EDITORIAL: Chairman Federal Board of Revenue (FBR) Rashid Mehmood Langrial while addressing the Lahore Chamber of Commerce and Industry acknowledged that sales tax, corporate tax and income tax rates in the country are too high and should be reduced but added that a reduction is only possible if the taxation structure is enabled to capture revenue across all segments of society.
A rather obvious observation is: it is up to the FBR to propose a change in the existing tax structure to enable this capture to the Minister of Finance who would then need to get cabinet approval prior to tabling it in parliament.
While both the Finance Minister and the Chairman FBR have been rhetorically maintaining that tax reforms to achieve this very objective are on the cards yet, sadly, the Finance Bill for the current year continues to rely on the same sources of revenue that required enhancing taxes on existing taxpayers.
This approach has led the country to a stage where it is becoming increasingly difficult for the government to generate higher revenue on three counts without negatively impacting on the country’s poverty levels which, at 41 percent last year, are merely a percentage point higher than in Sub-Saharan Africa: (i) indirect taxes comprise 75 to 80 percent of all collections today, whose incidence on the poor is greater than on the rich.
This high percentage is not openly acknowledged by the FBR which, contrary to the directives of the Auditor General of Pakistan, continues to dishonestly consider withholding income tax levied in the sales tax mode as direct taxes; (ii) the sustained reliance on low-hanging fruit continues and utilities and fuel are heavily taxed.
In addition, passing on the onus of achieving full cost recovery by poorly performing utilities is also being passed onto the consumers, like during previous administrations, which has raised tariffs to such an extent that there is a visible erosion of the quality of life as well as in demand for gas and power which, in the case of electricity, has implied that capacity payments, payable in dollars, to Independent Power Producers (IPPs) are rising; (iii) the budget target FBR collections itself, set with International Monetary Fund (IMF) concurrence under its ongoing programme was 40 percent higher than last year – an unrealistic target as per all domestic economists who argued that 20 to 25 percent is a more realistic target and the truth of their assertion is evident in the collections during the first five months of the current year.
A shortfall would, as per the agreement with the Fund, lead to the implementation of specified contingency measures, which are overwhelmingly in the form of indirect taxes that would further erode the value of each rupee earned with poverty levels rising; and (iv) 93 percent of those engaged in the private sector have not witnessed a rise in their wages for the past three to four years – first due to Covid-19 and later due to extremely low growth rates – and hence unless the tax structure is massively altered and based on the ability to pay principle there is a danger of socio-economic unrest.
At present, FBR is engaged in sending notices to taxpayers and threatening them with dire consequences including freezing their bank accounts, making their mobile phones inactive and shutting down their access to utilities; however, some reports allege that many of the tax officials are misusing their discretionary powers and harassing taxpayers with some seeking recompense, rent, to let the notice lapse.
The government and the Fund have agreed to levy farm tax on rich landlords from next year; however, only Punjab has legislated so far and that too was opposed by the Pakistan People’s Party which leads one to fear that Sindh is unlikely to pass this legislation. In addition, the failure to implement Tajir Dost Tax Scheme in the face of organised resistance has been a feature of other direct taxes that were imposed and then not pursued or withdrawn.
It is a foregone conclusion that changing the tax structure will entail time and constant engagement with the stakeholders.
We are of the view that until and unless acceptance of direct taxes is widespread the government must instead focus on reducing its current expenditure to reduce the onus on increasing collections to meet the budgeted expenditure rise.
In the budget 2024-25 the rise in current expenditure is a whopping 21 percent, which necessitated raising tax collections by an unrealistic 40 percent as well as reliance on external resources to the tune of 20.4 billion dollars, which were pledged as required under the IMF programme but not all pledged amounts have been disbursed as yet.
Copyright Business Recorder, 2024
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