Grey areas for taxation

At present economic indicators are worsening to the extent, which the country had never seen in the past. The government is placing reliance on the loans from World Bank, Asian development Bank, Islamic Development Bank and international finance markets to overcome the fiscal difficulties faced. The economists believe that this strategy of the government will not work.
In fact the situation calls for serious consideration to bring about structural changes in the system. Present system suffers from the large gap arises between the revenue generated and spending pattern of the government. The government emphasis is on the revenue generation only.
It does not look into the expenditures side, the way it spends the constraint resources ruthlessly. The fiscal difficulties can be resolved through mobilizing our resources provided the government has political will to resolve it. The government has to re-examine its expenditure policy. As it is said by an economist that it is easy to earn money but it is difficult to spend it.
The government is capable to generate revenue required by it as our tax collection target runs in trillion now, but the economic crises has worsened. The debt servicing shared 37 percent of the total expenditures in 2007-08, which now have budgeted higher at 38 percent in 2008-09. It is due to high and rising external debts burden, which constitutes a serious constraint for development. The borrowed resources must be utilized effectively and productively so that it generates economic activity.
The funds borrowed in the name of development programs are in fact utilized for current expenditures which mostly include unproductive expenditures of the government. The issue of fiscal crisis is so deep that it cannot be resolved easily and requires the government to take revolutionary steps to improve the taxation system. Firstly, tax administration on one hand and design of tax policies on the other.
The kind of present tax administration is reflective from the amnesty schemes for whitening of black money announced by the successive governments since 1958 and seventh of this kind by the current regime in the name of 'Tax Arrears Settlement Incentive Scheme' in the budget 2008-09. These schemes make the efficiency of tax administration questionable.
Because it reflects leakages in the taxation system either these may be due to the weakness in tax collection system or improper enforcement of policies. The discretionary powers of tax officials pave the way to tax evasion. There is need to make drastic changes in the fiscal reform programme to curb tax evasion instead of announcing amnesties again and again.
Although the international donors have provided finance to improve the efficiency of the tax administration but it appears that the financial doses did not yield the desired results, all these money went into drain at the expense of the taxpayers. The government needs to thoroughly examine this aspect to improve the efficiency of the tax collecting machinery so as to achieve the tax collection target.
Tax policies also need to be changed. Present tax policy based on taxing those who pays tax without giving any benefit to them. The tax defaulters are given tax incentives through amnesty schemes whereas, the honest tax payers are loaded with burden of higher and higher taxes in every budget. Out of the 160 million of the population of the country just 1.4 million that is 1-2 percent, fall into income tax net.
The 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 tax net. Present tax policy is anti-growth and anti-poor. It passes on most of the ultimate burden of the taxes to middle and lower income classes. It therefore hurts taxpayers.
Of course no one has ever heard of tax without tears, but in the present scenario our country has been in fiscal difficulties, every body will have to bear the brunt and should pay his due share for economic development.
The government will have to take revolutionary steps plugging loopholes in taxation regime, broadening the tax net encompassing more sectors of the economy for revenue generation; bringing all the sources of income under tax net, increase the component of direct tax on higher income groups and eliminate the exemptions from tax.
The Chairman of Federal Board of Revenue (FBR) is in search of gray areas for taxation. The records of FBR will reveal him such areas as the prime minister's ex-advisor on finance's statement in the press is on record, who said that CBR has undertaken a detailed sectoral analysis and has identified the mismatch between sectors whose contribution in the GDP is significant but not in taxes. The taxation policy in coming years will focus on those areas which have considerable tax potential.
Moreover, the FBR has prepared a taxation plan "Vision 2016", which has been approved by the President of Pakistan along with tax policy reforms bringing all potential sectors into tax net and tax administrative reforms aimed at enhancing revenue collection. Thus the task of the Chairman of the FBR has become easy and he is now in a better position to restructure the tax policy tapping potential sectors into tax net.
Under the present tax policy it is only the captive taxpayers who have to bear the brunt of targeted tax. A very big segment of elites is almost out of the tax net. Agricultural is one of the important potential sector, which contributes 22 percent to the GDP, but its contribution in taxes is negligible. It is the need of the hour that the agriculture sector should be taxed in the same manner as other sectors are contributing.
There are host of other potential areas to bring into tax net. The imbalances are basically responsible for generating tax evasion activities and who generally take advantage of the amnesty schemes announced by the government from time to time. Thereby the government encourages the defaulters of tax. Instead the government should devise a tax policy whereby all the people of the society should pay equal taxes then the tax evasion will be minimized.
The present tax policy lacks a level playing field, no equitable sharing between the taxpayers and non-taxpayers and increasing tax burden on genuine taxpayers which are the main reasons for increasing tax evasion. The onus of increasing revenue for the government to fill the gapping hole of deficit falls on the well-documented corporate sector that has to forgo around 60 percent of income earned and the salaried class who are subject to deduction of tax at source.
Further the common man on the street is subjected to 85 percent burnt of indirect taxes that are universally believed to be regressive in nature. The policy makers need to consider the foregoing factors to generate revenue and determine pattern of expenditures which may help to face the government the economic challenges the country is facing.