The Central Board of Revenue (CBR) has found that income from different sources is deliberately reported under the head of agriculture income to evade taxes. The CBR quarterly review released on Thursday reveals that a person having agriculture and non-agriculture income is liable to pay income tax only on the non-agriculture income if the agriculture income exceeds Rs 80,000.
Experience shows that income from other sources is also reported under the agriculture income to avoid taxation, the report said. The agriculture sector included major and minor crops, livestock, fishery and forestry. Its contribution to GDP is more than 20 percent, but its share in total federal taxes is less than 2 percent. The reason being, that while vesting the power to tax incomes on the federal government, the Constitution excluded income from agriculture from the purview of the federal income tax.
In case of provincial income tax, a paltry amount of less than Rs 2 billion is collected by the provincial governments as presumptive tax and this is mostly from Punjab. Sindh and NWFP make an insignificant contribution, while Balochistan has no contribution at all. The only federal tax paid by the agriculture sector is in the form of indirect tax on agricultural inputs like fertiliser and pesticides.
Food and beverages having a 2 percent share in GDP and about 10 percent share within manufacturing has the lowest revenue productivity of 2 percent in direct taxes and 27 percent in indirect taxes.
According to the report, board's plan to raise tax/GDP ratio to the desired level of 14-15 percent in the next ten years is not possible without changing the existing taxation regime in a drastic manner.
Exemptions and concessions offered to different sectors and tax regimes like treatment of depreciation of assets, withholding taxes, minimum taxes and presumptive tax regime promote tax evasion, narrow tax base, discourage compliance and reduce sectoral contribution towards taxes.
It is clear that growth in a number of sub-sectors does not correspond on one-to-one basis with growth in CBR tax revenue. The report said that higher contribution by the industrial sector does not necessarily imply that the private sector is paying higher taxes. In fact, a huge chunk of resources continue to flow from public sector or captive manufacturing units such as Pakistan Steel Mills, OGDC, and PTCL and NTC etc. Industrial sector though paying higher taxes as compared to services or agriculture sectors, yet it remains an under-performer in terms of revenue productivity. Sugar and textile industries are the leading examples of disparity between revenue growth and production growth. There is no doubt that the textile industry is passing through a difficult phase.
Despite heavy investment in plant and machinery, the industry has failed to retain its competitive edge against its competitors in the post quota free era. However, a careful examination reveals that the reasons for this malaise are domestic rather than international.