Muhammad Hamza Abbas
The question of appropriate sources of additional sources of revenue is of central importance to many developing countries including Pakistan. Under the International Monetary Fund (IMF) agreement, Pakistan has also agreed to undertake tax reforms, with one percent rise in tax to GDP ratio every year to get additional $6.6 billion under 3 years of Extended Fund Facility (EFF).
Some might argue that in terms of tax to GDP ratio, we are at the same level as India, Bangladesh and China, but for these economies, other sources of income are much higher than Pakistan. In the global tax payers’ index, Pakistan is ranked 162. Huge burden of debt and with the current IMF loan facility, debt to GDP ratio is going to rise above 60% this year. The question arises, from where are we going to fund this whole debt with ever rising unemployment and poverty.
In a policy symposium organized by Sustainable Development Policy Institute (SDPI), three major issues related to tax regime were highlighted by the experts in the tax collection system of the country, which are i) Exemptions, concession and preferential treatments under SROs, ii) Narrow Tax Base and, iii) Malfunction Tax Administration System.
Exemptions, concessions and preferential treatments result in huge loss to the economy. Huge amount of customs tariff lines are affected by SROs that leads to revenue leakage of 3-4% which amounts to Rs. 600-800 billion every year. Government has the authority to issue these subsidies without an approval from the parliament. Resultantly no legal requirement to report the value lost due to these exemptions, concession and preferential treatments.
Secondly there comes the issue of narrow tax base. No efforts have been made so far to improve them over the years. There are only 0.7 million tax payers in the country. According to the recent report issued by Mr. Omer Cheema (Investigative journalist), legislatures are among the major defaulters of tax. With few tax payers in the country, this leads to average tax rate to be higher than other South Asian countries.
Thirdly, inefficient, fragmented and rent seeking behavior in tax administration system is putting the system of tax collection to a standstill. It takes 560 hours for filing tax returns which is a huge loss of time for our tax payers. According to a survey conducted by SDPI, 68% of people said that tax system is not fair, 60 % firms said that corruption is the biggest issue, 10% said new sectors need to be held accountable for and 4 % said that filing tax is a very difficult job.
FBR had recently highlighted 176,000 people, those who have multiple bank accounts, houses and international travelling but they aren’t paying any tax. Now this list has expanded to 3.2 million people. At the first stage, FBR intends to send notices to 100,000, but the irony is the current system of FBR, it is going to take 32 years.
Having said this, let us now come to some short-term measures that are going to save our tax system and economy. There is a dire need to revisit SRO regime and it must be subjected to an approval from the parliament. Complete autonomy must be given to FBR and provincial revenue collection departments must be strengthened. If FBR is thinking towards moving to increase VAT, it must inform the business community at the earliest. Government must take steps towards accountability from the informal sector that is rapidly expanding in the country. It is undeniably not a good omen for a country like Pakistan. Now it is time to reconsider taxing agriculture income, property and capital gains in stock exchange. Nonetheless, trained and well capacitated human resource in FBR is a prerequisite for additional tax collection which will also help in improved accountability and transparency.
The writer is a researcher at Sustainable Development Policy Institute (SDPI), Islamabad.
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