KARACHI: Successive governments have failed to broaden the tax net as they lacked political will to take measures which could bring all categories of taxable income into the ambit of tax laws. As a result of this, tax rates could not be rationalised and the burden of the country with 150 million people is on the shoulders of 1.3 million taxpayers.

As long as the number of taxpayers remains low the tax-to-GDP ration will also keep at a dismal level and no government will be in a position to provide matching infrastructure and utilities required by the private sector in the fast process of industrialisation and high economic growth. This will ultimately retard the economic growth of the country and aggravate the unemployment situation.

It is a proven theory that the bigger the tax base the lesser the rates, but in our country the number of taxpayers (those who file returns) has remained extremely low. But a question arises as to why the figure still remains a little over one million despite the fact that there has been a conspicuous growth and prosperity in particular segments of the society.

The urban society has grown at a fast pace where most modern facilities are available and people no more live a simple life as they use modern electronic gadgets such as split airconditioners, household equipment, TV sets, power generators, cars, cellphones etc. In short, a larger segment of the society is presently having a higher living standard than what it had been two or three decades ago.

Similarly, it is an admitted fact that agriculture is by far the largest sector of the economy, with a share of a quarter of the gross domestic product (GDP). Farm tax has failed to contribute to the annual nominal tax targets of Rs10 billion. It is a major hurdle in widening the tax net and in ensuring equity, as almost the entire income tax collection is shared by trade, industry and salaried class.

Nevertheless, tax consultants are of the view that tax base could be broadened without much hassle if there is commitment to do so on the part of the government. All Pakistan Tax Bar Association (APTBA) President Younus Rizwani Sheikh told Dawn that if legislation was passed to make the National Tax Number (NTN) certificate mandatory for different documents the number of NTN holders would multiply within a short period and this would ultimately increase the number of taxpayers in the country.

He suggested that presently property deals worth billions of rupees were conducted with no questions asked and the least the government could do was to make it mandatory upon buyers and sellers to have NTN for the execution of these documents.

Similarly, he said, trading in shares worth millions of rupees and transfer of vehicles took place every day but all these transactions were carried out without having NTN. If the NTN requirement was made mandatory it would help to not only document the economy but also enhance the number of taxpayers in the shortest possible time.

Mr Sheikh pointed out that presently bank documents, such as credit, debit and ATM cards, as well as travel documents were processed and accepted without the NTN and if the government made its requirement mandatory there would be sharp rise in the number of taxpayers.

The APTBA chief said it was shocking when one learnt that such amendments were made to the tax law wherein certain categories of taxpayers were excluded from mandatory filing of tax returns. Citing an example, he said Clause 14(1)(b) was substituted vide Finance Act 2005 and the following categories were excluded from mandatory filing of returns: owners of motor vehicles, telephone and mobile phone subscribers, those who undertook foreign travel other than Haj, Umrah or Ziarat and members of clubs.

There is a greater need to distinguish between taxpayers and non-taxpayers and in the past there were certain tax concessions favouring taxpayers.

The APTBA chief said that under Capital Value Tax (CVT) taxpayers were charged less tax on purchase of motor vehicles whereas non-taxpayers were asked to pay a higher tax.

However, through an amendment to Finance Act 1997, both the taxpayers and non-taxpayers were brought at par by fixing the same tax rate on purchase of motor vehicles. This gave strength to the general notion that those who evaded tax did well, those who stayed out of the tax net did better and those who paid tax were ‘fools’.

President of the Income Tax Bar Association, Karachi, Ali A. Rahim, raised a question that when there was a confirmed and authentic number of commercial users of electricity and gas in the country then why they continued to stay out of the ambit of tax net.

He said that according to Wapda and the KESC there were around 6.4 million electric power users in the commercial sector and around 3.6 million gas users. However, the official figures showed that only 1.2 million were taxpayers or NTN holders in the country. Now who was to be blamed for such a situation where even documented economy was not being brought under the tax net?

Mr Rahim said that on the other hand there was a huge undocumented sector of the economy, particularly relating to the commercial sector. A sizeable portion of public funds was siphoned off through corruption, fraud and embezzlement. The unaccounted funds found their way into such activities and transactions inside and outside the country which were not being taxed due to lack of information and an effective mechanism of tracing the incomes and expenditures.

Citing an example, he said that in Karachi Saddar area alone the estimated number of shopkeepers was around 40,000 but one wondered that how many of them were taxpayers or even holders of NTN. Furthermore, he said, there were a large number of plazas and shopping malls in the country with even more coming up but one wondered where the tax collectors were?

This is the main reason for the inelasticity of tax collection as it does not increase proportionately to the growth of the GDP, which for the FY05 was 8.4 per cent while the tax-to-GDP ratio showed negative growth.

Since there is a major flaw in the tax policy and no government has the political will and strength to correct the situation by reducing the ratio of indirect taxes and increasing direct taxes for revenue collection, under the present system the burden of taxes is not shared proportionately.

This means that a person living in a far-flung area and earning less than a dollar per day, which makes him to be living below poverty level as per World Bank rating, becomes a taxpayer when he uses anything on which there is an indirect tax.

Consequently, there is an urgent need to re-structure taxes, remove distortions and ensure that due taxes are collected from all segments of the society and incomes. Only then can the tax rates be rationalised. If the present taxation system continues, it will make the poor become poorer and the rich even richer.

Who pays how much tax?

For reasons best known to the country’s ruling elite, the names and sums of money paid by taxpayers have forever remained a well guarded secret. It should not be so. In the era of transparency and full disclosure, the public would want to know how much money in taxes is contributed particularly by those who hold high public offices; politicians; powerful feudals and agriculturists; business tycoons and deep pocket corporate bosses. An easily accessible web-site should show the numbers, which would enable citizens to judge if there is a co-relation between the income that people disclose and their lavish life style. — DH