Who pays taxes anyway

Democracy is a form of government in which all eligible citizens participate equally – either directly or through elected representatives – in the proposal, development and creation of laws. It encompasses social, economic and cultural conditions that enable the free and equal practice of political self-determination.- Wikipedia.

From the above definition, it is logical to construe that in a democracy if everyone participates equally in the proposal, development and creation of laws, the majority – the middle to lower masses – will be better off. Since the proletariat, the 99%, immeasurably outnumbers the bourgeois, the 1%, taxation laws, under a democracy, must therefore ensure that the rich pay exceedingly more taxes. Hence, income inequalities can therefore not exist, let alone flourish, in a democracy. If that is not happening, then either there is no democracy, or more significantly, democracies’ very premise is faulty.

The news originating out of the world’s oldest democracy, irrespective of the efficacy of the claim, is however, not very encouraging. The popular view there is that the rich are getting richer and the poor are getting poorer. How can that be? Don’t the poor vote for their representatives who then aggressively protect the former’s interest ensuring that the rich pay more taxes to subsidise the poor? Admittedly, the voting poor can have made a mistake in choosing their representatives once or twice, but how can they make blunders for decades?

SOMETHING IS NOT RIGHT IN UTOPIA! On the premise that the headlines from the west are tampered with by the sensationalising media, the analysis is diverted towards the domestic situation. After all, by now the nation has enjoyed democratic rule for six successive years, which is sufficient time for the elected representatives of the poor masses to have tilted the balance in the latter’s favour.

All of the data used for the below analysis has been downloaded from FBR’s (Federal Board of Revenue) website and diligently chewed over. Nonetheless, there is always a possibility of inadvertent errors which may be condoned since the objective is to broadly confirm the hypothesis as opposed to an unvarnished truth. One more thing, FBR has not gotten around to posting the annual details of tax collected for 2012-13, accordingly the references for 2013 is for the nine-month period ended July, 2012 to March, 2013.

At the outset the breaking news is that out of the Rs 1.352 trillion collected till March 2013, withholding income tax (WHT), sales tax, Federal Excise Duty (FED) and custom duty collection amount to Rs 1.147 trillion, almost 85%. The argument that WHT a direct tax is proved to be fallacious by the fact that only Rs 38 billion relates to withholding on dividend and interest on bank deposits and Rs 16 billion only relates to exports; WHT on imports and contracts is, under all likelihood, added to the consumer price. By the way, WHT on electricity bills and telecommunication totalled Rs 29 billion which means that even in the absence of taxable income consumers of these utilities paid income tax. In theory these are refundable, but when has the tax collector ever been happy about dishing out money.

Accordingly, in 2013, almost 81% of the tax collected was regressive, meaning that low-income persons paid most of it. The comparable percentage for 2008 is 79%. The poor are hence 2% worse off after 5 years. Curiously, income tax collection on demand, net off refunds, up-till March 2013, is Rs 7 billion only. Tax collection on demand refers to income tax collected by the efforts of the tax department through assessment proceedings. The good thing about this is that most of the taxes collected, in fact almost all of them, are voluntarily paid by the taxpayers.

At this stage it is pertinent to point out that the rich store their wealth in property, currency and stocks. Immovable property is broadly not taxable under the constitution and unrealised gains arising on property and stocks are also not taxable. This means that the only tax that the rich pay on their wealth is the WHT on dividend and bank interest, which is a trivial 10% as compared to what salaried persons pay. Income tax on rental income may have been revised from the coming assessment year and the legislator has imposed a 0.5% tax on movable assets, but should the rich not pay taxes at a much higher rate than the rest?

There can be an argument that perhaps Sales tax is skewed towards the rich, unfortunately that is not the apparent case. Almost 41% of the sales tax in 2013 was collected from import and on domestic consumption of POL, the comparable percentage for 2008 is 36%. Since POL is generally used for transportation and generation of electricity, notwithstanding the subsidy on power, general consumers are worse off. By the way, sales tax as a proportion of total taxes has gone up to 44% in 2013 from 37.3% in 2008. Did anyone know that sales taxes collected on sugar, edible oil and fertiliser, which by default are used for the production of poor people’s staple food, was a whooping Rs 52 billion? Compared to this sales tax collection on vehicles was a paltry Rs 20 billion.

As regards FED, more than 50% was collected on cigarettes. For the naïve, cigarettes are consumed by the masses, and while the rich may also indulge, they hardly pay taxes on imported smokes. The details on FED for 2008 are a bit unclear; nonetheless, FED on cigarettes was 32%. The balance of FED is mostly levied upon gas, services, cement, beverages and edible oil; so guess who is paying for that generally.

The expected final salvation of the system depended upon customs duty on vehicles, the play toys of the rich. Unfortunately, detailed breakdown of customs duty for 2013 was not available. However, in 2008, customs duty on vehicles was again a measly Rs 26 billion, a mere 17% of the total custom duty collected in that year. On that basis, custom duty on vehicles cannot be more than Rs 29 billion in 2013. The rest of the custom duty is apparently mostly on POL and edible oil; unless things have changed radically in 2013.

The situation is definitely not encouraging, and the bad news is that based on this year’s budget the primary thrust is again on indirect taxes. Note that every time POL prices are raised, the amount of sales tax and custom duty thereon increases in absolute terms, the government may be able to balance the budget through this seemingly innocuous strategy, but the poor end up paying more.

Finally, the mother of all taxes, inflation is uncontrollable. The rich’s wealth, held in property, currency and stocks, is generally hedged against inflation and increases in valuation proportionately; unfortunately there is no known hedge for the poor’s consumption. Something is not right outside of utopia as well! When will the rich ever pay taxes and how will income inequalities move towards a declining trend is perhaps an unsolvable mystery, democracy or otherwise. Clearly, the poor pay taxes either way.

(The writer is a chartered accountant based in Islamabad)