THE NEWS
There is a lack of judicious balance between direct and indirect taxes in Pakistan
By Huzaima Bukhari and Dr Ikramul Haq
The financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances, as their policies are based on collecting taxes at source and without bringing the mighty sections of society within the tax ambit. They are interested in number game and are bent upon collecting taxes where the are not due: there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when major tax burden was shifted on consumers by introducing presumptive taxes in the income tax law.
The lack of judicious balance between direct and indirect taxes, levy of regressive taxes in the garb of income tax, petroleum development surcharge, etc, have pushed an overwhelming majority of Pakistanis below the poverty line. The sole stress on indirect taxation (even under the garb of income taxation through presumptive tax regime on number of transactions) without evaluating its impact on the economy and the life of poor masses is a serious cause for concern.
According to official figures, the contribution of income tax (though major portion of it is now composed of indirect levies or expenditure taxes) as a percentage of the gross domestic product (GDP) is continuously declining -- it was merely 2.8 per cent in 2006-07, 2.9 per cent in 2005-06, 3.0 per cent in 2004-05, 3.01 per cent in 2003-2004 and 3.15 in 2002-2003 (CBR Year Books 2003-04 to 2005-06 and Economic Survey 2006-07).
According to a budgetary document titled Explanatory Memorandum on Federal Receipts 2007-2008, of the collection of direct taxes of Rs 329.7 billion (as per the latest figures released by the Federal Board of Revenue -- FBR) in the fiscal year 2006-2007, the share of various taxes is as follows: Income Tax (312.0 billion), Workers' Welfare Fund (1.50 billion), Workers' Participation Fund (6.50 billion), Foreign Travel Tax (2.619 billion) and Capital Value Tax (5.0 billion). It is strange to note that Foreign Travel Tax has been shown as a direct tax.
In reality, only income tax of Rs 220.0 billion (not 312.0 million, as officially claimed) was the total share of direct taxes in the total tax collection of Rs 841.4 billion. Taxes collected at source on goods and services, contracts, supplies, rent, etc, which being full and final discharge are in substance indirect levies, if subtracted from income tax collection, the actual figure comes to Rs 220 billion. Thus the share of income tax as a percentage of the total revenue is not more than 26 per cent, whereas the same is claimed to be 31.7 per cent at page 68 of Economic Survey of Pakistan 2006-2007. This exposes the so-called authenticity and reliability of official figures.
The reliance on indirect taxes, which constitute about 70 per cent of the total tax collection, proves beyond any doubt that the tax system is directly contributing to rising poverty, as people who possess enormous income and wealth are not been subjected to income taxation in Pakistan (wealth tax was abolished as a condition for joining of a person as our finance minister!). Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated. It is pertinent to mention that in 2006 Sweden collected taxes at 50 per cent of the GDP, a rate almost twice as high as that of the United States and Japan. In most countries of Europe, tax revenue, on an average, makes 40 per cent of the GDP. In comparison, Pakistan collected taxes at only 9.5 per cent of the GDP in 2006-07.
Out of total collection of Rs 841.4 billion by the FBR in 2006-07, regressive taxes were to the tune of Rs 620 billion (after making adjustment of indirect taxes collected under the head of income tax!). This has distorted the economy, raised the cost of doing business, widened the gulf between the rich and the poor, and made the national industry non-competitive. The revenue deficit, despite this collection of Rs 841.4 billion, is monstrously high at Rs 200.5 billion and the fiscal deficit at Rs 373.5 billion.
Despite this, the chairperson of the Central Board of Revenue (now FBR) claimed that the share of direct taxes sharply increased to 39 percent in 2006-07 against 30 percent in 2005-06. This is gross misrepresentation of data. If presumptive taxes on goods and services camouflaged as income tax are excluded from the collection of direct taxes, the share of indirect taxes touches 70 per cent. It is pertinent to mention that the average share of direct taxes for high-income countries is 46 per cent, while in the low-income countries it is 28 per cent. In 2006, Iran and India posted direct tax shares of 40 per cent and 29 per cent respectively, as compared with 31.7 per cent (in reality, 26 per cent) by Pakistan.
