That the desire is boundless and the act a slave to limit.
— Shakespeare
If mere declaration of intentions could arbitrate on the bona fides of the resolve and the honesty of purpose, the government of Pakistan would attain the highest place of honour. It was never found wanting in declaring its grand designs concerning almost the entire range of its activities. Eradication of smuggling, curbing of tax evasion through conducting survey, weeding out corruption, reducing the budgetary deficit, etc, are all declared intentions of the government.
But alas! mere declaration of intentions does not result in their achievement. They have to have to be authentic and the outcome of critical analyses of the factors involved and an appraisal of nuts and bolts. Unfortunately such exercises were seldom undertaken and all the failed targets mock in the face of our faulty planning.
The latest move of the government falling in the category is the decision to increase the tax-GDP ratio to 20 per cent by the year 2006. Not many will dispute that Pakistan’s tax-GDP ratio, hovering around 13 per cent, is one of the lowest in the world. Our commitment to huge expenditure on defence due to our threat perception and the debt servicing cry out for a higher tax collection.
An examination of global trends brings up an interesting fact: the richer and more dynamic economies have a higher tax-GDP ratio, as would be apparent from the following.
1. Low income countries 13.9
2. Middle income countries 19.1
3. High income countries 28.7
4. Europe and European Union countries 37.1
5. South Asian countries 12.4
The tax-GDP ratio is the lowest amongst the South Asian countries, which largely explains their under-development.
There is a dire exigency for greater collection of taxes for our nation.
Consider the following indicators:
1. We spend 11.1 per cent of our GDP on debt servicing, both foreign and domestic.
2. Our internal debt stands at Rs1,652,106 million.
3. Our external debt amounts to more than $33 billion.
4. We spent Rs149,600 million on defence in 2001-02. The expenditure under this head was only Rs64,623 million in the year 1990-91.
5. We spend only 3 per cent of our GDP on education and health care.
6. Our adult literacy rate is only 44 per cent.
7. We rank a poor 135th on human development index, according to UNDP’s Human Development Report.
8. Our population growth rate at 2.4 per cent is one of the highest in world.
9. 33 per cent of our population lives below national poverty line.
The only way we can hope to improve the gloomy indicators, enumerated above, is through higher tax collection provided it is cannalized properly and is not eaten away by corruption and iniquity.
Before we embark on the discussion of strategy of achieving this goal, let us try to comprehend the immensity of the task before us.
In the year just concluded (2001-02) Pakistan’s GDP has been estimated at Rs3,726,611 million. What would be our GDP in 2006? Its growth rate fluctuated between 7.6 per cent to 1.7 per cent in the years 1991-92 to 2001-02. Let us assume that GDP in the next four years would grow at an average rate of 5 per cent. On this basis, our GDP for the four years would be:
Rs In million
2002-03: 3,912,942
2003-04: 4,108,589
2004-05: 4,314,018
2005-06: 4,529,718
At 20 per cent of the GDP, the revenue collection should go up Rs905.94 billion in the year 2005-06. Thus we hope to more than double our collection in next four years. Can we do it? It is a mammoth task indeed but can be done if we have the will and the determination to do it. Here are some suggestions:
a) No exemptions:
Exemptions, as a rule, create distortions. Though the government is trying to reduce their number, one big exemption remains in tact i.e. exemption of agricultural income from income tax. This can present a big handicap in achieving our aim of increasing the tax-GDP ratio. Agricultural sector contributed from 26 per cent to 24.1 per cent to our GDP in last 5 years. Let us assume that its share would be 25 per cent in the target year of 2006. The projected GDP for the year sans the contribution of agricultural sector, would be Rs3,397.288 million.
We will have to plan for a ratio of 26.66 per cent and not 20 per cent, if we are aiming to collect Rs905.94 billion out of a GDP bereft of the contribution of agricultural sector. Such a high target can not be achieved unless agricultural income is brought within the tax net. This exemption not only rules out tax from agricultural income but also adversely affects collection from sources which are otherwise taxable. In a large number of cases, untaxed income from other sources masquerade as agricultural income. Thus taxing this source will plug evasion of tax from other sources as well.
Taxing those who have the ability to pay:
The chasm between the haves and ‘have-nots’ is growing in Pakistan with leaps and bounds. The evidence is profuse, almost shocking. Despite recession sales of cars are growing. A few days ago the manufacturers of a popular brand of car, which recently introduced a new model, had to advertise to request their patrons not to pay illegal premium on the purchase of their cars but wait for their turn. Imagine the abundance of extra cash these classes of people have as to be wanting to pay hundreds of thousands of rupees to satisfy their whim of owning the model here and now and being discouraged by the sellers. The ever-growing jewellry shops, nay markets, is another evidence. Yet another evidence is the ever-increasing price of real estate and coming up of palatial houses all over the country.
