Taxes are share of state in income, production and consumption and never liked by individuals or corporate bodies. However, they have very important role in economic development and income redistribution. As per recorded history, oldest records on taxes suggest that tax was levied during the reign of Egyptian Pharaohs on oil consumption. Tax collectors called scribes used to visit houses to ensure that citizens were using only taxed oil and leftovers of other substitutes on which tax was not payable were not in use. Ancient Greeks used to collect taxes during war time called eisphora. However, once emergency was over collection was suspended and earlier taxes refunded through spoils of war. In the Roman Empire, earliest taxes were customs duties on imports and exports called portoria. Caesar Augustus was considered the most successful tax strategist of the Roman Empire. Sales tax was imposed @ 4% for slaves and 1% for general public. First tax assessed in Britain was during the reign of the Roman Empire. After the fall of the Roman Empire, the Saxon Kings imposed taxes on land, properties and customs duties. In 14th century, taxes in Britain were very progressive. In 1377 poll tax was noted to be 520 times more on Duke on Lancaster than the common peasant. Income tax was imposed on clergy, office holders and wealthy and poor paid little or no tax. King Charles I developed problems with the Parliament on distribution of powers on taxation. King Charles’s writ was to collect progressive taxes from people of status and means. Parliament on the other hand imposed taxes on essential commodities like grains and meat. Parliament extracted more taxes than the King especially from the poor. Modern income tax was invented by the British in 1800 to finance war with Napoleon.
In the USA, Tax Act 1862 was passed and signed by Abraham Lincoln on July 1st, 1862. Tax rate was 3% on income above $ 600 and 5% on income above $ 10,000. This law was cheerfully accepted by the citizens but compliance was very low. The Tax Act 1864 was enacted to raise additional taxes with revised slabs. This Act was challenged in the Supreme Court of the USA but its legality was maintained. After the civil war, the same court held this law unconstitutional.
All over the world, two types of taxes are collected by state machinery i.e. direct taxes and indirect taxes. Direct taxes include taxes on income and in some countries tax is also charged on wealth. However, in most countries wealth tax has been abolished. Indirect taxes are consumption taxes and charged on consumption of goods and services. Indirect taxes mainly include sales tax, excise duty, customs duties, capital value tax, gift tax, etc. States are highly dependent on taxes to run affairs of state. However, there are some countries in the world that are tax free because their population size is small and they have rich natural resources. However, with increasing population and state expenditure those countries are also developing taxation system gradually.
Like other countries of the world, Pakistan is no exception either. Pakistan inherited taxation system of British India. At the time of independence, Central Board of Revenue constituted under the CBR Act, 1922 was responsible to collect federal taxes. Main sources of tax collection were income tax, sales tax, central excise duty and customs duty. CBR was converted into Federal Board of Revenue (FBR) through the FBR Act, 2007. FBR has played an important role to run finances of state and contributed a lot towards development of country. However, questions are always raised on performance of FBR against potential of tax collection. FBR has undergone many changes and reforms process was initiated in 2002 under the aegis of World Bank which mainly transformed assessment mode into self-assessment mode. On Income Tax side, Universal Self-Assessment Scheme was introduced through Income Tax Ordinance, 2001. On the side of Sales Tax, Federal Excise Duty and customs duty, the system of self-clearance was introduced. However, all those self-assessment modes were made subjective to record keeping. A just taxation system provides subsidy from rich class to poor and middle class and must act as a catalyst for reducing income inequality through redistribution of wealth. Due to these absent ingredients, taxation system becomes lopsided and it impacts overall economic development and increases poverty.
FBR’s performance for the last financial year 2022, in collection terms, is commendable as it has surpassed its annual target by collecting total taxes of Rs 6,128 billion. Whenever there is a discussion on low tax to GDP ratio, FBR is the only organization labeled with inefficiency because at federal level this organization is mainly responsible to collect direct and indirect taxes. Ironically, provinces are never allocated any tax to GDP share despite the fact that they also have legal and institutional framework to levy and collect taxes. There is no distinction of federal and provincial GDP. It’s national GDP and both federal and provincial governments have legal powers and institutional framework to collect taxes. After the passage of the 18th Constitutional amendment in 2010, collection of general sales tax on services has been devolved to provinces and they have constituted their own authorities to collect taxes and made some headway as far as collection is concerned. Services constitute 59.6% and agriculture 19.5% of GDP. Provinces have been empowered to collect taxes on agriculture as well as sales tax on services. So they have great potential to make their share in tax to GDP ratio.
Where tax collection is more tilted towards indirect taxes and it burdens different segments of society differently. It also has an impact on economic development as savings of the middle and poor class are badly affected. Where such a situation exists, there is a need for a gradual paradigm shift to achieve the goal of revenue targets on the basis of principle of justice and equity.
Economic development cannot ensure distribution of wealth unless there is an effective and just taxation system. Just and effective taxation system on one hand acts as a catalyst for distribution of wealth, and on other, the tax collected is again pumped into the economy by government through infrastructure and social sector development programmes which in turn fuel the economic growth.
Distribution of wealth is one of the key goals of fiscal policy. Role of progressive taxation is to redistribute wealth in a welfare society which is skewed in a few hands. Success of a taxation system lies in breaking concentration of wealth in few hands. Success of taxation system can be viewed from data on income inequalities over a period of time. If data on income inequalities is stagnant it means that taxation system has failed to move the tilt of concentration of wealth. In statistical terms income inequality is measured through Gini-Coefficient which is a scale on which zero (0) is absolutely equal and further we drift it becomes more unequal. Tax policies can play a greater role in making post-tax income less unequal. Further taxes are again redistributed through public finance which favors low income households. However, there is a need to strike a balance to weigh up the extent to which tax rates can be increased so that entrepreneurship and investment is not discouraged because it would have negative effect on economic development. Income tax related benefits are considered more beneficial for increasing disposable income of lower segments than reducing rates of indirect taxes because it often results in increase of prices of those goods and services.Muhammad Faisal Mushtaq Dar, "History of taxation: a perspective," Business recorder. 2022-09-28.
Keywords: Economics , Tax collectors , Income Tax , Sales tax , Economic development , Taxation system , Tax policies , India , CBR , FBR , GDP