One trillion tax target

The Central Board of Revenue is committed to meeting the revised revenue target of Rs 1 trillion set for the next financial year despite a shortfall in collection of custom duty and sales tax.
According to a Recorder Report, the projected target was thoroughly discussed at the last board-in-council meeting, chaired by the CBR chairman, at which the main topic of discussion was the negative growth in custom duty and sales tax, collected at the import stage in March 2007.
Responding positively to the sector-wise presentation made by the Member, Fiscal Research and Statistics (FRS), the tax authorities informed the Council members that the board was committed to realising the Rs 1 trillion target set by President Musharraf.
Therefore, all CBR wings should start preparing policy proposals for increasing the revenue collection and broadening the tax base. Informed sources have quoted the CBR chief as saying that the Board will not only exceed the target of Rs 835 billion set for the fiscal 2006-07, but will also fashion a plan to cross Rs 1 trillion target set for the next fiscal.
The strategy chalked out at the board-in-council meeting is a part of the 10-year "Vision-2017" programme, which envisages increasing the total revenue collection to Rs 4.3 trillion and taking the tax-to-GDP ratio, which at present stands at only 9.4, to 14.5-15 by 2016-17.
Under the Vision-2017 programme, the CBR plans to secure five-percent growth in the tax-to-GDP ratio by tapping all potential sectors of the economy. The tax authorities have, meanwhile, demarcated six priority areas that will be subjected to special focus for broadening the tax base.
The strategy envisages mounting greater efforts for controlling custom duty evasion; bringing all transporters, wholesalers and retailers under the tax net; conducting evaluation of impact of taxes imposed on edible oil, ghee and sugar for rationalisation of duties and taxes; introducing a tax friendly culture for bringing more people under the tax net; and adopting policies to reduce the burden of indirect taxes to provide relief to low-income groups.
In its conceptual framework the strategy appears to be sound enough, though its results will depend on how rigorously it is implemented. A special feature of "Vision-2017" programme is that it lays maximum stress on encouraging voluntary compliance, and on shifting the focus from high tariff rates to a lower taxation structure.
Secondly, under the new strategy the CBR envisages a fundamental policy shift from collecting taxes on production and investment to income and consumption. Thirdly, the strategy is tailored to ensure minimum possible contact between the taxman and the taxpayer, so as to curtail chances of tax evasion. There have been press reports regarding large-scale under-invoicing and mis-declarations by importers to avoid paying taxes.
A favourite subterfuge used by some importers and exporters is the filing of exaggerated refund claims through use of fictitious invoices, non-accounted cash sales or purchases, and under-reporting of sales by maintaining multiple account books, etc.
Unchecked sale of smuggled goods by local traders poses yet another problem for the tax authorities. As we have maintained in this space earlier, broadening the tax base will involve imparting to the system a truly multi-pronged complexion. Unfortunately, the policy so far seems to have been dictated by a mindset that puts premium on granting unjustified exemptions and concessions.
For instance, agriculture and real estate, particularly the former, can be a huge source of additional revenue, if tapped rigorously. According to the late Dr Mahboob-ul-Haq, the aggregate annual income of big landholders in Pakistan was over Rs 600 billion, but they did not pay even Rs 1 billion on their farm income.
A subterfuge usually employed by big landholders is that many of them tend to show their non-agricultural income as agricultural income to avoid paying taxes. Capital gains tax is another lucrative source that needs to be tapped by the government. Shares market is yet another.
Obviously, all these sectors should be brought under the tax net if the targets set out in the "Vision-17" are to be achieved. There should also be greater synchronisation among federal and provincial taxes, so as to achieve a unified thrust of the new strategy.
The ambitious targets set under Vision-2017 programme can only be achieved by easing out all weak spots in the taxation structure, and by bringing about uniformity in the application of tax laws. Pakistan's current tax-to-GDP ratio at 9.4 is among the lowest in the region.
The main causes of Pakistan's low tax-to-GDP ratio include a narrow tax base, poor compliance by tax collectors and duty-payers, too many exemptions and a huge underground economy created primarily by smuggling, drug money and massive tax evasion. These are some of the "Black Holes" that have been exerting a pernicious influence on the country's economy.