THE countrywide protests by traders and opposition by the nation’s leading economists to the imposition of the 0.6pc repressive withholding tax on banking transactions is a wake-up call for the government to revisit its taxation policy on the grounds of equity, documentation of the economy and social acceptability.

By extending the scope of the withholding tax (WHT) to banking transactions — and also the way it has been done — the government has stepped into a very sensitive area that may prove counterproductive. Bank deposits have fallen; banking transactions have dropped more sharply; and money in circulation is reported to have risen still more steeply.

The traders are now trying to evolve a parallel banking system while resorting to cash transactions.

And instead of the WHT leading to the documentation of the economy, the informal sector is gaining ground. While there is a general trend not to pay taxes, this extractive tax policy is making matters worse.

First of all, the withholding tax, though labelled a direct tax, is collected in the mode in which indirect taxes are raised. Given the nature of its application, it targets not only those who evade their tax liabilities but also those whose incomes are not eligible for taxation. The number of those penalised for no fault of theirs in case of the 0.6pc levy on bank transactions is much larger than the rent-seekers who are to be brought into the tax net.

With the government unable to deliver and fulfil its obligations, the justification for its right to collect taxes is being questioned. The outcome is a poor tax culture

The second fault line is the growing appetite of the federal government to raise more and more revenue from this repressive tax, opting for an easier course, now being made difficult, taken to its logical absurdity. The WHT has emerged as a major source of revenue from ‘direct’ taxes.

The items of mass consumption are heavily taxed and the real wages are not rising, depressing the demand for goods and services and resulting in slower economic growth. The tax-to-GDP ratio is low because the share of direct taxes is dismal in the overall tax collection. There is so much excess money in the capital market that is not finding productive outlets and is engaged in speculative activity, which is lightly taxed.

The government has the right to tax incomes and consumption in a balanced manner, making adjustments as and when the situation demands on the basis of equity and fair play. Besides, it must recognise that the right to taxation is deeply linked with the obligation to ensure that every rupee of tax money is well spent. As the balance has not been maintained over decades, social acceptability of the tax system has been eroded.

While there is a frantic effort to raise tax revenues, there is very little effort to demonstrate in a transparent manner how the tax revenue is being spent for the benefit of the taxpayers and the common citizens. With business not being the business of the state, the government’s responsibility is confined to the development of social and physical infrastructure.

And here, too, it is unable to narrow the social gap required to push up economic growth. The physical infrastructure, necessary to improve efficiency in the economy, is in bad shape. Development spending as a ratio of GDP is dismal, and worst still no study is being carried out on the cost-benefit ratio of the long-delayed projects either by the government or the international lending agencies. Despite rising irrigation water scarcity, no major dam/water reservoir has been built in recent decades.

Bleeding state enterprises are eating up billions of rupees of taxpayers’ money and the fiscal deficit is unmanageable. There is so much leakage of funds that are not being productively used in projects to create the capacity to repay debts. Tax money is going into a bottomless pit.

With the government unable to deliver and fulfil its obligations, the justification for its right to collect taxes is being questioned. The outcome is a poor tax culture.

Published in Dawn, Business & Finance weekly, September 14th, 2015

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