A Cabinet meeting has been reportedly called for this week where the Federal Finance Minister Ishaq Dar will share budgetary proposals, especially with reference to taxes. It may be pertinent to recall Dar's statement in Washington made last month when he acknowledged that the government had pledged to the International Monetary Fund (IMF) to increase taxes and urged Pakistani taxpayers to get ready to bear an additional burden in the budget for the forthcoming fiscal year. The critical question is whether the government intends to further burden existing taxpayers by raising taxes, as is the normal practice during the past two decades or more, or would it attempt to bring those currently operating outside the legal economy into the tax net.
All Pakistani governments - including military dictatorships and the PPP-led coalition as well as the incumbent civilian government - have acknowledged the need to raise taxes through plugging loopholes. Unfortunately though acknowledging the need has not led to implementing the identified measures and the reason is fairly obvious: the influential sectors threaten the government of the day with shutdown strikes that would have implications on not only employment levels but also productivity and exports. Government after government has been deterred from implementation of appropriate taxation measures and the result has been; continued reliance on ever-rising taxes payable by the already burdened existing taxpayers, which has led to a steady rise in poverty levels in this country.
The government would be well advised to take three measures to raise revenue. First and foremost, FBR must proactively try to bring the large number of wholesalers and retailers who remain outside the chain required for collection of ad valorem tax under the Value-Added Tax mode into the tax net. Finance Minister Ishaq Dar enhanced sales tax levy from 16 to 17 percent in his drive to increase government revenue, however, with the chain incomplete the FBR is collecting only 6 percent out of the 17 percent levied. And to make matters worse this is being passed on in its entirety to the consumers, which is fuelling inflation. In addition claims for refunds, in some cases, even greater than the sales tax collected. A better option before the entire chain is developed, is to revert to the non-adjustable mode of sales tax collection at the manufacturing and import stages at a much lower rate. This would not only pre-empt the need for rationalising large refunds but also allow the government to proceed with developing the chain - a policy decision that would benefit the consumers as well as the treasury.
Second, the culture of statutory regulatory orders (SROs) that grant exemptions of billions of rupees to influential sectors must end. The government has already pledged to the IMF that it would begin ending SROs in a phase-wise manner. But in this context, it also needs to eliminate existing anomalies. For example, there is a difference in import duty on commercial importers as opposed to industrial importers for importing industrial raw material. Commercial importers while they do keep a margin also facilitate the small industrial units that are unable to import due to lack of credit lines available and hence a more rational policy is required.
Finally there is a need to enhance direct taxes instead of sustaining the heavy reliance on indirect taxes to meet unrealistic budget targets as the latter's incidence on the poor is greater than on the rich. Direct tax collections must rise given that at present they are only 60 percent of indirect tax collections. This would require the federal government to ensure that those with a certain level of income irrespective of the source of that income must pay the same tax. To ensure this would require that the provincial tax code as regards farm incomes is brought in consonance with the federal tax code on incomes. We do realise that this is a big task as feudal lords abound in the federal and provincial legislatures. And at the same time the government must also ensure compliance with all its tax-related measures that make it mandatory to file income tax returns and wealth statements if the income is above the prescribed threshold. In this respect the government should lead from the front and ensure that tax deducted from salaries of government servants and functionaries is deposited by AGPR with full details of the individual whose tax has been deducted. Thereafter the FBR must ensure that these individuals file their tax returns if they are required to under the law.