The present tax policies of the government are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer. The ability-to-pay principle is regarded as the most equitable and just method of taxation. It is emphasised primarily for its re-distributive role. In Pakistan, the rulers have completely deviated from this principle, which is, in fact, their constitutional obligation. The existing tax system protects the establishment and exploitative elements that have monopoly over economic resources. There is apparently no political will to tax the privileged classes.
The common people are subjected to General Sales Tax (GST) of 15 per cent plus one per cent Federal Excise (tax incidence is 42 per cent on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities (even salt sold under brand names is subjected to 15 per cent GST), but the mighty sections of society -- like big industrialists, feudal lords, generals and bureaucrats -- are paying no wealth tax / income tax on their colossal assets / incomes. It is tragic that in a country where billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low (just 9.5 per cent in 2006-07) and the government is least bothered to tax undocumented economy and benami (name-lender) transactions.
The mighty sections of society are engaged in these transactions and rulers of the day, being dependent on them, lack the will to tax them. Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit and improving tax-to-GDP ratio to 25 per cent within two-year time provided a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation.
The FBR is directly responsible for present state of affairs, as its mafia-like operations have been helping people to avoid tax on income by paying bribes. Through the infamous system of Statutory Regulator Orders (SROs), the FBR's top officials provide 'legal' ways and means to the mighty sections of society to amass huge wealth, which is now threatening the state's very survival. It is worth mentioning that soon after the passing of Finance Act, 2007, the federal government reduced rate of collection of tax from purchasers of locally manufactured cars from five per cent to 2.5 per cent. This benefit to local the car manufacturer cartel and those who have the money to buy cars (but not paying any tax claiming that it is from exempt source -- agricultural income) was extended by using executive authority.
The sole stress on indirect taxation (especially under the garb of income taxation through presumptive tax regime on goods and services) without evaluating its impact on the economy and the life of poor masses is a serious cause for concern. The exorbitant rate of GST (on an imported article of public consumption, the effective rate of indirect tax before any further supply is 42 per cent and nowhere else in the world it is so high) is another problem. As a result, a large segment of the middle class is being pushed into lower middle class category, while the total number of people living below the poverty line is also increasing at an alarming pace.
The priority of our rulers is achieving revenue targets, fixed ambitiously every year in utter disregard of how various taxation measures will affect the economy and lives of the common people. Fixing revenue targets in isolation, and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where it can neither afford to give any meaningful tax relief package to the common people, trade and industry (due to the huge fiscal deficit) nor can it achieve a satisfactory level of economic growth (due to the retrogressive tax measures).
This is a vicious circle in which our policy makers find themselves trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive haven, where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, the investors will never venture to risk their capital.
Sunday, January 6, 2008
Wednesday, December 26, 2007
Updating poverty and inequality estimates
THE NEWS
By Haroon Jamal
Synopsis
The Government of Pakistan (GoP) has declared a reduction of 10.6 percentage points in the poverty incidence of the country during 2001-05 based on the latest available household survey data. According to the Pakistan Economic Survey 2005-06, poverty declined from 34.46 per cent during 2001, to 23.94 per cent in 2005. This decline has been witnessed in rural as well as urban areas of the country. In urban areas, the incidence of poverty reduced from about 22.69 per cent during 2001, to 14.94 per cent in 2005. In rural areas, it declined to 28.1 per cent during 2005, compared to 39.26 per cent in 2001. The Survey also reports that the poverty line of 2004-05 is adjusted by the inflation rate (Consumer price Index- CPI) during 2001-05.
On the contrary, the World Bank (WB) report on Pakistan’s poverty objects to using CPI for inflating 2000-01 poverty line and instead suggests using the sure based prices index - Tornqvist Price Index (TPI) the report concludes “In summary, we strongly recommend using the TPI based inflation to update the 00-01 poverty line for 04-05, which yields a poverty headcount of 29.2 per cent. This will imply a decline in poverty of 5.2 percentage pints between 00-01 and 04-05.”
