GROWING poverty is directly linked to distortions in the tax system.

The government also recognises that the major challenges that are hindering its poverty alleviation efforts include, amongst others, a low tax-to-GDP ratio, resulting in large fiscal deficit and a smaller fiscal space for social sector development and poverty reduction.

According to 2005 estimates, the overall tax gap was more than Rs600 billion whereas last year, the then chairman of the Federal Board of Revenue (FBR) publicly admitted that the gap had increased to 79 per cent (i.e. the gap between the actual tax collection and the actual potential tax revenue).

A study by the State Bank of Pakistan estimated that the informal sector was around 30 per cent of the total economy.

The present government has not been able to take any tax policy measures which could have resulted in a significant reduction of the tax gap.

The purpose of this article is to identify the pro-poor tax policy measures, based on the principles of equity and fairness, which should be considered by the policy-makers to improve the tax revenue.

In 1991, under the garb of presumptive taxes, elites’ interest were safeguarded by the then ruling regime and wealth tax was abolished while exemption from capital gains tax on trading of shares and reduction in personal income tax rates were allowed to continue.

The most essential principle of the fairness in the tax system is based on the anticipation of taxpayers to receive adequate public goods and services which, in fact, is a calling for good governance.

The cardinal aspects in the process of tax administration — equitable taxation of all economic sectors and the gradual abolishment of all tax amnesties and exemptions —  requires that policymakers revisit the tax regime.

Such vital segments of the economy, as agriculture (20 per cent of the GDP) and services’ sector (53 per cent of the GDP) are not contributing towards the tax revenue in proportion to their share in national income.

The tax incidence should be equally distributed among all sectors of the economy, the concentration on some selective sectors should go.

In this regard, provincial laws on agricultural income tax are required to be amended (by the respective Assemblies) to remove the anomaly in the tax rates.

An independent agency should be formed to collect relevant information on agricultural income, which should be accessible to the FBR and other government agencies to have definite data on the income derived from farming.

Under the constitution, the federal government does not have a right to tax gains on sale of immovable properties (other than constituting its stock-in-trade). Owners of assets and beneficiaries of speculative gains have found it easy to evade taxes.

For example, for purposes of official registration, urban property transactions often take place at a fraction of the actual market value.

There is a need to review the local and provincial laws relating to transfer of immovable properties so as to provide for payment of transfer-related taxes on the basis of fair valuation of the properties at the time of sale.

The overall contribution of income tax collected under presumptive mode — a transaction based mechanism of income tax — is estimated to be more than 40 per cent of the total income tax collection. However, serves as a disincentive for the documented sector, and should be gradually withdrawn.

Services’ sector contributes 53 per cent of the country’s GDP. The wholesale and retail trade constitutes almost 32 per cent of the total services’ sector.

The tax contribution by services’ sector is, however, negligible.

There is a need for all the provinces to jointly formulate a policy framework to extend the scope of general sales tax on those services which are not presently taxed either due to expressed exemption or due to evasion.

The above narrative is not exhaustive. Unless steps are taken by the policy-makers to eliminate the distortions in the tax system there will be no significant improvement in the tax revenue.

It is necessary to generate reasonable revenues to eradicate extreme poverty and hunger.

The biggest challenge for the policymakers is to increase the number of taxpayers rather than rely on regressive taxes to meet the short-term revenue targets.