EDITORIAL: That Pakistan’s moribund tax structure is in urgent need of a comprehensive overhaul is a reality that has long been recognised, but has never resulted in substantive reforms, exacerbating the country’s precarious fiscal position and allowing elite capture to persist unchallenged.
Now, major changes in our tax laws are on the cards, which are set to be passed through the Finance Bill 2024, and aim at increasing the cost of financial transactions of non-filers of income tax returns, and introducing enforcement measures of Rs300-400 billion in 2024-25.
It remains to be seen, however, how sincere the government is about carrying out tax reforms that are of a structural nature, and that tackle the underlying issues that have marred our tax architecture, ranging from a narrow tax base to an over-reliance on indirect taxes, and rampant tax evasion.
The government would do well to realise the importance of structural changes needed in the realm of direct and indirect taxation. A reluctance to employ direct taxation tools through taxing incomes and assets has, over the years, resulted in an over-reliance on indirect taxation, often in the form of sales tax, whose regressive nature ensures that there is a disproportionate impact on lower-income groups.
This heavy dependency on high rates of indirect taxes is not just highly inflationary but it is also essentially unjust, unfairly burdening lower income groups while allowing the wealthy to evade their fair share of contributions. The simple act of recharging mobile balance on prepaid SIM cards, for example, truly captures the ills of depending on indirect taxation.
Mobile top-ups result in the imposition of both sales tax and advance income tax, which is fundamentally unfair as prepaid SIMs are largely used by the poorest segments of the population.
While the rich have the means to claim adjustment/credit of the advance income tax charged when filing their tax returns, our poorer sections who do not have incomes that would attract tax and are compelled to pay income tax in advance don’t have the means or the opportunity to reclaim this amount.
What also needs to be considered is that within the income tax regime currently in place, there are large segments that remain exempted from tax and that too without generating any economic activity of note.
A case in point here is the annual pension bill – set to exceed the Rs1.5 trillion-mark this year – that remains entirely untaxed. Given its current ballooning trajectory, this state of affairs is wholly unsustainable, making it necessary that pensions above the statutory exemption level come under the tax net.
Furthermore, apart from instituting measures that bring the retail and wholesale sectors under the tax net in a meaningful manner, another area requiring long overdue action is that of agricultural incomes. Successive federal governments have argued that as agriculture is a provincial subject, it is impossible for them to carry out reforms that could lead to agricultural incomes being taxed.
This is an excuse that cannot be hidden behind anymore, given that the PML-N and the PPP, both part of the ruling coalition at the centre, are governing the two largest provinces, Punjab and Sindh. What is stopping them from instituting the changes required to bring agricultural incomes under the tax net, at least in the provinces they are ruling, if they are genuinely sincere about lifting the country out of economic morass?
Moreover, what is stopping them from devising a system that doesn’t exempt arthis, or middlemen, working in the agriculture sector, from the tax burden as that does not require overcoming constitutional constraints?
Policymakers must realise that indirect taxes have never solved problems related to our precarious fiscal reserves, and that the almost criminal exemptions given to various segments of the economy have resulted in solidifying its elite capture, as lower income groups have essentially been subsidising the lifestyles of the affluent classes. Continuing on the current path will only spell disaster for our economy and our constrained fiscal space.
Copyright Business Recorder, 2024