Fruitless documentation exercises
The industry’s share in the GDP is around 24 per cent but it chips in the biggest chunk to the revenue pie of direct taxes of over 66 per cent of the total collection. The services sector that makes up more than half of the GDP at 54 per cent and agriculture that contributes the rest of the nearly 22 per cent, pay next to nothing in direct taxes.
So the elitist consultants, media gurus, event managers, fitness experts, designers, artists, tutors, landscapers, architects, electricians, tailoring experts, beauty experts, realtors, builders, dermatologists, gynecologists, therapists, tax practitioners, etc., rolling in money, do not pay income tax.
But the lowly paid clerks, private and government employees pay taxes through their nose because deductions are made at the source. And so do the proprietors of profitable companies.
Why is this so? Are money-minded, blue-eyed corporate heads really so thoughtful that they pitch in what is their due in taxes voluntarily without shedding tears?
On the contrary, the fact is that these rich people engage the best tax practitioners to avoid as much tax as possible and pay only what is absolutely unavoidable.
Most of the tax amount is collected from the listed companies that include many multinational corporations that have to adhere to more transparent accounts.
“Last year, after the audit we created a demand of Rs80 billion in direct taxes. Of this, Rs36 billion was realised”, said a member audit FBR from Islamabad over the telephone endorsing the view that there exists a gap between the potential and realised tax revenues under the current tax regime.
The gap between the tax liability and payment is narrow for the salaried class because deductions are made at the source. It would however be apt to repeat here that hardly two per cent of the entire population of over 160 million pays direct taxes.
The impression that the Federal Board of Revenue (FBR) does not have the capacity to bring sectors outside the taxation regime in the tax net was contested by the FBR officials. “We do not make rules and we have to act within the defined parameters,” said a senior FBR officer. “Having the right tools is not enough. These are to be applied properly for results” he said.
Another officer confided that many exercises were carried out over the past two decades at a huge capital and human cost to improve the documentation of the economy but the ratio of domestic revenue generation to the GDP has hovered below 10 per cent.
This, he said, is because the government has never been serious about generating more resources domestically as it fears political backlash. The thrust, therefore, is more towards securing foreign funding.
“In a country with such a skewed asset base as Pakistan, it is not merely an accident that we have no wealth tax,” said an officer who was highly critical of the ex-prime minister Shaukat Aziz for stopping the documentation drive midway to earn the goodwill of those who own the most prized assets.
“The vested interests are too powerful to be forced into paying their tax dues. In fact, every time a study is commissioned to broaden the tax base, a parallel exercise ensues to find loopholes to spare them from paying new taxes,” sources in the ministry of finance revealed.
There is data available in the FBR based on the asset assessment survey carried out in 2000. A networking was developed, linking it with the data of the billing departments of utility services, civil aviation authorities, telephone companies, financial institutions, real estate transactions, etc.
“It can give you a fair idea of consumption pattern of individuals and can serve as a credible starting point for selective tax audit to improve tax compliance or broaden the tax base,” said a senior bureaucrat who was a part of the last administration.
“If the government decides to bring service sector under effective tax net or improves the compliance of agricultural income tax laws in Sindh and Punjab, the FBR has the capacity and expertise to assist at any tier of the government to ensure maximum results,” said Irfan Usman Khalid Mirza, member audit FBR from Islamabad over telephone.
Ahmed Waqar, Chairman FBR was not available to comment on the status of documentation and as to how the higher tax-to-GDP ratio would be achieved in an economy under stress.
Last year the total collection of agriculture income tax was Rs1.5 billion according to a senior officer in the FBR.
Tax experts and audit wizards contacted in Karachi blamed lack of documentation for the big gap between the potential and actual realisation of tax revenue. They felt that besides the lack of political will, taxation machinery is too archaic to meet the demand of modern times.
“It is naïve to demand tax on agricultural income. Three years back the law was enacted in Punjab and a little later in Sindh that brought income generated from farming in tax ambit. Why it failed to generate sizeable revenue is another story,” a high profile private auditor told Dawn in Karachi.
“I do not see much happening on the taxation front. They will try to squeeze more from those already in the net by activating audit, etc but that will not yield much”, said the audit consultant.
However, the cash-stripped government cannot afford the luxury of supporting socially irresponsible and politically powerful free riders. It is not just donors’ pressure, the economic conditions also do not permit the tax anomalies to persist.
If the economy is to be pulled out of the downward spiral, new investment will have to be made. The government will need resources for public-private partnership to work.
It is important to double the investment in infrastructure to attract private local and foreign capital. The deficiencies need to be addressed across all sectors including energy.
The documentation should be updated and utilised for tax audit. More importantly, the tax base needs to be widened to include all incomes at a progressive rate above the exempted limit that may be raised to Rs300,000.