Rising direct taxes

By Parvaiz Ishfaq Rana

http://www.dawn.com/2007/06/18/ebr10.htm

A redeeming feature of the new budget is the projected increase in direct tax recovery to Rs408billion or around 40 per cent of the total tax revenue target of Rs1.030 trillion set for 2007-2008.This on-going drive is aimed at striking a balance between direct taxes and indirect taxes in the collection of state revenues.While direct taxes are restricted to taxable incomes, indirect taxes are unjustly distributed in total disregard to one’s incomes or tax payment capacity.Direct taxes of Rs305 billion are estimated to be been collected during the current fiscal ending June 30.Against this, the revenue collection through indirect taxes has been estimated at Rs622 billion or around 60 per cent of the total revenue budget. As per revised estimates of current fiscal (2006-07), indirect taxes’ contribution towards revenue collection stood at Rs519 billion or little over 61 per cent of total revenue estimates at Rs839 billion.On indirect taxes, the largest revenue collection of Rs311 billion has been estimated to come from sales tax during current fiscal whereas the new budget (2007-08) places the collection at Rs375 billion. However, there is a huge shortfall of Rs23 billion in customs duty collection when compared with budget estimates of Rs157 billion.There would be little change in quantum of federal excise collection which has been placed at Rs2 billion as per revised estimates against budget estimates of Rs2.2 billion. The new budget has estimated revenue collection from federal excise at Rs2.3 billion.However, the budget document is silent over the issue as to how the revenue contribution through direct taxes will be enhanced. There are two methods for increasing revenue collection: First, by increasing tax rate and, second, by broadening the tax net. Strangely, the budget proposals have not unfolded any of these measures and it will remain a question as to how the Central Board of Revenue (CBR) will go about. Perhaps, it is banking upon a 7.2 per cent GDP growth, yielding more tax revenues.Presently, official estimates put the number of taxpayers at 1.6 million which means only one per cent of the total population of 160 million is under the net. This has placed tax- to- GDP ratio at a very low level of nine per cent compared to the world standard of 15 per cent and above.Since the rural population cannot be brought under tax net through the cost-effective measures, the only choice remains is to bring the left out urban populace under the net. A fair proposition, say some tax experts, would be to increase the net to cover around 2.5 million people.Despite the fact that CBR has taken a number of measures under the on-going reforms agenda for facilitating taxpayers and improving the image of tax collectors, a lot will have to be done.There is a need that policy makers revisit their reforms agenda, look into loop-holes and find out ways and means to plug leakages and corruption because in some areas, the past legacy has re-surfaced which may tarnish the CBR’s image and scare away prospective taxpayers as well.Besides, broadening tax net, there is also a need to reduce tax rates for encouraging people to come under the net willingly. The tax rate for banking, public and private companies is presently uniform and stands at the rate of 35 per cent which should be reduced by five per cent, whereas private companies' tax rate should be higher by five per cent to encourage them to become listed companies.Similarly, tax rate for individuals and association of persons (AOP) be reduced from 25 to 20 per cent. For the salaried class, tax rate should be brought down from 20 to 15 per cent.On the indirect taxes, policy makers have to do a lot of thinking on sales tax which is also known as futuristic or consumption tax. But the worst part of this tax is that it does not discriminate between a person who earns a taxable income and who does not.Despite the fact that sales tax (ST) has not been imposed on food items--except branded ones-- all manufacturing goods are being taxed at 15 per cent at the retail end. This means that any person living in a far-flung area and using match boxes will have to pay 15 per cent sales tax.Initially, ST was imposed at the manufacturing stage under Sale Tax Act 1990 but gradually the CBR converted it into a value-added tax (VAT). As a result, there are only 76 sections in sales tax act but have a very large number of rules and procedures. This has made the ST law a very complicated one and there is an urgent need to promulgate new act as had been was the case with the Income Tax Ordinance-2001.Above all, the 15 per cent sales tax at retail end is very high as the poverty level is worrisome. There is no justification to ask majority of the people to pay such a high rate of sales tax when they hardly earn a sustainable income.The ST at the retail end should not be more than 10 per cent. The new budget has imposed ST on foreign travel but removed it from money changers and cable operators. However, revenue component of federal excise in the budget is nominal.

Source: Dawn Newspaper