Assignment of tax: Assignment of a tax means transfer of taxation power from a higher level to a lower level government. Taxation power includes the following: right to levy the tax, collect the tax, and appropriate the proceeds from the tax. Thus, there can be three interpretations of assignment of a tax.
Firstly, higher-level government may levy and collect a tax but hand over the entire proceeds to the lower-level governments. Secondly, the higher-level government may levy a tax but allow the lower level governments to collect it and retain fully the proceeds therefrom. Finally, the higher-level government may transfer a tax to the lower-level governments, a situation, which defines assignment of a tax in its strictest sense.
In the Pakistani scenario, the opposite and worst has happened. The federal highhandedness in tax matters has destroyed the financial and economic rights of the provinces. The provinces must have exclusive right to levy taxes on goods and services within their respective physical boundaries. The federation blatantly encroaches upon their undisputed right by levying tax on services on a presumptive basis - this is in substance indirect tax - under various sections of the Income Tax Ordinance, 2001. Such taxes are no more taxes on income (which the federal government is empowered to levy under item 47 of the Federal List) but tax on goods and services.
Generally, the purpose of the tax assignment is to augment the resources of lower-level governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower level government to levy the tax assigned to it. Not only this, the lower level government may not have powers to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing the tax rates within a minimum and maximum range prescribed by the higher-level government.
There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal and taxing powers between the federation and the provinces. True provincial autonomy can only be guaranteed if assignment of tax principle is followed in letter and spirit. By just electing some people under the local body elections and asking them to dislodge the District Management, provincial autonomy cannot be extended. Let the provinces have exclusive right over their resources and finances. Let us transfer taxes to local governments so that grass root democracy and funds for public services can be guaranteed.
Buoyancy and elasticity of tax revenue Tax revenue may change through automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of the existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying the tax parameters (bases, rates etc) are called discretionary changes. Variations in the tax yield flowing from the combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax. It is computed by dividing percentage change in tax yield by percentage change in national income.
The Pakistani experience in this regard has been very disappointing as admitted by the government in almost every Economic Survey in the following manner: "Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan tax system is still characterised by a narrow and punctured tax base, over-reliance on distortionary import-related taxes, high taxes on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effect of these structural weaknesses has resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilisation efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure".
Buoyancy estimates assess the overall success of government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income. In the absence or weakness of the elasticity attribute of the tax system, a government will have to revise tax rates and tax bases every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws, reduce administrative efficiency and are also politically inexpedient. This is what happened in Pakistan since 1977. It is high time that we must have a paradigm shift in out tax policy to avoid these kinds of negative effects. Therefore, the tax structure should be so redesigned as to impart a reasonable degree of elasticity to the tax system.
Taxation is a potent instrument to shape and influence the socio-economic polices of a country. It is, therefore, imperative for us to formulate a nationally acceptable tax policy, keeping in view our own peculiar conditions.
Our Tax policy must take into account:
------ The present stage of our economic development.
------ Objectives of economic policy.
------ Priorities of economic policy continually change with the changing economic, social, and political milieu.
It is necessary for us to use the forthcoming budget as a tool for CHANGE and not as protector of the status quo. In taxes, we need to bring some fundamental structural and operational changes. Mere amendments here and there will serve no useful purpose. New tax strategy should entail the following three components:
Resource mobilisation and GDP growth The first and foremost objective must be to raise resources for public authorities for administration and development. Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idly or squandering them on luxury consumption. According to Roy Gobin, "the revenue criterion is usually the dominant consideration, since governments in developing countries have become increasingly aware of the active role which budgetary measures can play, not only in initiating and promoting growth but also in maintaining political power. Not only are higher revenue levels needed, but also tax yields should be increased at a faster rate than income, if infrastructural investments and social welfare expenditures are to be financed without generating unacceptable inflationary pressures and/or increasing reliance on foreign assistance."
The revenue performance is in fact the best and optimal use of resources. Since the composition of investment is an important determinant of the growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing high tax rates on luxuries and other low priority items (such as motor cars, air conditioners, and jewellery), the government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors.
Distributive justice Distributive justice or economic justice is an important function of tax policy. Economic justice relates largely to the distribution of the tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, and racial and religious tolerance in a society. Tax policy is a democratic method to influence the distribution of income and wealth on desired lines. The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by low-income groups. In Pakistan we are moving from progressive taxation to regressive taxation, on the dictates of foreign donors. It is a dangerous step that is bound to force us to civil strife, as our society is already divided on economic, geographical and religious divisions.
