The defective tax system has partially been responsible for most of our problems like fiscal deficits, capital flight, concentration of wealth in a few individuals, large-scale tax evasion, maladministration within the tax department, arbitrary powers to tax officials, and inadequate infrastructural investments.
Why we need to break away from the old system. The simple reason is that many income-earners pay too much tax, while others pay too little. And that's not fair. Some people, who have money, can afford to minimise their tax through schemes while others avoid tax by dealing in cash economy. And that's also not fair.
Quoting from the website of CBR surprisingly it took more than 50 years for the Central Board of Revenue to initiate study to determine the efficiency of Pakistan Customs, a major revenue collection organ of the CBR. The result presented a very bleak picture for customs efficiency, cost of doing business investment in the country and competitiveness of the local industry in the international market.
To bring efficiency in CBR in the year 2002 care was initiated as part of its campaign to revamp the federal tax collection machinery. During the last three-and-half-years CBR is going through the process of comprehensive reforms both at the HQ and field formations.
The main purpose of these reforms is to transform the taxation system from an autocratic organisation to a service-oriented one. To achieve this goal CBR has simplified IT Ordinance 2001, has established large tax-payer units (LTU) at Lahore and Karachi, medium taxpayer units at Peshawar, Rawalpindi, Lahore, Quetta and Karachi. These reforms also include STARR (Sales Tax Automated Refund Repositioning). These reforms have been introduced on the recommendations of the IMF.
Frankly speaking LTU and MTU are to distinguish between a VIP and VOP (very ordinary person) and nothing else. In actual practice people, who come under the fold of LTU and MTU, were already getting better treatment at the hands of the tax collectors for obvious reasons. But the main purpose of establishing LTU and MTU was to root out the corruption and it was to be ensured that it presented a corruption-free unit.
Have we succeeded? The right answer is no. According to the tax advisers, who have their work done in LTU and MTU, nothing has changed. The pseudo-reforms speak volume of themselves. It was superficial spending of money to build beautiful buildings with the latest electronic gadgets.
It has no relationship with the corruption. Rooting out corruption and bringing competency without changing the mindset would remain a dream that would never be fulfilled. There is no change in the system of posting of officers, the selection is based on pick and choose, likes and dislikes. People continue serving at one place, be it customs or income tax. To have break in service at the same station they manage their posting to other organisations like FIA, PIA, Pakistan Steel, Export Promotion Bureau, WAPDA, EOBI, NIPA and different departments of provincial headquarters and in capital the CDA and different ministries like commerce, labour etc.
Tax reform without observing posting criterion and duration of various categories of officers is the key factor that has always been overlooked. Can the chairman CBR explain as to why certain officers are sitting at one station for more than 2 to 3 years, other competent people, who have no push and pull, are sidelined? Such policies itself breeds corruption instead of curtailing it.
It is worthwhile to go through history of various senior officers who make their way of course with short break back to Karachi, Lahore, Islamabad, Peshawar, Multan, and Faisalabad on lucrative assignments .Why? Does it require holding a seminar and determining reasons behind such moves by various officers?
The biggest problem of our tax collectors has been the tax collection system. Sometime back Member Direct Taxes said that inspite of Central Board of Revenue's efforts the taxpayer's numbers have not exceeded 1.5 million and receipts through direct taxes are very low and therefore the CBR is planning to bring more units in the net to enhance the base from 1.3 million to 1.5 million. Imagine the tax system of our country: with a population of 160 million we have 1.3 million taxpayers only.
The revenue collected through direct taxes is around 165 billion rupees as compared to indirect taxes which are around 355.8 billion rupees. These figures are a true reflection of the efficiency of the CBR; this is so sad that how the poor people are being taxed in the shape of indirect taxes.
It is factually incorrect to suggest that there are only 1.5 million taxpayers in this country. To give a very simple picture Withholding Tax is collected on all the utility bills and bank accounts which should roughly reflect the number of tax payers in Pakistan.
