Industrialists for tax cut to spur growth
“Forget about increasing the low tax- to- GDP ratio for the time being; focus on maximising revenue generation by pushing growth in manufacturing, agriculture, services and commerce,” argued Mohsin Syed, a businessman from Lahore, during the Federal Bureau of Revenue’s (FBR) three-day conference on “Tax Policy Options for Pakistan” on how to increase tax collection.
The conference is expected to be followed soon by the reported FBR’s moves to take various measures to enhance tax revenue and trim budgetary deficit.
Syed underlined that the government stood to mobilise far more revenues if it encouraged industrial growth by cutting customs duties on raw materials and reducing tax rates. He quoted the example of motorcycle industry in the recent years to prove his point
“The government reduced customs duties on raw materials that eventually pushed the sale of motorcycles in the country to one million units in 2007 from mere 100000 in 2001. It brought down the average price of motorcycles to Rs45000 per unit from Rs60000. Sales tax collected on the motorcycles grew to Rs6.75 billion in the same period from Rs1.05 billion as the sales revenue of manufacturers rose to Rs45 billion from Rs6 billion,” he said.
He pointed out that customs duties contributed 17 per cent or Rs180 billion to total tax revenue collection last year, which is higher compared to India’s 14 per cent. Similarly, he said, sales tax rate should be brought down to 10 per cent as it would slash the prices of the end products and result in more sales and increased absolute tax collection. Sales tax formed 46 per cent of the total tax collection last year. This is compared to less than 10 per cent in India.
By implication, he meant that any increase in import tariffs for raw materials may cripple industrial and GDP growth and result in massive unemployment, denting the effort to mobilise tax revenues for development spending as well as controlling budgetary deficit that swelled to above seven per cent of GDP last fiscal.
With the tax- to-GDP ratio as low as 9.6 per cent – one of the lowest in the region – in the last financial year to June 2008, the government is committed with the IMF to improve its tax revenue collection to 10.2 per cent of GDP this year and to 15 per cent over the next five to seven years.
This has stoked widespread fears that the tax collection authorities – constrained by a narrow base of less than two million taxpayers – could focus on burdening the corporate sector with additional taxes in order to meet its targets for the year.
A leading manufacturer and exporter, Tariq Saigol, said the industrial sector paid 65 per cent of taxes though it constituted 20 per cent of GDP. On the other hand, he said, the services sector constituted over 50 per cent of GDP, but contributed only 30 per cent of the total tax. “The tax burden should equally be shared by all sectors of the economy,” he insisted.
The Prime Minister’s Advisor on Finance Shaukat Tarin, who underscored the need for redrafting tax laws to simplify the tax system and remove distortions, did not favour high income tax or GST rates and termed the present rates as high. “We need investor-friendly income tax and GST regimes,” he said. But, he said, “the fiscal space comes from collection of taxes and we need to increase our tax base, which at present is narrow. All sectors of the economy have to be brought in the tax net.”
The gross tax collection target for the current fiscal year has been set at Rs1.25 trillion, up by 24 per cent from last year’s Rs1.05 trillion. (The IMF wants the tax target to be enhanced to Rs1.36 trillion). Significant measures – increase in GST rate to 16 per cent from 15 per cent, enhancement in excise on some services, and imposition of regulatory duty on luxury imports – have already been taken in the budget for the year to mobilise more tax revenue.
Yet the tax target is feared to be missed as the macroeconomic stabilisation policies to address trio of crises – fiscal gap, current account deficit and inflation – are likely to drag down growth to close to three per cent from last year’s 5.8 per cent. Energy shortages and high credit cost have already led to complete or partial closures of the manufacturing facilities. The weak performance of industrial sector has begun showing its impact on other sectors.
The task of meeting tax target looks more formidable because of huge tax exemptions estimated between Rs300-600 billion, as major revenue generating sectors like agriculture, real estate and services remain out of the tax ambit.
Hence, Waqar A Malik, president of the Overseas Investors Chamber of Commerce and Industry, urged the government to tax the untaxed sectors and eliminate subsidies. “The low tax- to- GDP ratio shows that a large segment of population does not pay taxes, and thus overburdens the existing taxpayers. All sectors need to be brought into the tax net and all distortions and subsidies removed to make our tax administration equitable,” he argued.
Though Tarin has talked of taxing these sectors and eliminating exemptions and cross subsidies that increase the cost of manufacturing, few believe he would be able to implement his plan in view of the strong lobby in the assemblies representing agriculture and real estate sectors. “For this to happen, a strong political will has to be shown by the government and the tax administration has to be made transparent and equitable to stimulate economic growth,” Malik said.
Saigol acknowledged that the government facing its own problem, could not be expected to look at the economy as the businesses do; the country had never been able to finance its imports from export earnings. Unless exports were given precedence over imports and zero-rated and facilitated, he warned, the situation was likely to persist in the years to come.
While the economic growth may result in higher tax revenue in absolute terms, experts say, the low tax- to -GDP ratio will continue to haunt the economy and lead to eruption of periodic economic crises like the present one, unless the tax net is significantly widened.