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This blog is for students, managers and those lay people who are interested to contribute to, comment on or simply share their workplace problems and are keen to learn about issues relating to public finance, corporate finance and macro-economic management affecting their lives.

Friday, August 27, 2010

Please wake up....This system alone can trigger a public revolt.

Pakistan collects nearly one third of its total tax revenues from direct taxes which implies that major portion of tax revenues is not levied on income or economic resources of the rich and mighty. Two third of tax revenues is paid from transactions which means that the whole population pays tax, irrespective of their capacity, through purchase of even basic necessities. A state which sustains itself on the revenues of poor segments and spares the elite only to have fun on the revenues collected from the poor people has hardly any justification to survive. In nutshell, poor pay taxes and rich live and thrive on these taxes without paying any share from their massive wealth which gets accumulated at others’ expense.

It was discussed in this blog that by adopting a just taxation system, the Government can collect  billions of rupees in taxes without fleecing the poor. Unfortunately, not only that the system is unjust, Pakistan’s tax base is also narrow and selective which means that majority does not pay the direct taxes. This is amply reflected in tax-to-GDP ratio which is just 10 in case of Pakistan. India and China have 18 and UK has 39. This calls for drastic changes otherwise a public revolt is in the air. Business Recorder has published an interesting analysis of Pakistan existing taxation system authored by Huzaima Bukhari and Dr Ikramul Haq in whose view the existing tax system, undoubtedly, protects the rich and mighty having monopoly over economic resources whereas the common man is subjected to sales tax of 17% (tax incidence is 35% on finished imported goods after applicable customs duty, 17% sales tax with mandatory value-addition of 10% and 5% income tax) on essential commodities but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax and meager income tax on their colossal assets/incomes.

The analysis laments that in today’s Pakistan, millions of homeless are crying for food and shelter, but the rulers are living lavishly in Pakistan (mostly at taxpayers' money) and investing billions of rupees in buying property abroad-the cases of heads of two leading political parties need no proof now. On the one hand, millions are made in speculative transactions at stock exchanges-using fictitious accounts-and through adventure in the nature of trade in real estate while, on the other hand, people are dying of hunger and epidemics in flood affected areas. Here is the text of the article courtesy Business Recorder.

The affluent are not ready to part away with their colossal wealth, sharing with the needy and the state is least pushed to impose personal taxes, including flood levies, on them to collect necessary funds for the poor and destitute. No excess profit tax is imposed on flour, sugar and cement mafias-just to mention a few.

The tax-to-GDP ratio in the fiscal year 2009-10-when flood factor was not there-remained pathetically low at 9.8%. Now it will further decrease in the wake of devastations brought about by floods destroying whatever little there was left of the economy]. There are reports that there is going to be over 2 percent decline in GDP alone. In these circumstances, the government is least bothered to tax undocumented economy and benami [name-lender) transactions and rent-seeking is going unabated. The mighty sections of society are engaged in these transactions and the FBR, being their handmaid, has no will to tax them. The definition of 'business' in section 2(9) of the Income Tax Ordinance, 2001 covers "adventure in the nature of trade", meaning by that profits earned through short term purchases and sales of immovable property are business earnings chargeable to tax-whereas tax machinery is treating them as capital gain falling outside the ambit of income tax law. This is causing colossal loss to the national exchequer.

It is well-established by now that regressive taxation has increased poverty problem of Pakistan. According to many studies, the tax system of Pakistan, which was progressive till 1990, was converted into a regressive one in 1991 with the introduction of certain withholding provisions in the Income Tax Law (most of which being retained even in the new law promulgated in 2001) and VAT-type tax in the Sales Tax Act, 1990. The result is that during the 20 years period (1991-10), tax burden on the poorest households has been estimated to have increased by 17.4 %, while it declined by 25.9 % on the richest households. It is lamentable that in the frenzy of showing higher figures of collection to foreign donors, our rulers instead of taxing the rich and mighty began imposing extra taxes on the poor of Pakistan-history will never forgive them for this act of treachery with their own people.

At present, the poorest 10% of households contribute 26% of their income to the three indirect taxes-general sales tax (GST), federal excise duty (FED) and customs duty. The FBR relies heavily on indirect taxes, which constitute nearly 68% of total federal tax receipts. If surcharges and presumptive taxes, levied under the garb of income tax are also included, the ratio would rise to 78 %.

Taxation requires a delicate balance between rewarding entrepreneurship, innovation and risk-taking on the one hand, and the need to finance important public expenditures on the other, including education and social programs, as well as the traditional public service. There are three main sources of tax revenue upon which the government treasuries depend: income, capital and consumption. Too heavy a tax burden on any one of these will cause it to become unreliable as a source of revenue, as well as generating distortions and inequities. In some cases, it might spur tax evasion or drive part of the economy underground. Excessive and imbalanced taxation can prevent many individuals and businesses from taking full advantage of the opportunities of the new knowledge-based economies.

Taxpayers (including businesses), should share the burden of protecting those who are vulnerable as a result of change, through well-designed social protection measures, not through excessively rigid job protection measures and inflexible labor regimes that penalize productivity.

That is why a fair and transparent tax system is so essential for maximizing economic growth. Politicians must have the courage to achieve a sensible balance between income, capital and consumption taxes. And they must also have the courage to spend, not on ill-designed social programs introduced more to collect votes than social returns, but on important investments in creating human capital (eg education, training and health), and necessary public infrastructure to increase economic productivity.

It is high time that we take due cognizance of disparities and dichotomies existing in the prevalent tax system. We should not waste any further time to remove them. Taxes should be meant for the welfare and benefit of public at large and to make the state invincible; not for the luxuries of rulers and state functionaries or to fund inefficient public sector corporations.

The successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line and now the kitty is empty in the days when millions of people desperately await state funds for their survival. We will have to move quickly and decisively to make our tax base equitable and wide, aimed at improving the tax-to-GDP ratio and restoring Pakistan's undeniable geo-strategic and business competitive position in the region.

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