EARLY reports about the forthcoming budget suggest a great expansion in the use of withholding taxes to meet future revenue needs. Of particular interest is the proposed expansion of the withholding tax on bank transactions of non-filers of returns. Last year, the measure was announced and billed specifically as an inducement to get people to file their returns. But having tasted the easy revenue that the tax yielded, it appears the government is now preparing to expand the scope of this tax and make it applicable to 18 more sectors. It is clear that by now the tax did little to spur documentation of the economy, and the failure of the tax amnesty scheme offered to traders this year testifies to that. But as a revenue measure, it has worked well. Expanding its scope, therefore, can longer be said to be a documentation exercise, and the tax has become a revenue line now.

This is a wholly regrettable development. Banking transaction taxes have been rejected in many countries because they do not tax incomes or consumption, which are the two core bases from where revenue should come. Transaction taxes, as pure revenue measures, are not only inequitable, they also stifle growth and promote informality. So long as the tax was conceived and implemented only as a penalty for non-filers it was acceptable. But its transformation into a revenue line bodes ill for the future. In due course, as it yields up its easy revenue, it is likely to be expanded further and eventually come to include those who file their returns as well.

In large part, the measure is the result of failed tax reforms. It has been a couple of decades now that the country has been trying to move towards a consumption tax regime, as well as upgraded administration to strengthen direct tax collection. In the 2013 IMF programme, that effort was abandoned and, since then, the PML-N government has been increasing its reliance on withholding taxes of various sorts to energise its revenue effort. In all the budgets of this government, the bulk of new revenue measures have been in withholding mode, with the banking transaction tax only the latest permutation in this series of developments. Without a commitment to undertaking comprehensive tax reform, the country is left to muddle through with measures that place a growing burden on productive activity, as well as squeeze those already within the tax net. It is unlikely that the next budget will break from this trend, and although the new revenue required for the next year is likely to be slightly lower than what it was last year, the resort to withholding and bank transaction taxes will continue unabated. Five lost years in the tax reform effort makes for a bad track record.

Published in Dawn, June 1st, 2016