Out of a population of over 180 million people; only about 2.8 million are registered tax payers with their own National Tax Numbers (NTN). Additionally, one-fourth of these registered tax payers are non-compliant.
Further, about half of the compliant taxpayers derive their incomes from salary and are not required to file income tax declarations as their Employer's Annual Statement is treated as income tax declaration on their behalf. Resultantly, the effective number of taxpayers deriving income from business, rent of property and other sources (interest, dividend, etc) currently stands under 750,000. On the other hand it is also true, that a large number of the population of Pakistan is paying income tax but are non-compliant or not borne on the records of the Tax Administration. Such income tax payments are on account of:
Dividend income at the rate of 10 percent;
Interest/profit/yield from:
National Savings Schemes (except Behbood and Pensioners Schemes) at the rate of 10 percent;
Savings accounts and fixed deposits with Banking companies and financial institutions at the rate of 10 percent;
Bonds, certificates, etc issued by companies;
Prize on Prize Bond at the rate of 10 percent;
Cash withdrawn from bank accounts, where the daily withdrawal exceeds Rs 25,000 at the rate of 0.20 percent (0.30 percent up to June 30, 2011); Issuance of banking instruments against cash, where the amount exceeds Rs 25,000 at the rate of 0.30 percent; Sale and/or purchase of shares through a stock exchange at the rate of 0.01 percent of the sale or purchase value;
Ownership of private motor cars at the rate varying from Rs 750 to Rs 8,000 per annum depending upon the engine capacity; Industrial and commercial consumers of electricity, where the bill amount exceeds Rs 400 per month, at the rate varying from Rs 80 to Rs 1,500 per month depending upon the bill amount; Mobile phone users at the rate of 10 percent of the value of usage;
Land line telephone users, whose monthly bill exceeds Rs 1,000, at the rate of 10 percent of the value of usage; Domestic air travel at the rate of 5 percent of value of ticket. Further, following are required to furnish annual income tax declarations (returns), irrespective of the fact, that they have any taxable income or not:
Over the last three decades, the entire focus has been on withholding tax which constitutes more than 50 percent of the total Income Tax Revenue and in case of non-corporate taxpayers, it contributes nine-tenths of the total collection. An analysis of the contribution of various sectors to the GDP and tax revenues reveals that the contribution towards the tax revenue by the transport, real estate, services, wholesale and retail sectors is extremely low as compared to their contributions to the GDP. The tax contribution of the agriculture sector is negligible despite the fact that it generates a hefty proportion of the national income.
Put simply, Pakistan faces two major hindrances to broadening the country's tax base. Firstly, those paying taxes indirectly need to be documented better by making the filing of income tax returns mandatory. Secondly, sectors which have so far remained largely untaxed or under taxes should be brought into the fold of tax payers as well. Addressing the first hurdle, it is pertinent to note that there are many different reasons for a low number of compliant taxpayers. These include:
Lack of political will; a large withholding tax regime, which has over time increased reliance on indirect taxes instead of direct taxes final/presumptive tax regimes under the garb of simplification and avoiding contact between the taxpayer and tax collectors
tax amnesty schemes of converting un-taxed income by payment of a nominal tax (2 percent as against 25 percent)
permanent source of converting un-taxed income of foreign remittances availability of third party information, such as sale/purchase of immovable and moveable property/assets, banking transactions, etc under statement of consideration of sale/purchase of immoveable property exemptions and in particular the agricultural sector a substantially large un-documented and informal sector of the economy that depends on cash transactions
POSSIBLE WAYS OF EXPANDING THE TAX BASE In order to expand the tax base of Pakistan, the following steps are needed: Create a tax culture - Whereby a non-complaint and delinquent taxpayer is discriminated over a compliant taxpayer Encourage non-cash transactions Documentation of the economic transactions - Among developing countries, Pakistan has the advantage of having a unique identifier (CNIC) for all of its citizens (to a large extent).
Automation of the economic transactions Creation of a national database of all economic transactions
Avoid tax amnesty schemes
Remove the permanent source of converting un-taxed income from the statute - Section 111(4) of the Income Tax Ordinance, 2001 The establishment of a centralised data warehouse is imperative for improving tax collection in the country. Such a system would be able to store and retrieve information by linking it to computerised national identity card (CNIC) numbers for individuals and NTN numbers for companies.
The information collected through these sources, as third party information (including bank accounts), would become a tangible proof of information for every individual linked to CNIC number as sole identifier. Tax authorities would then be able to compare returns whether they are filed or not; and confront tax dodgers with tangible proof against such practices.
Given the fact that such systems are commonplace across the globe, FBR does not need to reinvent the wheel to put an end to exploitation and manipulation that goes on under the manual systems. While reigning in non-compliance is the need of the hour, it is equally important to facilitate those who are fulfilling their tax obligations. For this purpose, the implementation of Integrated Tax Management Systems (ITMS) is essential.
AGRICULTURAL INCOME
Agriculture is the largest single sector of the Pakistan economy. This sector generates roughly 25 percent of the GDP and employs 45 percent of the working population. Yet despite the introduction of provincial taxes on this sector, its contribution to the national exchequer remains negligible.
Logic dictates that distinction between agricultural and non-agricultural incomes for purposes of taxation by the federation is unfair and unjustifiable. This arbitrary distinction is tantamount to creating a preferred class over other groups in the society. Instead of creating such a preference for which there appears to be no economic justification, it is suggested that just exemption from income tax in this sector should be similar to that offered to business and salary incomes below a certain level, in other sectors. This would take care of the small farmers by automatically excluding them from tax obligations.
That the taxable capacity of the larger farmers (who constitute the rural elite) has improved over time; is evident from the considerable increase in consumption expenditure of rich farmers. This leaves no justification for discrimination between agricultural and non-agricultural income for the levy of income tax.
SALES TAX
Sales Tax under the value added mode (VAT) is one of the most effective ways of broadening the tax base. However, in spite of efforts made in last ten years, progress has been elusive. The current situation is that only around 75,000 registered tax payers (business entities) are furnishing sales tax declarations, which include a large number of "nil" filers. Out these 75,000 filers 90 percent of the revenue is generated from some 2,000 entities (excluding commercial imports).
Concerted efforts, political will and documentation of economic transactions are the biggest challenges in the implementation of sales tax. With the intent to document the economy the government tried to introduce the concept of value added tax (VAT) and then revised it to RGST.
The introduction of reformed general sales tax (RGST) is essential to get more people to pay taxes. However this would need to be phased in over a period of time. First of all, a large chunk of current exemptions must be withdrawn. Moreover, services must be taxed by the provinces and goods have to be taxed at all the stages of value addition. This huge effort would require education and training of the tax payers and the tax collectors.
Political will for the improvement of the tax collection mechanism is vital for the introduction of all these reforms. Equity demands that all incomes, irrespective of their source, must be taxed beyond a minimum threshold. Contrary to some assertions, the expansion of the tax net will not hurt the under privileged segments of society. While RGST could affect some of the poorer segments of society, exemptions on essential items would remain intact, hence safeguarding vulnerable populations.
The road to reforms is long but it must be taken soon. After all, income tax and RGST are together the most significant sources of government revenue, across the globe and it is high time that Pakistan also joined these ranks. The writer is former chairman Federal Board of Revenue. He can be reached at abdullahyusuf48@gmail.com