The inference is obvious. Those who are in plenty are not being taxed and their untaxed money is giving rise to all these distortions in our economic life and creating discontent, anger and hatred for the haves by the have-nots. The growing crime rate in the country can be traced back to this phenomenon.
The poor is groaning under the yoke of grinding poverty. We are told that the inflation is in single digit. One does not have the means to check the veracity of the claim, or question the composition of the CPI on the basis of which the claim is made. But the abject reality, in the shape of suicides of the unemployed, growing number of baggers on our streets, etc. tells another story. It had to be like that when we have increased the price of electricity and fuel as many as six times since October 1999.
Sales tax is spreading its wings all the time. When electricity and fuel are made dearer, every single item of consumption, from essential to luxurious, becomes more expensive. Sales Tax is paid by the stark poor and the fabulously rich in equal monetary terms. But it hits the former much harder because he is already finding it difficult to keep his head above the water. Our growing reliance on the indirect taxes has to be curtailed.
An attempt was made to tax the income and the wealth of the rich through the conduct of a survey in 2000. More than two years have passed, but we have not heard of its outcome. Was it abandoned in mid stream under the pressure of the vested interest? Were the figures collected could not be collated? Or the entire exercise became victim of inefficiency and callowness? The answer, one suspects, is the combination of all the three questions.
We can tax the rich without undertaking the grandiose plan of two years ago. Creating a big hullabaloo, as we did, has the tendency of raising unrealistic expectations on one hand and super resistance on the other. And the whole exercise is bound to come crushing down. This is exactly what happened.
It is advisable that the government does not make it sails too big to catch the blast of the vested interest. The unfortunate fact has to be accepted that this class has both clout and strength. Secondly, there is no need for the survey teams to go out in the market place and pretend that they are all-knowing and all-powerful. They are neither. What ought to have been done, instead, was to mobilize our internal resources. The recommendation entails the following:
a) All the owners of property, be it residential, commercial or industrial, should be required to declare their National Tax Numbers (NTN) in all the documents pertaining to their properties, from purchase deeds to tax bills periodically issued by the relevant agencies. Those who are not tax-payers and do not hold NTN should specifically state so. They are the ones who should be targeted as they are the potential tax-payers. It is highly improbable that a property-owner would not have a taxable income. This group should be the first priority for a thorough check. In the second phase, the value of the property can be determined by taking into account the size of the plot, the built-up area and the quality of construction. This value can be taxed as deemed income under the relevant provisions of income tax law.
b) Identical procedure can also be adopted in respect of cars, sports and utility vehicles, buses etc.
c) Similarly, the declaration of NTN by the holders of bank accounts, users of credit cards and the investors in National Saving Schemes should also be made compulsory. This can unearth big spender and large account holders.
It may be noted that the measures suggested here relate to those assets which already exist on the books of various governmental agencies and banks. Other channels which can lead to the discovery of tax evasion, like expenditure on luxury items, are not being proposed at this stage because they operate through the undocumented economy and are difficult to bring to book. The tax evasion in our country is all pervasive and can not be banished in one go Goose’s feathers have to be plucked one by one.
One all important condition of the success of this scheme is full and complete cooperation amongst all the governmental agencies dealing with registration of properties and vehicles, national saving centres, banks and the CBR. It is a difficult task, but much less difficult than extracting information from a defiant citizenry who considers tax evasion as their birth right.
Second condition of success of this scheme is that the CBR has to undertake a massive exercise to spruce up its record keeping through computerization. Every tax payer, existing or potential, has to have a separate file and all the data collected about him or her should find its way to that file without delay or hindrance.
The public opinion towards greater tax compliance has to be mobilized but not through hollow slogans or spinning a yearn of deceit and deception. Our people have had enough of it, you can not fool all the people for all the time. The benefits of higher tax collection should trickle down to the common man. They should be palpable and perceptible. If the people continue to fend for their security, remain victim of the tanker mafia, suffer electricity outages or pay exorbitant price for the inefficiency of Wapda and the KESC, it would be contrary to reason to expect a greater tax compliance.
If the government of Pakistan, unlike its track record of the past, is serious in implementing its avowed goal, time to start taking concrete actions is now. The addition of 7 per cent in tax-GDP ratios in less than 4 years can not be achieved by pious intentions alone. The government will have to plan meticulously and take unflinching, many times unpleasant, actions for achieving this cherished goal.