However, one should be aware how TPI is calculated and what are its drawbacks. TPI can only incorporate homogenous goods like food items and fuels. Moreover, the household survey does not report on quantities of non-food items consumed and provides only expenditure. The extent of adjustment in TPI can be ascertained from the fact that TPI includes only 75 items, whereas CPI includes more than 300 items. Further, TPI might provide a wrong picture on the inflation rate if two or more distinct goods are included within a single commodity.
The CCFs are estimated separately for urban and rural areas. It is argued that consumption behaviour, purchasing patterns, dietary habits, taste and ecology are significantly different for urban and rural groups. Following Jamal (2002), these functions are estimated from the lowest quartile of distribution after ranking households by per capita expenditure. Household per adult daily calorie consumption is regressed on total household expenditure (excluding taxes). The functional form is chosen on the basis of maximisation of R2 criterion. Nonetheless, other statistical tests are also applied before choosing the functional form. The results of these functions are furnished in table A-1. The estimated coefficients of calorie-consumption functions are applied to derive the poverty line for urban and rural areas. (see table-1)
In order to ease in interpretation, minimum calorie requirements are converted into per capita term using household demographic data and proportionate minimum requirements.
The estimated poverty lines for urban and rural areas are mapped on household per capita total expenditure for computing various poverty aggregates. Table 2 displays these measures of poverty during 2004-05 overall, 30 per cent of the population was poor, according to the above definition of poverty and the poverty line. The incidence and depth of rural poverty are high as compared to the urban areas, whereas urban poverty severity is high as compared to its rural counterpart. (see table-2)
Our estimates show a decline of about 3.52 percentage points (as against the GoP’s claim of 10.6 percentage points) in poverty incidence during last three years. The incidence figures propose that about 46 million people were below the poverty line during 2004-05, as against 47 million during 2001-02.
Apart from the disagreement with the official numbers, the reduction in poverty however, does not come as a surprise. The overall average Annual Growth Rae (AGR) of the economy during 2001-05, was nearly six per cent compared to only 3.3 per cent each year during the preceding four years. There is consensus among researchers and analysts that economic growth may not always be a sufficient condition for poverty reduction but it certainly is necessary one. To illustrate the point, a historical relationship between the Gross Domestic Product (GDP) growth and poverty incidence in the context of Pakistan is plotted in the following charts. In general, both charts suggest an inverse relationship between poverty and economic growth.
Admitting, that there is a disagreement between the government” and the “civil society” over the official poverty figures, it is worth highlighting some plausible causes responsible for the decline in the poverty trend. Perhaps the principal factor is the timing of both surveys. First, the period during 2004-05, was exceptionally favourable in terms of growth the macroeconomic stability. A remarkable growth of 7.5 per cent in agriculture was recorded in FY2004-05 as against 0.1 per cent growth during FY02. Second, growth in the manufacturing sector was 12.5 per cent as against 4.5 per cent during FY02, Second, a significant increase in public spending during the past three years created an enabling environment for the decline in the poverty incidence. However, rising trends in inflation (especially food prices), unemployment and in other equality worsening did not let poverty decline sharply and substantially.
On average, 2 per cent rise in annual growth in poverty incidence in estimated during 1987-88 and 2004-05. Our estimates indicate a relatively higher increase in urban poverty during this period. A comparison of 2001-02 and 2004-05 shows that the decline n urban poverty is relatively less than the rural poverty. Rural poverty in this period has dropped with an AGR of 4 per cent, while the decline is about 2 per cent in the case of urban poverty incidence. Another important finding of this research is the national poverty incidence during 2004-05 which is the same as the poverty incidence estimated during 1998-99. The regional composition however has slightly altered and now urban poverty is more as compared with the poverty estimate for 1998-99 (28 per cent v/s 25 per cent).
Conclusion
This research note provides poverty figures estimated from the latest available household survey (PSLM/ HIES 2004.05). In the absence of any suitable CPI inflate poverty line of 2000-01, the poverty line for 2004-05 is recomputed from the latest survey using a consistent methodology.
