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Optimizing tax collection

The governments, both federal and provincial, have shown a lukewarm attitude towards optimizing tax collection. Reliance on easily-collectable indirect taxes with weak enforcement, reluctance to tax the rich and mighty, inefficiencies, incompetence and corruption are main factors for low tax collections. The federal government instead of broadening the tax base is keen in extending amnesties, immunities, tax-free perks and perquisites to powerful segments of society. In this scenario, the sufferers are the ordinary citizens, whereas wealth is being concentrated in a few hands that undermine democracy and social justice. Pakistan’s ruling elites is afflicted by cronyism, greed and corruption. They are parasites and not growth catalysts or innovators. They are not interested in accelerating growth, reforming tax system and ending wastage of public money. Pakistan cannot become self-reliant unless it raises revenues (tax and non-tax) of at least Rs 8 trillion. Instead of striving for it, the rulers are indulging in self-praise for giving unprecedented concessions and immunities to tax evaders, money launderers and plunderers of national wealth.

The government of Pakistan Muslim League (Nawaz) during the last two years accumulated public debt of Rs 3.2 trillion, an increase of 22%. Public debt of Rs 18 trillion as on June 30, 2015 (65% of GDP) took away about 60% of FBR’s revenue in debt servicing alone for FY 2015. Till today, the worthy Finance Minister has not informed the Parliament or public about his plans for optimizing tax collection. He has also not unveiled any strategy for retiring debts and meeting other obligations in the coming years. The future challenges include repayments of dollar-denominated bonds, the Paris Club rescheduled debt and the IMF loan. Huge funds would also be required for imports related to projects under the China-Pakistan Economic Corridor (CPEC). Where are reliable estimates for Pakistan’s external liabilities on CPEC projects and sources from where to meet the same? New loans and more strains on fiscal side are obvious.

The Prime Minster is not ready to admit that under his third term in office, Pakistan has lost large share in the external markets because of high cost of electricity. Sakib Sherani in ‘Pakistan’s debt dynamics’ [Dawn, October 16, 2015] rightly observed: “A crude indicator of the PML-N government’s priorities is the number of hours the finance minister has spent travelling the world meeting foreign bond investors in the past two years versus the amount of time he has given to Pakistan’s exporters in listening to, and trying to address their concerns”. Under the government policy the cost of system losses and theft are shifted on to manufacturers. By imposing higher taxes, the government has been depriving the industrial consumers to take the benefit of low global oil prices. The question is how long can we sustain our economy with the borrowed money? Pakistan had received more than US $40b in foreign remittances over the last two and a half years of the present government, but these huge funds had not contributed towards reducing trade deficit created by falling exports and surging imports despite low oil prices.

Manufacturing and service sectors contribute substantially towards revenues (more than their share in GDP) but are facing adverse conditions, including more and more stringent and oppressive tax measures. On the contrary, the traders contributing negligibly towards national treasury are being offered yet another tax amnesty. Nearly 2.5 million retail outlets in the country have net trading margin of nearly Rs 5 trillion (18% of GDP) but their total share in income tax collection is only 0.5% and in sales tax about 1%. Is this a fair tax policy to give them more concessions and immunity from audits?

While traders and other powerful segments (militro-judicial-civil complex) are enjoying tax concessions, there is no political will to impose excess profit tax on cartels that earned billions by manipulating prices. In the past, these cartels were fined by Competition Commission with evidence that was irrefutable. If this is done, the government can easily raise additional funds of Rs 400 billion. The provincial governments, like the federal government, are not willing to collect agricultural income tax from the rich absentee landlords. Collection under this head can generate a revenue of Rs 200 billion. Provincial governments have been wasting funds received as share from divisible pool, but have shown no inclination to generate funds themselves by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich people and on unproductive transactions.

The following two measures alone can generate extra revenue of Rs 500 billion at federal level-out of which provinces will receive 56% as per existing NFC Award, which cannot be reduced in the coming one:

— Excess profit tax: on cement, sugar, flour mills, and banking and telecom sectors would generate extra tax of Rs 400 billion.

— One-time de-logging litigation scheme: Taxpayers be asked to pay 20% of disputed tax arrears between January 2016 to 30 June 2016 with pending cases before appellate authorities and courts deemed to be settled. In 1998, India through a similar scheme [Kar Vivad Samadhan] generated a revenue of Rs 900 billion, while disposing huge backlog of cases in the country. Such a scheme with a time limitation of up to 30th June 2016 would not only generate revenue of about Rs 100 billion but would also help drastically in reducing workload of tribunals and high courts.

The provincial governments can also raise substantial revenues by imposing transactional taxes on speculative dealings in real estate. Though total tax potential of Pakistan is not less than Rs 12 trillion at federal and provincial levels, even if we manage to collect taxes of Rs 6 trillion at federal level, our reliance on domestic and foreign loans can decrease significantly providing much required fiscal room to the government to offer necessary relief (by lowering taxes) to industry for increased growth.

Huzaima Bukhari And Dr. Ikramul Haq, "Optimizing tax collection," Business recorder. 2016-01-08.
Keywords: Economics , Social justice , Political , Sales tax , Tax planning , Income Tax , Wealth tax , Democracy , Corruption , Pakistan , India , NFC , GDP , CPEC