A retrogressive taxation system

October 23, 2006
By Sabihuddin Ghausi
DOES Pakistan’s taxation system promote or retard manufacturing growth? Is it industry-friendly? And one final question: Is the tax burden fairly distributed?An attempt was made to find answers to these questions from trade leaders and business executives, a former senator and a senior official responsible for the promotion of industrial development.The taxation system is not fair in the sense that it does not raise revenues proportionate to the incomes generated by different sectors of the economy. This was the virtual consensus. More than 60 per cent of the revenue is contributed by the manufacturing whose share in the GDP has remained stagnant for decades at around 17/18 per cent.The services sector that includes retail and wholesale trading, transport, construction, real estate, and stock trade is either under-taxed or spared of taxation altogether. Yet, it is the biggest sector comprising 50 per of the economy. Then comes agriculture with 23-24 per cent of the GDP that generates only 1.2 per cent of tax revenue.“We will try to change this taxation system to make it business and manufacture-friendly, bring equity and justice and create a system where any one who works more would earn more’’, says Taj Hyder, a former PPP Senator now engaged in organising weekly study circles of his party workers to debate the current socio-economic and political issues.The former Senator is convinced that the taxation system is hurting industry, impeding business growth and virtually ignores those who are creative and hard working.Businessmen did not mince words when calling the taxation structure, ‘retrogressive, exploitative, inflationary and expansionary’’ that alienates a section of society by creating in them a feeling of being discriminated against, while “others’’ are treated as favourites.However, there are business leaders and multinational executives who feel convinced that the government has started responding to their difficulties and is gradually drawing up a business-friendly taxation structure.‘Pakistan’s taxation structure manifests deep mistrust between the government and the businessmen’’ observed a business leader while pointing out to the load of withholding and presumptive tax that constitute almost 90 per cent of the tax—income tax.“You pay 1.5 per cent of your export proceeds, no matter you earn profit or suffer loss’’ he said , adding that “six per cent withholding tax on import is a final tax settlement’’. These and many other such taxes are levied because businessmen want to avoid hassles in tax assessment and tax collectors find it convenient to meet their collection targets. However, the real victims of this system are millions of consumers who have to bear the inflationary impact of these levies, which are treated as indirect taxes by business.‘ The government mainly focuses on revenues and employment generation remains a secondary goal when it comes to taxing industry’’, Majyd Aziz, President of Karachi Chamber of Commerce and Industry said.Mr Ameen Bandukda, chairman of SITE Association of Industry, is more vocal in declaring the taxation system as “anti-industry”. He refers to the unending problems of the biggest sector—textiles as an example. He advocates revamping of the taxation structure before it is too late.The slump in the exports in the first quarter of this fiscal year is the direct outcome of the taxation which pushed up production cost to a level “where our exports are gradually becoming uncompetitive and foreign products are flooding the domestic market’’, said another businessman.Mohammad Idrees, Textile Commissioner who has been an industrial development officer his whole life, identifies the taxation system as one of the many factors responsible for the plight of the textile industry. There are other factors that hurt industries such as outdated management practices, flawed production and marketing techniques and lack of prudent decision making by the businessmen.The taxation system is business friendly, says Qazi Sajid, Chief Executive, German chemical company who is also on the board of a dozen companies. He also sees a lot of improvement in tax system over the last few years which has resulted in “virtual end of direct contact’’ between the tax payer and the tax collector.“My company and others where I am on the board now files our tax returns on internet and that’s all’. There is virtually no hassle in getting refund of extra advance taxation.“No excise inspector is there now in our factory without whose signature, in the past, we could not move our production outside the factory gate’’, he said.Qazi refuses to believe that taxation has impeded the growth of manufacturing and production. The large-scale production touched the record highest of 18 per cent about a year ago and still maintains a reasonable growth rate.‘The industry consumes almost Rs5 billion worth of chemicals as against hardly Rs1 billion a few years ago. Growing appetite for chemicals consumption, he said, is one indicator of industrial growth.Ameen Dadabhoy, a ruling party Senator, concedes that agriculture, stock exchange, real estate, retail, wholesale trade, construction and landed gentry are virtually outside the tax net and it causes a heart-burning.“I tried hard to bring all these sections of society under the tax net while participating on the Senate Finance Committee’s deliberations. He reiterates his intention to continue to strive in this direction.Engineer M.A. Jabbar, a former FPCCI vice president, wonders as to how the government can tax at import or at production stage when no business transaction has taken place.. “World over, you are allowed to install your manufacturing facility, buy inputs, produce goods and after these goods are sold in the market, the government taxes you on your income’’.Imagine the plight of the common men from whom the government collected Rs3.5 trillion in six years (1999-00 to 2005-06) by implementing the World Bank and IMF sponsored reforms and compare this collection with Rs1.9 trillion in the entire decade of 90’s. Now President Musharraf has announced that his government’s intends to collect Rs1 trillion in 2007-08.Tax recovery went up by roughly 11 per cent every year in the last six years, but the tax-to-GDP ratio remained dismally low— at 10 per cent of the GDP. What does this mean? It means that tax is not being recovered from all sectors of the economy.While a large section of population is being over-taxed, an entire class of elite has been given a free hand to speculate in trading on easy bank loans and earn tax-free income.A crippling tax burden on a few sectors is leading to expansion of black economy and is reducing social acceptability of the tax system. It is time to develop a tax structure based on equity that would increase revenues and spur economic growth.