The estimates show a decline of about 3.52 percentage points (as against the GoP’s claim of 10.6 percentage points) in poverty incidence during the past three years. Overall, 30 per cent of the population was poor during 2004-05, indicating that about 46 million people were blow the poverty line during 2004-05, as against 47 million during 2001-02.
The trend in poverty incidence, estimated with the consistent methodology, revels that national poverty incidence during 2004-05, is exactly the same as was estimated during 1998-99. The composition however, has slightly altered and now urban poverty is more as compared to the poverty estimates for 1998-99. The level of income inequality in terms of GINI coefficient also shows an upward trend.
— (This article is a synopsis of a well written research report produced by Social Policy and Development Centre (SPDC), Karachi.)
TABLE-1: ESTIMATED POVERTY LINES (2004-05)
Urban Rural
Per Day Calorie Requirements- Per Adult Equivalent Unit 2230 2550
Per Day Calorie Requirements- Per Capita 1901 2117
Poverty Line- Rupees Per Capita per Month 990 778
(Per cent of Poor Individuals)
Head Count Index (Incidence) Poverty Index (Depth) FGT2 Index (Severity)
Pakistan 29.85 6.51 2.13
Urban 27.70 6.62 2.29
Rural 30.85 6.45 2.06
Source: Author’s estimates based on PSLM/HIES, 2004-05
By Haroon Jamal
Synopsis
The Government of Pakistan (GoP) has declared a reduction of 10.6 percentage points in the poverty incidence of the country during 2001-05 based on the latest available household survey data. According to the Pakistan Economic Survey 2005-06, poverty declined from 34.46 per cent during 2001, to 23.94 per cent in 2005. This decline has been witnessed in rural as well as urban areas of the country. In urban areas, the incidence of poverty reduced from about 22.69 per cent during 2001, to 14.94 per cent in 2005. In rural areas, it declined to 28.1 per cent during 2005, compared to 39.26 per cent in 2001. The Survey also reports that the poverty line of 2004-05 is adjusted by the inflation rate (Consumer price Index- CPI) during 2001-05.
On the contrary, the World Bank (WB) report on Pakistan’s poverty objects to using CPI for inflating 2000-01 poverty line and instead suggests using the sure based prices index - Tornqvist Price Index (TPI) the report concludes “In summary, we strongly recommend using the TPI based inflation to update the 00-01 poverty line for 04-05, which yields a poverty headcount of 29.2 per cent. This will imply a decline in poverty of 5.2 percentage pints between 00-01 and 04-05.”
However, one should be aware how TPI is calculated and what are its drawbacks. TPI can only incorporate homogenous goods like food items and fuels. Moreover, the household survey does not report on quantities of non-food items consumed and provides only expenditure. The extent of adjustment in TPI can be ascertained from the fact that TPI includes only 75 items, whereas CPI includes more than 300 items. Further, TPI might provide a wrong picture on the inflation rate if two or more distinct goods are included within a single commodity.
The CCFs are estimated separately for urban and rural areas. It is argued that consumption behaviour, purchasing patterns, dietary habits, taste and ecology are significantly different for urban and rural groups. Following Jamal (2002), these functions are estimated from the lowest quartile of distribution after ranking households by per capita expenditure. Household per adult daily calorie consumption is regressed on total household expenditure (excluding taxes). The functional form is chosen on the basis of maximisation of R2 criterion. Nonetheless, other statistical tests are also applied before choosing the functional form. The results of these functions are furnished in table A-1. The estimated coefficients of calorie-consumption functions are applied to derive the poverty line for urban and rural areas. (see table-1)
In order to ease in interpretation, minimum calorie requirements are converted into per capita term using household demographic data and proportionate minimum requirements.