The CBR figures do not include over 24 million mobile phone customers, 5.7 million landline customers and consumers of water, power and gas and bank account holders. The figure runs in crores as for as tax payers are concerned. The figure of 1.5 million of taxpayers registered by CBR is in respect of those taxpayers to whom the CBR have issued NTN numbers.
What about those tax payers who pay their taxes through different channel of withholding schemes which runs into crores? The CBR is giving fallacious figures about the tax payers. Since the department is not collecting tax by its own efforts and it is generally through indirect means automatically, so both the figures collected by the tax collectors and taxpayers are not correct.
If that be the case why have such huge establishment at the cost of this poor nation. What is the justification of spending millions of rupees on income tax buildings throughout Pakistan?. This is not adding to the tax collection except increasing the expenditure on the revenue services and providing pleasant atmosphere to tax collectors to be cool.
We always hear about revolutions in all the departments but in actual reality it is restricted to only VIPs and there is hardly any relief to the poor taxpayer. They continue to suffer as before.
If we have the proper system of tax collection we can double the number of taxpayers alone from Karachi leaving aside the rest of the country. We evolve systems good or bad and leave plenty of room for tax evasion intentionally. Just imagine the roadside barbecues operating in Karachi and other cities of Pakistan are doing roaring business. The payment is on cash basis, mostly without any receipt, and if a receipt is issued it authenticity is always doubtful.
Likewise doctors, businessman, small or big, are doing roaring business and paying very little to the government. It was a wonderful experience for me to see a Pakistani restaurant in Yorkshire being fined by the tax authorities to the tune of one million pounds which later on was reduced to one lakh pound as the owner accepted his guilt. To determine the tax evasion the tax people would come and sit in the restaurant, take food and leave just before closing hours of restaurant.
They would maintain account of the visitors every day and approximate money collected by the owner of the restaurant. When he was confronted with the actual figure he was simply stunned and had no way out and accepted the evasion. As a result the punishment was of less intensity. On the other hand in Pakistan we create lot of loopholes in the relevant rules which otherwise are of no use and suit the tax collectors to negotiate the terms to provide relief.
Do our tax collectors ever bother to carry out any such exercise in Pakistan. I am sure billions of rupees are being evaded and go unchecked. If this is the system of our tax collection we can never succeed in enhancing the base, except to bother the already taxed people by opening their files or carrying adjustments in tax structure. The major sufferer is the common man, who is paying heavily in the shape of indirect taxes and getting no relief.
In many developing countries, taxation has been used judiciously to finance the priority investment needs of the country as an instrument for promoting equity. In Pakistan, unfortunately taxation has not only been inadequate in relation to the needs but has also been regressive.
It is largely derived from indirect taxes-custom duties, excise taxes and sales tax whose incidence falls equally on all income classes. Most income tax payers are salaried or wage earning employees, importers, contractors or others whose taxes can be withheld at source. Tax evasion, exclusion from the tax net and collusion with the tax collectors have given rise to a nouveau riche class of tax officials and businessmen who have made millions at the expense of the State.
There was a time when traders, businessmen used to cry against income tax officials' arbitrary powers but now there is a complete silence. The present reforms, restructuring of Central Board of Revenue are aimed at providing relief to the elitist class and has nothing to do with the common man. The progress of the country is not measured by high rise buildings, luxury cars and palatial houses and beautiful offices with splits providing cool atmosphere to a few but it is gauged from the condition of the poor masses who even can't get safe drinking water.
We are all hostile to any sort of discipline be it to form a queue or to pay taxes, knowing fully well that the major source of the government revenue is taxes. But due to lack of tax discipline and poor administration we fail to motivate our people to come out for voluntary tax compliance. The problem with our system has been that while framing instructions one important factor of literacy is not at all taken into account.
When the instructions are issued even the tax people get confused and are unable to explain it to the public at large and end their discussion by blaming CBR for making such faulty forms.
The reforms have not been able to provide relief to the common man. There is major upward trend in the prices of necessities; food, energy, transportation, housing and health. These expenditures amount to 70 percent of the spending of most of the families and a much higher percentage for the poor. They are major stimuli to the wage-price spiral and ought to be attacked directly instead of using shotgun approach that wounds too many in trying to kill inflation.
