectors that are either outside the tax net or lightly taxed.

The study reveals textile contribution in manufacturing was more than 28 per cent but their contribution in taxes was negative (4.6 per cent). In fact, whatever is paid has been received back as refund hence the net collection becomes negative. Food and beverages sub-sector also portray a similar picture.

Whereas the share of agriculture sector in GDP is slightly over 21 per cent, its contribution to taxes is only 1.1 per cent. This has been due to wide-ranging tax-exemptions granted to this sector, narrow tax base, low compliance and enforcement, and constitutional constraint whereby taxation of agricultural income is a provincial subject.

One really wonders how to justify tax exemption to income earned by sprawling orchard-owners and those who are engaged in lucrative horticulture business. At the same time the anecdotal evidence, only partly confirmed by empirical evidence, also suggests that keeping agriculture outside the tax net has provided ample opportunities for tax avoiders and evaders to declare their incomes earned in the non-agricultural sector as agricultural income.

Regarding narrow tax base, it needs to be stressed that nearly 50 per cent of agriculture value added is generated by livestock engaged in milk, poultry, and related activities. This sector, despite its profitability, has almost no tax contribution. Enforcement is yet another critical issue.

So far only two provinces have opted to have tax on agriculture income, but even in these provinces, the collection is abysmally low, which speaks volumes about the level of compliance within the agriculture sector.

The second disturbing area as far as tax compliance is concerned is services sector. The tax contribution of this sector is only 33 per cent compared to its share of over 50 per cent in GDP.

There are a number of activities that have gained prominence over the years. The most important among them are banking and insurance, telecommunication, wholesale and retail trade, transport, and construction.

The growth recorded by these sectors has been simply overwhelming. However, the tax contribution is not found growing at the same pace. As a matter of fact, it has lagged behind by a wide margin and there are very exceptions.

The glaring loopholes are found in construction, transport, and wholesale and retail trade sub-sectors. Hotel and restaurant business, the commission agents, and road transporters are among the lowest tax compliant sectors.A deeper analysis reveals that out of 53.7 per cent share in taxes of the manufacturing sector, 42.6 per cent are generated through indirect taxes. Since the incidence of indirect taxes is almost always shifted forward, the result implies that nearly 80 percent of taxes attributable to the manufacturing sector are, in fact, borne by final consumers.

This forward shifting is glaring in the case of iron & steel industry, cigarette manufacturers, cement producers, edible oil industry, machinery and automobile industries. In all these cases, more than 85 per cent of tax incidence is passed on to the final consumers. The highest transfer of burden of 97 per cent has been estimated for iron and steel industry. Thus, there are serious equity concerns.

However, this overall situation changes diametrically when tax contribution is decomposed into direct and indirect taxes. Barring petroleum and to some extent automobile sector, the direct tax contribution of all other sectors relative to GDP turns out to be too low.

This result confirms that the incidence of federal taxes is not borne by the manufacturing sector, as may have been misconceived on the basis of aggregate analysis. It is unfortunate that almost all the manufacturing sub-sectors prefer to pass taxes forward to final consumers in the shape of higher prices and themselves bear nearly no tax burden.

On the other hand, income and corporate tax payments by economic sectors remains far below the desired level. Even the manufacturers who appear to be sharing ‘extra’ burden of taxation, find it easier to transfer the tax burden forward quite easily.