The Central Board of Revenue (CBR)'s Chairman Abdullah Yousuf has stressed the need for expanding the tax net by bringing the booming real estate sector, retailers and professionals under the tax regime. Speaking to a panel of Business Recorder during an exclusive interview on Tuesday, the CBR chairman admitted that the increase in economic indicators like enhanced rates of GDP and inflation and a strong Rupee have not been reflected in revenue collections because of zero tax on food items and less collections on oil prices frozen for six months.
Elaborating his point, he said that the Rupee almost remained constant at Rs 60 against dollar during the period from the last budget to-date.
Increase in inflation from 5 percent to 6.6 percent was the result of raise in oil prices and food prices. As far as food sector is concerned it is exempted from the sales tax and its contribution in taxes is only 3 percent. Increase in retailers' income has not been resulted in expansion of the tax net, he added.
Replying to a question regarding the jump in oil prices, the chairman said the tax was always collected at the end price, which remained frozen at home for six months.
Elaborating on higher GDP growth's impact on tax revenue, Abdullah said that the increase in cotton production from 10 million bales to 14.5 million bales did not have a positive impact on the tax collections, because 80 percent of the products made from cotton for export were zero rated.
He said that the agriculture contributed 25 percent to the GDP and the tax collection here was nil. The highest tax collection comes from the manufacturing sector whereas service sector contributes very little.
He said that the main problem of the tax collection was in direct taxes as only 1.1 million people out of a population of 140 million were in the tax net. The ratio of direct taxes to the GDP in recent years had increased from 18 percent to 32 percent while the indirect tax ratio had declined from 82 percent to 68 percent. The ratio of direct taxes to the GDP is not satisfactory, he added.
Responding to a suggestion to have a flat income rate as it has been successfully experienced in some Eastern Europe countries, the CBR chairman said that the experiment could not be successful in Pakistan due to lack of tax culture and low level of incomes and expenditures.
He said that average tax rates in neighbouring and Asian countries was 25 percent, adding that our tax rate ranges from 7.5 percent to 35 percent, which is same in most of the countries except Thailand with 28 percent tax rate.
He said that by introducing capital value gain tax on share transactions, the CBR made inroads for the first time in stock business. The nature of the tax is presumptive which is due on both selling and buying of shares, he added.
Referring to tremendous increase in prices of properties, he said the government was aware of the boom in real estate sector but he cannot commit on introducing sales tax on sales and purchase of the property. Because, he said, presently the provincial governments were charging tax on property transactions at very low rates.
He said that in the past attempts were made to tax the real estate sector in the form of CVT and Capital Gain tax on land but later these taxes were abolished.
He expressed dissatisfaction over low contribution of the tax from different sectors against their higher contribution to the GDP. For example, service sector contributed only 16 percent and retailers and wholesalers contribute only 8 percent against 16 percent contribution to the GDP.
He said there was no sales tax on retailers and wholesalers. A large number of professionals such as doctors, lawyers, architects, estate agents, etc were out of the tax net.
Abdullah stressed the need for expanding the tax net and remove distortions despite all political and historic factors. New sectors would have to be brought under the tax net because every citizen making income should pay tax to the government, which is run on public money. The change can however not be brought overnight, he added.
The CBR Chairman also described about the corrupt and outdated tax machinery for low tax collections in the past, and said the department had initiated a tax reform process with the World Bank assistance amounting to 150 million dollars, which was aimed at streamlining the fiscal policy regime to simplify the tax procedures to create an efficient and transparent tax machinery.
He said that to meet the challenges of the global village the tax machinery should be efficient and transparent to meet the challenges of the global world so that cost of doing business could be reduced to help exporters compete in the free trade era.
A major step taken under the tax reform programme is the introduction of the universal self-assessment scheme (USAS), which covers 90 percent cases of the income tax.
The system has done away with problems emanating from inefficiency and non-transparency, he added.
To a question regarding high sales tax rate in the country, Abdullah Yousuf recalled that in the past the four rates of sales tax from 15 percent to 23 percent prevailed in the country, which has been brought to only one at 15 percent.
The tax rate could only be lowered if the tax net is expanded. There are 88,000 registered taxpayers of which the corporate sector paid the maximum.
The department has so far not been successful in completing the chain of the taxpayers, including group importers, manufacturers, distributors, wholesalers and retailers.
A large number of wholesalers, distributors and retailers are out of the tax net and contribution of the service sector to sales tax is nil.
The problem of sales tax is not the high rate but that is the psyche of the businessmen, who were scared of documentation, he maintained.
In this connection, he cited example of gold importers where rate of custom duty is just 0.5 percent but they indulged in misdeclaration.