Wages and price control are key factors in fighting inflation; until they are tackled no amount of reforms will bring relief. The disastrous effects of oil price increase is a major factor of all-time high cost of commodities. Therefore, unless it is attended to there would be no change.
The Federal budget decisions not only reflect views about fiscal and social policy, but also are substantially shaped by electoral policies and by the processes of the government. The Prime Minister proposes and the Parliament disposes. In Pakistan the budget is a carbon-copy of the previous budgets with minor adjustments in figures. The centralisation of decision-making by the federal government allowing financial support has been the major cause in meeting the provincial needs of the people with regard to health, education, water supply etc.
According to Press reports the Central Board of Revenue has directed the Commissioners of Income Tax to collect information about the people who have invested huge sums of money in real estate business in the United Arab Emirates; investment in other part of the world also came under discussion. This is a good step in the right direction, but won't it be better if this exercise was undertaken first at home.
Investment in huge plazas all over the country, Defence Housing Authorities, Creek City, Bahria Towns, lucrative flat sites in major cities, purchase of costly plots and huge investment in stocks. To obtain information about investors should pose no problem provided we are serious. Apparently such huge investment is not possible from honest savings when an ordinary plot in under developed areas cost over a crore of rupees.
This is a general practice in most of the countries of the world that income tax is levied on income and wealth tax is imposed on wealth. Wealth Tax returns and wealth tax were being collected from the rich people but it was abolished on July 1, 2000.
There was no tax on stock exchange business where billions of rupees turnover take place, but with effect from July 1, 2004 a very nominal tax of .01% has been imposed when buying shares and .005% tax is charged when selling the shares. This percentage of tax imposed on share business can be termed a joke of the century.
Sometime back President SMEA complained that outdated tax laws are inhibiting small and medium enterprises growth. He was of the view that 96% industries in the world fall under SME definition and contributed around 38% towards GDP but in Pakistan SME is yet to be defined, as it is silent on the strength of the labour tax rate etc. In the USA an enterprise having a work force one to 90 is considered small, 100 to 500 medium, above 500 large.
In Pakistan we have a large number of non-productive staff and the policy-makers want to put the work force of one to 49 to small unit. Laws need to be simplified; multiple and complex laws are hindering the growth. Free environment like Dubai, Singapore, Malaysia may be given for better industrialisation. It should be borne in mind that when the economic activity takes boost, the volume of revenue increases. Underreporting by taxpayers, inspite of various checks and balances, continues unabated.
The old tax system has been abolished and replaced by (USAS) Universal Self-Assessment System from July 1, 2002. In this system all taxpayers qualify for self-assessment. This system was introduced with great fanfare. Careful study would reveal by introducing this system the number of taxpayers has reduced by 50%.
People are reluctant to file their returns, even avoid claiming withholding tax. Will the CBR provide information that how many refunds have been issued under USAS to small and medium taxpayers whereas refunds of millions of rupees have been given to multi-national companies.
If we really want to revamp the old system we must have proper career planning of officers. The day they join the service they should know where they are going to end up. Unfortunately there is no such programme with the CBR. The only method is of pick and choose.
Members should have no say in the posting and transfer of various categories of officers. It should be the responsibility of the HR department which should be fully responsible to implement decisions.
Taxing already the taxed people is no solution to the problem. Since most of the tax collection is through indirect means there is no point in opening new regions. It will only add to the existing expenditure. The best course of action is to strengthen the existing system.
Wealth tax that has been abolished should be introduced immediately because there is no justification for its exemption when a poor salaried person is made to pay the tax at source.
Member Direct Taxes in his recent statement has said that a substantial amount of revenue collection came through withholding tax, which suits our country.
About 100 million population live in rural areas and the agriculture under the constitution was not a federal subject what is preventing the provincial governments not to impose agriculture tax commensurate with the income of land holders.
This is a very healthy statement from a government functionary, that too from the CBR, and is highly appreciated but the question arises who will bell the cat.
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