The chairman, Central Board of Revenue, Abdullah Yousuf, talking to journalists in Islamabad the other day reportedly expressed his concern over the abysmally low contribution of the services sector in Pakistan to the exchequer.
He also cited other potential sources which were contributing very little in the form of taxes although they were operating in full glare with ever-rising transactions.
He referred to the stock exchanges which he felt were not contributing adequately in their payment of taxes to the government.
The last budget's imposition of Capital Value Tax (CVT), in his view, was the first attempt by the government to tap this source for taxes.
Another important source of taxation having so far escaped from making a desired level of contribution to government revenue, according to him, was the group of estate dealers and developers. He appeared to be right in his observations about the two important sources for contribution of taxes.
It is for the CBR to take necessary measures to include these sources within the tax net and thereby ensure their contribution to taxes to a significant extent.
The CBR chairman seemingly opened an old chapter of agriculture sector's conspicuous absence from the tax net and admitted that this was a constitutional issue that needs to be looked into by the government.
He however repeated the theory of taxation that all income generation irrespective of its source must be subjected to taxation.
This is true but Pakistan's constitution made by a legislature dominated by feudal lords precludes imposition of federal income tax on this sector.
The provincial governments, however, have no such bar and can tax income from this sector, which they too are reluctant to impose.
He appeared to be right in his views that since the share of agriculture in the GDP was in the region of 25 percent, its contribution to taxes must be commensurate with its size in the economy.
His concern about the low level of tax generation from the services sector also appeared to be correct.
However, the exact estimates of tax recovery from the services sector and its share in the total tax collection needs to be compiled by the CBR and then alone the expected potential of numerous segments of the services sector could be brought into focus.
As to how this sector continues to lag far behind in its contribution to the government's tax revenue is a question which deserves serious attention from the income tax department.
The services sector, as observed by the CBR chairman, has a share of as much as 50 percent in the GDP but it continues to generate a very small portion of tax, which may be seen as an intriguing aspect of the taxation efforts of the CBR.
As opposed to the retail shops in the overall business activity which are largely unregistered with the tax department, the various segments of the services sector are supposed to be duly registered but seemingly remain out of the tax net.
There is reason to emphasise here that effective efforts must be directed by the CBR departments to enroll the various players in the services sector as taxpayers rather than taking extra pains to discover new taxpayers in the informal sectors of the economy.
The CBR would do well to launch a deeper study to unfold as to why the services sector is not contributing adequately to the exchequer. It is due to lack of proper approach to the objective of increasing the tax revenue that seems to be responsible for continued low level of Pakistan's total tax revenue that constitutes a ratio of 11.5 percent to the GDP.
Comparatively speaking, this ratio in other developing countries in the region averaged between 17 to 18 percent as the chairman himself pointed out in his observations.
According to Yousuf, he planned to increase the tax revenue by 8 percent annually over the next few years as compared to the existing rate of growth of 6 percent.
The success in this direction, according to him, could be achieved through the basic strategies of simplifying procedures of tax payments and secondly to build up trust among the taxpayers vis-à-vis the tax officials.
The efforts in this direction under the guidance of the chairman are already visible firstly in the launching of Universal Self Assessment Scheme (USAS) and secondly initiating the pending reforms in the customs clearance under the programme of Custom Administrative Reforms (CARE) which envisages filing of returns electronically by the importers and clearance of imports within 2 to 3 hours as against which the present system takes about 15 days.
The simplification of income tax return forms for the current financial year is also a welcome beginning of the strategy to simplify tax returns.
The structural reforms of the CBR to be financed by the World Bank and other international financial institutions with an estimated assistance of $125 million, are likely to be completed by the year 2006 which it is hoped would lead to the planned accomplishment of much needed improvements in the country's taxation system.
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