The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of the Pakistani tax managers is highly disappointing as fiscal deficit remained high during the last decade and the revenue targets fixed annually were revised downwards many a times and even then the same could not be achieved. The tax-GDP ratio remained dismally low.
The second equally important function is: To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has transferred the burden of taxes from the rich to the poor.
Stabilisation Initial developmental efforts are generally marked by inflationary tendencies in an economy. Inflation, if uncontrolled, may thwart all development plans and bring misery to the poor. A reasonable degree of price stability should be a primary concern of a government's economic policies. The overall level of economic activity in an economy depends upon aggregate demand, relative to capacity output. At times, the level of aggregate demand may be insufficient to secure full employment of labour and other factors of production. At other times, aggregate demand may exceed available output at full employment level. Government intervention in both the cases becomes essential to correct such disequilibria in the economy.
The evaluation of our existing tax system with reference to the foregoing objectives is a difficult task because various other policies (like public expenditure policy) may be geared to achieve the same objectives. To what extent the redistributive objective has been served and what was the relative role of tax policy in it is a difficult question to answer. Moreover, the various objectives of tax policy may not always work harmoniously. Rather, they are often in conflict with each other if not mutually exclusive. Since the tax system of a country grows out of the interaction between political judgment and economic rationale, the process of compromises and trade-offs is influenced by political expediency and economic logic, the former, in most cases, having the upper hand. In fact, political requirements and economic thinking change with time, giving new directions to tax policy. As Richard Bird has observed, "Tax reform is, therefore, a never-ending process, not something that can be brought about once and for all and then forgotten."
How to bridge tax gap A country's tax gap is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology' (http://aysps.gsu.edu/isp/files/ispwp0811(1).pdf), a joint study of the Federal Board of Revenue (FBR), Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail, tax gaps by type of tax and describes the methodologies and data used for such estimates. The report released in December 2008 under the name of Rubina Ather Ahmad (FBR) and Mark Rider (Andrew School) warns that views expressed "are of the authors and not of the Government of Pakistan". It is shocking that the FBR on the dictates of World Bank initiated this study and when the final report was released it disassociated itself - this is typical of our government - always non-committal and hesitant to take any responsibility. After disowning this report, in 2012, the FBR is still struggling to bridge the large tax gaps which are the direct result of its persistent inefficiency, incompetence and rampant corruption.
For fiscal year 2004-2005, according to this report, Pakistan's federal tax gap was Rs 409.5 billion or approximately 69% of actual tax receipts of Rs 590.4 billion. Terming this as a "conservative estimate", the report claims direct tax gap at Rs 262.8 billion (around 143% of actual collection of Rs 183.1 billion) and an indirect tax gap at 146.7 billion (36% of actual tax collection of Rs 407 billion). In 2008, the data selected was for fiscal year 2004-2005 and the tax gap was estimated at 45%. Since then the tax gap has increased significantly and it can safely be concluded that it is not less than 70% of the actual tax collection. This report and many others do not take into account the real tax potential of Pakistan and therefore estimates of tax gaps are underestimated.
The real tax potential of Pakistan, by a very conservative estimate, is Rs 5000 billion. However, the target for the current fiscal year at the time of budget announcement was fixed at Rs 1952 billion.
Who is responsible for the prevailing pathetic state of affairs? Our debt burden is increasing monstrously, fiscal deficit is getting beyond control, inflation is crushing the poor, taxes are being evaded and avoided by the rich and whatsoever little is collected, is mercilessly wasted by the men who matter in the land. What a tragedy that the rich and the mighty are not only refusing to pay due taxes but also living shahana zindagi (emperor-like life) at the taxpayers' expense. They are the de facto beneficiaries of the State's resources - generated mainly by the landless tillers, industrial workers, professionals and white-collared employees.
Pakistan is not a poor country - the State's kitty is empty because of unwillingness of the rich to pay taxes, collossal wastage of taxpayers' money on unproductive expenses and non-exploitation of vital natural resources. The absentee landlords (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper personal taxation on their enormous income and wealth. Even in the wake of floods, the President promulgated an Ordinance on March 15, 2011 to levy 15% surcharge on existing taxpayers and enhance indirect taxes on poor growers and common man instead of taxing the rich. An unholy anti-people alliance of trio of indomitable civil-military complex, corrupt and inefficient politicians and greedy businessmen - controlling and enjoying at least 90% the state resources - contribute lower than 3% towards the national revenue collection. This tax gap has not at all been discussed in 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology', a study which is nothing but an eye wash.
(To be continued)
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