The estimated poverty lines for urban and rural areas are mapped on household per capita total expenditure for computing various poverty aggregates. Table 2 displays these measures of poverty during 2004-05 overall, 30 per cent of the population was poor, according to the above definition of poverty and the poverty line. The incidence and depth of rural poverty are high as compared to the urban areas, whereas urban poverty severity is high as compared to its rural counterpart. (see table-2)
Our estimates show a decline of about 3.52 percentage points (as against the GoP’s claim of 10.6 percentage points) in poverty incidence during last three years. The incidence figures propose that about 46 million people were below the poverty line during 2004-05, as against 47 million during 2001-02.
Apart from the disagreement with the official numbers, the reduction in poverty however, does not come as a surprise. The overall average Annual Growth Rae (AGR) of the economy during 2001-05, was nearly six per cent compared to only 3.3 per cent each year during the preceding four years. There is consensus among researchers and analysts that economic growth may not always be a sufficient condition for poverty reduction but it certainly is necessary one. To illustrate the point, a historical relationship between the Gross Domestic Product (GDP) growth and poverty incidence in the context of Pakistan is plotted in the following charts. In general, both charts suggest an inverse relationship between poverty and economic growth.
Admitting, that there is a disagreement between the government” and the “civil society” over the official poverty figures, it is worth highlighting some plausible causes responsible for the decline in the poverty trend. Perhaps the principal factor is the timing of both surveys. First, the period during 2004-05, was exceptionally favourable in terms of growth the macroeconomic stability. A remarkable growth of 7.5 per cent in agriculture was recorded in FY2004-05 as against 0.1 per cent growth during FY02. Second, growth in the manufacturing sector was 12.5 per cent as against 4.5 per cent during FY02, Second, a significant increase in public spending during the past three years created an enabling environment for the decline in the poverty incidence. However, rising trends in inflation (especially food prices), unemployment and in other equality worsening did not let poverty decline sharply and substantially.
On average, 2 per cent rise in annual growth in poverty incidence in estimated during 1987-88 and 2004-05. Our estimates indicate a relatively higher increase in urban poverty during this period. A comparison of 2001-02 and 2004-05 shows that the decline n urban poverty is relatively less than the rural poverty. Rural poverty in this period has dropped with an AGR of 4 per cent, while the decline is about 2 per cent in the case of urban poverty incidence. Another important finding of this research is the national poverty incidence during 2004-05 which is the same as the poverty incidence estimated during 1998-99. The regional composition however has slightly altered and now urban poverty is more as compared with the poverty estimate for 1998-99 (28 per cent v/s 25 per cent).
Conclusion
This research note provides poverty figures estimated from the latest available household survey (PSLM/ HIES 2004.05). In the absence of any suitable CPI inflate poverty line of 2000-01, the poverty line for 2004-05 is recomputed from the latest survey using a consistent methodology.
The estimates show a decline of about 3.52 percentage points (as against the GoP’s claim of 10.6 percentage points) in poverty incidence during the past three years. Overall, 30 per cent of the population was poor during 2004-05, indicating that about 46 million people were blow the poverty line during 2004-05, as against 47 million during 2001-02.
The trend in poverty incidence, estimated with the consistent methodology, revels that national poverty incidence during 2004-05, is exactly the same as was estimated during 1998-99. The composition however, has slightly altered and now urban poverty is more as compared to the poverty estimates for 1998-99. The level of income inequality in terms of GINI coefficient also shows an upward trend.
— (This article is a synopsis of a well written research report produced by Social Policy and Development Centre (SPDC), Karachi.)
TABLE-1: ESTIMATED POVERTY LINES (2004-05)
Urban Rural
Per Day Calorie Requirements- Per Adult Equivalent Unit 2230 2550
Per Day Calorie Requirements- Per Capita 1901 2117
Poverty Line- Rupees Per Capita per Month 990 778
(Per cent of Poor Individuals)
Head Count Index (Incidence) Poverty Index (Depth) FGT2 Index (Severity)
Pakistan 29.85 6.51 2.13
Urban 27.70 6.62 2.29
Rural 30.85 6.45 2.06
Source: Author’s estimates based on PSLM/HIES, 2004-05
Subscribe to:
Posts (Atom)
