Simply not enough

The FBR has set an ambitious revenue target for fiscal year 2007-08, but it can generate even more than that provided there are supportive policies

25/11/2007

By Huzaima Bukhari and Dr Ikramul Haq

THE NEWS

According to the general perception, the revenue target fixed for fiscal year 2007-08 at Rs 1.025 trillion is ambitious. In reality, it is still on the lower side -- the potential of total tax collection in the country is not less than Rs 2.5 trillion. It is sheer lack of political will and incompetence on the part of Federal Board of Revenue (FBR) -- which used to be Central Board of Revenue (CBR) till a few weeks ago -- that we have failed to collect the revenues where these are actually due. For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes, and granting unprecedented concessions and exemptions to the rich. For tapping our actual potential, there is an urgent need to tax the rich, bring undocumented economy in the tax net and distribute the incidence of various taxes judiciously amongst all segments of the society.

The Government of Pakistan, anticipating higher growth in economy, fixed the revenue target for fiscal year 2007-08 at Rs 1.025 trillion -- an increase of 21 per cent over the collection of Rs 841.4 billion in fiscal year 2006-07. The government projected that the share of direct taxes in the total tax collection for fiscal year 2007-08 will be Rs 408 billion, or 23.6 per cent higher than the previous fiscal year. This target is simply irreconcilable with an earlier statement by the FBR chairperson, in which he had claimed that there was 45 per cent growth in direct taxes during fiscal year 2006-07.

In fact, the real potential of tax collection in the previous fiscal year was not less than Rs 1.5 trillion. However, the FBR failed to achieve even 60 per cent of this, as generous exemptions and concessions were granted to the wealthy segments of society. The cost of exemption under just one head -- capital gains on stock markets -- in fiscal year 2006-07 was Rs 112.45 billion, according to government's own admission on page 262 of Economic Survey 2006-07. Had this exemption not been granted, the total tax collection for fiscal year 2006-07 would have been Rs 953.85 billion. This exemption continues in this fiscal year too and will have a negative revenue impact of about Rs 250 billion.



The people of this country are accused of not paying income tax. The reality, however, is that even a small shopkeeper in a village (whose total income is much below the taxable limit of Rs 150,000) is paying as high a tax as Rs 720 per annum with electricity bill (as a commercial user). On the other hand, a rich absentee landlord of the same area having agricultural income of million of rupees is not paying even a single penny as income tax. Similarly, a person making millions in speculative transactions (shares and property) is enjoying tax exemption, while a widow pays Rs 6,000 per annum as tax on her meager income of Rs 60,000 from bank savings.

The levy of taxes on speculative transactions and withdrawal of exemptions can easily increase the country's annual tax collection to Rs 2.5-3 trillion. However, this requires a strong political will, which is completely lacking at present because those in power are safeguarding the interests of the rich only.

The unwillingness to tax the rich reflects the pathetic state of affairs vis-a-vis tax-to-gross domestic product (GDP) ratio from 1990-2000 to 2006-07, which is highlighted in the table. For example, the tax-to-GDP ratio of direct taxes is appallingly low. Moreover, it may be noted that in these official figures a huge amount of indirect taxes is shown as direct taxes. The actual direct taxes-to-GDP ratio for fiscal year 2006-07 -- after excluding presumptive taxes ñ was around 2.4 per cent, whereas officially it was projected as 3.02 per cent.

Presently, the 'high' tax collection by the FBR is based mainly on imports and exports, as well as extraordinary profits by banks (who claim that they have profit-sharing accounts yet deny due share to deposit holders!). Importers, contractors, retailers and even service providers are passing on their tax burden to consumers and clients, courtesy presumptive tax regime introduced in 1991-92 that has also widened manifold since then. This erratic taxation is at the expense of equity and the poor are the real victims of this fiscal highhandedness.

It is an established fact that despite resorting to all kinds of highhandedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-to-GDP ratio. The burden of a number of presumptive taxes levied under the Income Tax Ordinance, 1979, has been shifted from income-earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth, and made consumers and clients the ultimate sufferers, but have also failed to bridge the widening fiscal deficit. Of the total tax collection of Rs 841.4 billion by the FBR in fiscal year 2006-07, regressive taxes amounted to Rs 631 billion (after making adjustments for indirect taxes collected under the name of income tax). The revenue deficit, despite this record tax collection, was as high as Rs 200.5 billion, while the fiscal deficit touched the alarming figure of Rs 373.5 billion.

The rich who do not pay taxes are the real culprits. Exemptions and concessions provided in our existing tax laws -- the whole of Second Schedule in the Income Tax Ordinance, 1979; most of the items of Sixth Schedule of Sales Tax Act, 1990; and innumerable statutory regulatory orders (SROs) relating to customs and excise -- should be immediately done away with. There should be a level playing field for everyone. If the government removes all exemptions and concessions, brings big absentee landlords into the tax net, manages to get taxes from the influential, and succeeds in imposing general sales tax (GST) across the board (preferably at a low rate of three per cent at one single point), there will be a record annual tax collection of Rs 2.5-3 trillion. However, this goal can be achieved only if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery.

Pakistan can easily generate at least Rs 2.5 trillion as tax revenue in fiscal year 2007-08 provided that tax-base is shifted from presumptive to real income; agricultural income tax on actual profit basis (presently it is an eye wash levied on acreage basis) is collected from absentee landlords; Section 111(4) of the Income Tax Ordinance, 2001, giving amnesty to tax evaders, is withdrawn; rate of sales tax is reduced to three per cent and it is levied across the board; provinces restore tax on gaining immovable property; and profits generated through speculative transactions in shares at stock exchanges are taxed and exemption given under the garb of capital gain are withdrawn. If genuine political will is shown, there is no reason why we cannot achieve double the target fixed for fiscal year 2007-08.

(The authors are tax advisors and teach at Lahore University of Management Sciences.)