During a meeting between the International Monetary Fund Director (IMF) for Middle East, Masood Ahmad, and Prime Minister Yousuf Raza Gilani, the need to raise the tax to Gross Domestic Product (GDP) ratio was, yet again, highlighted. It is unfortunate that Pakistan's tax to GDP ratio remains abysmally inadequate, and is at least 4 percentage points, reflecting around 350 billion rupees, lower than other countries in the region.
Former Central Board of Revenue Member (Fiscal Research and Statistics) Dr Ather Maqsood revealed some disturbing findings of a study undertaken by the Board earlier this year. First, 83 percent of all indirect taxes (including VAT) are sourced to 18 commodities. Fifty-three percent of indirect taxes are generated from five commodities, including petroleum products, automobiles, telecom, machinery, and cigarettes.
POL including LPG, contributes 26.2 percent of total indirect taxes collected. Sugar industry pays 3 percent of the indirect taxes and the contribution of textile sector is one percent in gross terms and minus 1.9 percent in net terms. Secondly, the services sector, inclusive of the retail sector, transport, construction, hotels/restaurants and commission agents, is a major non-compliant sector as its contribution to the GDP does not match its tax contribution.
Thirdly, contribution of banking, insurance and telecommunication is also below potential. And finally Dr Maqsood pointed out that 63 percent of the return filers relating to corporate sector have declared either nil income or business losses. More appalling, he noted, was the fact that nearly 32 percent of those declaring business income did so up to 200,000 rupees only.
These revelations reflect the numerous inadequacies that beset our tax system ranging from under-reporting to evasion, to outright corruption, and to distortions within the system that allow private and government entities to evade taxes. There is thus an acknowledgement by FBR of the main problems that exist in the tax system which should automatically provide recommendations for remedial measures.
And yet this low tax to GDP ratio is not a new phenomenon and therefore Pakistan's lack of past success in this regard must be attributed to pervasive corruption, distortions within the tax system, inadequate documentation and proactive resistance by the 'sacred cows' that undermines any significant increase in tax collection or indeed in some instances, imposition of a tax commensurate to their income.
To assess what the government is committed to, it is relevant to refer to the Letter of Intent (LoI) consisting of agreed policy actions between the government and the IMF which led to the release of the 7.6 billion dollar standby facility in November.
The LoI states that "consistent with the government's objective of substantially increasing tax revenue a number of tax policy and administrative measures are envisaged during the programme period." These include (i) integrated tax administration on a functional basis to be established at the FBR that will embrace both the income and sales tax administration.
This would imply that sales would also determine income tax to be levied and vice versa and reduce exemptions for both taxes. (ii) Audits will be reintroduced from end of 2008 following a planned seminar that is currently underway in Lahore. The fear of an audit is expected to deter under-reporting on sales or income.
(iii) Following the seminar, legislative amendments will be submitted to parliament by end June 2009 and draft legislation to implement full VAT with minimal exemptions is scheduled to be ready for debate by end of next year. And, finally, (iv) excise tax will be raised on tobacco in the context of the 2009/10 budget - the only specific rise in any tax committed to by the government for next year.
There is little doubt that the potential to raise taxes through these measures is significant. However, one would have hoped that the sacred cows would be brought into the tax net at this stage. In addition it is hoped that the audit reintroduction is implemented on the same pattern as that undertaken by the dreaded Internal Revenue Service of the US which has held even the wealthy and the influential accountable for evasion.
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