EDITORIAL: The taxation bureaucracy’s knack of coming up with measures that claim to tackle the inefficiencies of our taxation system has often led to less than ideal results, leaving taxpayers to deal with convoluted regulations, while the underlying issues of a narrow tax base and rampant tax evasion continue to persist.
Given this history, it is only understandable that there will be reservations regarding the effectiveness of the much-touted “homegrown transformation plan” of the FBR, which was approved by the prime minister on September 20, that encompasses a variety of measures, including third-party audits of the tax body’s projects, as well as restrictions on financial transactions of taxpayers failing to pay their due share of taxes in a timely manner.
A simple reading of the plan indicates that this could be yet another futile effort to grapple with the pervasive culture of tax evasion that has long undermined revenue generation. Like other similar initiatives that litter the FBR’s history, the thrust of this plan also appears to be on targeting those already part of the tax net.
The plan envisages the division of Pakistani taxpayers into two categories: those who have declared annual incomes of below Rs10 million in a fiscal year, and those who lie above this threshold. The bizarre aspect here is the government treating those who have incomes below Rs10 million as potential tax evaders, who must have under-declared their assets and incomes, and thus must explain their sources of incomes while purchasing a car, immovable property or financial instruments.
While it is true that an individual’s expenditure profile is one of the possible ways to detect whether any tax evasion has been committed or not, the fact that there will be little scrutiny of the financial activities of those who have reported incomes above Rs10 million raises concerns about equity and accountability, as high earners may continue to exploit loopholes while the burden falls disproportionately on smaller taxpayers.
In effect, vital resources may end up being spent on going after compliant taxpayers, especially as, under the plan, tax officers are slated to receive incentives based on their performance, and it is to be expected that they will take the easy way out by pursuing active taxpayers instead of undertaking the much arduous endeavour of going after those that evade the tax net. This is akin to pursuing shadows: how much revenue can one extract from those who have already been squeezed to the limit?
The transformation plan displays little imagination and ingenuity when it comes to perforating the environment of tax evasion that has become all too pervasive, best exemplified by the failure of the tax bureaucracy to widen the sales tax regime to include the majority of retailers and wholesalers, who still lie outside the tax net.
The measures proposed under this new scheme will remain under question unless we witness a substantial increase in the number of registered retailers and wholesalers in the near future. What could have actually been transformational here would have been to eliminate the category of non-filers.
Having this category, in effect, goes against the very basic concept of respecting the law, as it has fostered an environment where one can flout the law with impunity and then just simply pay a monetary penalty to avoid facing any truly serious consequences.
While delivering his budget speech earlier in the year, finance minister Aurangzeb had rightly stated that “a 9.5 percent tax-to-GDP ratio will not run a country”.
At the end of the day, the architects of this plan must ask themselves: will their scheme address that critical issue and is it properly oriented towards solving the core problem at hand, i.e., expanding the tax base? Or will it end up like previous superficial changes that failed to either reduce tax evasion or increase the number of taxpayers?
Copyright Business Recorder, 2024
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