THERE seems to be a consensus that our tax policy is seriously flawed and needs a complete overhaul. However, glancing through various newspapers, one does not come across any solid suggestions as to how it should be achieved.
Over the years, a number of initiatives were taken by our government and donors to improve our tax collection system. But these initiatives failed to address the basic flaws of our tax policy.
Perhaps, the only exception was the short-lived reform process from 1997 to 2002. But even these reforms were half-hearted as it was during this period that wealth tax was abolished to shield the rich.
In order to prescribe the cure for the tax system, its major ailments need to be identified.
When comparing with other successful countries, it is clear that our tax policy is suffering from the following short-comings:• It yields one of the lowest tax to GDP ratios in the world;
• It does not put the burden on people’s capacity to pay or in other words it taxes the poor more than it does the richer people;
• It does not help distribute the resources amongst various regions and strata of society and
• It seriously hampers economic growth.
We do not have to re-invent the wheel but just to see what other successful countries have done and follow those policies.
The key difference between us and them is that their predominant source of revenue is direct taxes such as income tax and consumption tax rather than indirect taxes such as customs duty or withholding taxes on imports. If we look at our share of indirect taxes i.e., customs duty, sales tax on imports and withholding taxes on imports, almost 70 per cent of revenue is collected through those sources. All these taxes are passed on to the poor, who end-up paying more than their due share.
When our politicians and other rich persons claim to pay huge taxes, in fact they refer to indirect taxes, which they pay in the first instance but then pass on to others.
Thus the rich get away without paying any taxes. If we were to shift our reliance on direct taxes such as income tax, theimplication would be that the impact and incidence of a tax would be on one and the same person and on one’s ability to pay.
The second major problem is that our tax policy discriminates between different incomes. For example, agriculture constitutes about 20 per cent of GDP but agricultural income contributes less than one per cent of tax.
This means that not only agricultural income remains out of the ambit of the tax but also provides a strong also provides a mechanism for money-laundering and evasion of taxes on incomes earned through other sources.
There is no tax on total wealth or inheritance and there are a number of other exemptions that shelter well-to-do persons.
Furthermore, our tax system favours income created through inactive sources such as rental income whereas that earned through working as a salary person or through business is charged at three times that rate.
By relying on high tariffs, our tax policy encourages shifting of resources to more developed areas. Such taxation policies result in discontment and in many countries have led to their break-up or civil wars.
Since we are now entering the budgetary period, it is high time our ministry of finance chalk out a five-year programme to overhaul our tax policies.
The writer is former Pakistan’s ambassador to WTO and Member Customs, FBR
manzoor_ahmad@yahoo.com