Economic Advisor to the Ministry of Finance Dr Ashfaque Hasan Khan told a seminar on Thursday in Karachi that the federal government was not empowered under the Constitution to collect income tax on agriculture and would not do so.
Concerned over the declining tax-to-GDP ratio, the World Bank and the IMF have advised the government to review the self- assessment scheme with a view to penalising tax dodgers and corrupt tax officers.
During their recent inter-actions, the officials of the World Bank and the IMF were surprised by tax departments receiving estimated tax ranging from Rs4,000 to Rs6,000 annually from the businessmen of the Liberty Market, Lahore, Jinnah Super Market, Islamabad, and various markets in Karachi and other big cities.
The government has also been advised to ensure that businessmen do not take for granted that there would be no action against them in case of tax evasion. “If a business man is involved in tax evasion, he should be brought to book and corrupt tax official to should be punished. And then only one could expect increase in the tax-to-GDP ratio", said an official of the local donor agency. The government is needed to be tough if it wants to enhance taxes which were quite low as compared to many other developing anddeveloped countries, he observed.
Prominent economist and former director of the Pakistan Institute of Development Economics (PIDE), Dr A. R. Kamal, is critical of government's tax-collection policy. He asked, "why should only the public and the trading sectors continue to pay taxes whereas the services sector should go escort free?”.
There was also a need to recover tax on agriculture income and it should no more be considered a provincial subject. "If at all it is a provincial issue then the government should make it a federal subject and this is how volume of tax could be increased,” Dr Kamal said.
There should be a legislation for tax evasion and it should be treated as a heinous crime, exemption from wealth tax and capital gain tax should be reviewed and there should be a real documentation of the economy.
In his view there was a dire need to tax the real estate sector and the manufacturing sector should also be made to pay due taxes.
“Only after all sectors of the economy is brought under tax net, the required 15-16 per cent tax-to-GDP ratio can be achieved in next few years," the former Pide director observed.
Chairman of the Central Board of Revenue (CBR) Abdullah Yousef agreed that Pakistan's tax-to-GDP ratio was low and needed to be enhanced.
“There is a gap of about 4-5 per cent in the GDP and the government has been advised for a change in policy in the tax administration to achieve about 15 per cent tax-to-GDP ratio in next 10 years," he said. Tax on agriculture income should also be realised and there should be an across the board policy for all sectors.
Abdullah Yousef said that while he was ensuring revamping of the CBR and broad improvements in the tax administration, he was expecting the higher authorities to review the issue of tax on agriculture income with a view to filling the "tax gap".
He disclosed that a debate is currently going on in the relevant quarters to introduce tax on agriculture income. "People have different views about this issue but we have made our point very clear that all sectors of the economy must be taxed if at the objective of generating adequate taxes in the country is to be achieved.
"I have no doubt in mind that we need to implement a plan that seeks to have an extended tax base which is inevitable", he said. To a question, how do you manage to have reforms in the tax administration, he said he was trying to ensure efficiency and transparency in the organisation and wanted to move like other countries to recover equitable share of taxes from all citizens.
The CBR chairman said there was a dire need to remove "distortions and exceptions" in the tax system to ensure that everybody is to pay his or her taxes.
Generally, it is said that tax policy is concerned with the design of a tax system that is capable of financing the necessary level of public spending in the most efficient and equitable way possible. An efficient tax system should raise enough revenue to finance essential expenditures without recourse to excessive public sector borrowing and raise the revenue in ways that are equitable and that minimise its disincentive effects on economic activities.
In developing countries, establishment of effective and efficient tax system faces formidable challenges. First of these is the structure of the economy that makes it difficult to impose and collect certain taxes. For example, the economy of Pakistan is often characterised by a large share of agriculture in total output and employment; by large informal sector activities and occupations by many small establishments; by a small share of wages in total national income and so on. All these characteristics reduce the possibility of relying on certain modern taxes such as income and to a much lessen extent, on sale.
Generally, there is also consensus in the society that widening the tax base by reducing exemptions, incentives and concessions, reducing multiplicity of rates, lowering tax rates, shifting the incidence of tax burden from production to consumption, moving away from the excessive reliance on manufacturing and taxing all value additions including services, enhancing neutrality between present and future consumption, enhancing neutrality of tax systems to forms of business organisations and sources of finance, and re-engineering business process changes in the tax administration to establish an effective and efficient tax system that are the guiding principles of the tax policy.