THE Central Board of Revenue (CBR) plans to move on the fast track of policy reforms and wants to set up 11 regional tax offices (RTOs) where returns on income and sales tax and excise duty will be received at a single counter. The collectorates of income and the sales tax and that of excise duty are to be wound up under the new system.
Reforms in tax administration were taken up with $150 million World Bank assistance about five years back but these have failed to give desired results. The recent State Bank annual report points out that the tax-GDP ratio has come down to nine per cent in 2004-05 from 9.6 per cent in 1993-94. The tax-GDP ratio had remained above 10 per cent during “the lost decade of nineties.”
“We are now trying to adopt Turkish and Korean tax models’’ a senior official of the CBR told Dawn. Turkey is said to have a 32 per cent tax-GDP ratio and took up reforms in policy as well as in administration since 1986 in its zest to become a member of the European Union (EU). The State Bank report quotes the IMF’s government finance statistics, according to which, high-income countries maintain the ratio at 40 per cent, middle-income countries are at 25 per cent and low income countries at 18 per cent.
For a change, the State Bank in its annual report is blunt in declaring that “tax evasion is rampant’’ and it attributes unfavourable tax compliance to a series of negative perceptions of the government which are; (i) government is corrupt; ii) it is wasteful in expenditure; (iii) its spending supports certain ethnic groups or economic classes over others; (iv) taxation lacks horizontal and vertical equity and,(v),transparency.
In expectation of a voluntary compliance from the tax payers, the CBR in 04-05 suspended the income and sales tax audit. As a result, the income tax on current demand declined by more than 15 per cent. The Finance Act 2004 increased the threshold limit for registration of retailers from Rs1 million to Rs5 million. And the number of registered retailers under sales tax came down from 163,188 to 114,952 in 2005.
The State Bank now wants the government to reduce this threshold limit. It wants the CBR to increase the risk/gain ratio of indulgence in tax evasion through creation of data-bases of economic transactions of taxpayers and its utilization through an effective system of audit and investigation and a stringent system of penalty.
The proposal of setting up RTOs and receiving returns of income and sales tax and excise on a single counter is expected to serve the purpose of creating data-bases of economic transactions of the tax payers.
The CBR responded to the State Bank’s observations and conceded that there was lack of voluntary compliance on the part of the taxpayers but obliquely refers to the rebasing of the national economy in 2001 (shifting from 80-81 base year) has also been one of the key factors.
The size of the economy expanded to about Rs3.5 trillion after it was re-based on the year 00-01 from Rs2.95 trillion. The economy now is officially estimated at over Rs6 trillion (over $120 billion), because of incorporating the fast growing telecom sector, the expanding IT sector, unrecorded labour/incomes in rural areas etc.
Shabbar Zaidi, a chartered accountant who was involved in the task of reforming the tax administration in the year 2000-01 is of the view that under existing conditions, the tax-GDP ratio is bound to come further down. The State Bank report provides the answer to the questions it has raised on falling tax-GDP ratio, he added.
Agriculture constitutes merely 24 per cent of the national economy. There is an agricultural income tax at the provincial level. But the collection is hardly Rs1 billion and that too only in Punjab. In Sindh, agriculturists pay a paltry Rs150 to Rs200 million. There is hardly any collection in Balochistan and NWFP. Though the services sector is more than 50 per cent of the national economy, its potential also remain untapped
Coming to manufacturing, the share of the single largest segment in tax revenue, the textiles, is negligible. Banks have shown profitability but corporate tax rate has come down and in 04-05 were given a hefty refund of Rs40 billion. Cement and automobile sector are involved in capacity expansion and taxes are being deferred.
According to Shabbar, the tax structure is such that any big expansion in any of these sectors brings the tax-GDP ratio down.
Tariq Sayeed, a trade leader a member on the CBR Tax Advisory Committee said that businessmen pay a much higher ratio of tax than other section of population. He remains a staunch supporter of fixed tax and presumptive taxation. While supporting the six per cent income tax at import stage he refuse to believe that it has inflationary impact. “Could you think of buying air conditioners, refrigerators, motor cycles and many other items that are assembled here from imported kits on present prices about four or five years ago?
But a common man’s perception is different from the tax collector and that of a businessman. Even after a cut in import tariff, the total impact of all levies is more than 46 per cent on import. This is because of 25 per cent import tax, 15 per cent sales tax and six per cent withholding tax.
As much as over 70 per cent of the income tax is still being collected by way of withholding and presumptive taxes which have regressive and inflationary impact. The biggest burden of Pakistan’s taxation falls on the poor sections of the population. The taxation structure takes away from the poor and passes on to the rich and hence the growing rich-poor disparity.
A report on reforms on tax administration incorporates a survey report of the Lahore University of Management Sciences (LUMS) which found that out of every taxable Rs100, the government recovers only Rs38. It means Rs62 is being shared by the tax payer, tax collector and tax practitioner. It also conveys loudly that Pakistan’s taxation promotes black economy which is on expanding every day.