The Inequitable Tax Structure

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By

Shamim Ahmad*

Abstract

(The prevalence of tax evasion in Pakistan is so universal that it defies all guesses, surmises and even scientific research. The result is that the determination of the extent of the evasion can only be conjectural. There is no reliable data available to substantiate the various guesses which vary from 50 percent to as high as 200 percent of the taxes we recover. Evasion is the most serious problem confronting the Pakistani tax structure. All taxes, whether direct or indirect, are evaded to a grater or a lesser extent by an overwhelming majority of our countrymen. The morality of the tax administrator, too, has sunk dismally. We have tried many systems, modifications and amendments. But we are the greatest sellers of quack remedies. In our hands, any system will sell better than it is. And all the selling is done in bad faith, without believing a word of what we say. It is time for us to realize that more than 60 years of our existence as an independent country have been wasted in deluding ourselves that duties are the province of the other person or the other section of the society and that we can escape the retribution of history by passing on the buck and blaming others for our own shortcomings. Author).

Payment of taxes entails a measure of sacrifice. Human nature, being what it is, is averse to making sacrifices. The collective good and the nation’s well-being are too vague as concepts to be comprehended by an average mind. They pale before avarice and narrow self-interest. This proclivity is reinforced by our colonial past. Holding back a part of one’s tax liability was not considered unpatriotic because payment would augment the revenues of the colonial masters. By the same reasoning, full payment of the liability could be construed as unpatriotic. Though the shackles of colonialism were broken some 62 years ago, the deeply- entrenched habit of tax evasion, coupled with our covetousness, has survived. Our dictatorial governments and self-serving administrators further aggravated this unfortunate affliction. The prevalence of tax evasion in Pakistan is so universal that it defies all guesses, surmises and even scientific research. The result is that the determination of the extent of the evasion can only be conjectural. There is no reliable data available to substantiate the various guesses which vary from 50 percent to as high as 200 percent of the taxes we recover. Evasion is the most serious problem confronting the Pakistani tax structure. All taxes, whether direct or indirect, are evaded to a grater or a lesser extent by an overwhelming majority of our countrymen.

The three overarching problems which imperil Pakistan’s economy, acknowledged by one and all, are inflation, poverty and the ever-widening gap between the rich and the poor. An efficacious and equitable tax strategy can substantially neutralize these threats. However, in nearly 62 years of our national life we have failed to broaden the base of direct taxes, reduce, much less eliminate, tax evasion, increase the Tax – GDP ratio and provide relief to the poor by reducing his tax burden. On the contrary, it has increased. The number of people who pay income tax hovers around 1.5 million which represents only 0.88 percent of a population of 170 million. Our informal economy, which pays no taxes, is estimated to be larger than the formal one. Even those who pay taxes, both corporate as well as individual, grossly under-report their incomes. Indirect taxes, too, are evaded with impunity as is evident from the flourishing Bara markets where smuggled goods are readily available. Fictitious claims of refunds of input tax by persons registered with the Sales Tax department through the means of ‘fake and flying vouchers’ are scandalous.

Eradicating, or at least controlling, the three evils referred to above necessitates revamping the taxation structure. But before we explore this complex issue, an examination of the prevalent ground reality is warranted. The elements that require further scrutiny include:

(1) Tax collection as a percentage of GDP (2) Composition of the taxes we collect

(3) Some glaring distortions in our system

(4) Suggestions for improvement

Tax Collection as a percentage of GDP:

It is a truism that taxes are the cost we pay for being civilized. Taxes are raised for a variety of purposes. They are primarily used to finance government expenditure, regulate the level of expenditure of the individuals and provide social and humanitarian services, such as health facilities, education and security to the citizens. One reason that our government is mired in a chronic current deficit, has an inadequate development programme, fails to bridge the gap between haves and have-nots and falls short of providing security and social services to its citizens could be that it is collecting less than the required amount of taxes. The criterion for gauging a government’s capability to collect the requisite amount of taxes is to determine the taxes it collects as a percentage of country’s GDP. The following table gives comparative figures of tax collection of in various countries.

Country Tax as % of GDP Sources Year
Australia 30.6 (a) 2006
Austria 41.9 (a) 2007
Belgium 44.4 (a) 2007
Canada 33.3 (a) 2007
China 21 (b) 2005
Czech Republic 36.4 (a) 2007
Denmark 48.9 (a) 2007
Finland 43.0 (a) 2007
France 43.6 (a) 2007
Germany 36.2 (a) 2007
Iceland 41.4 (a) 2007
India 23 (b) 2005
Italy 43.3 (a) 2007
Norway 43.4 (a) 2007
Pakistan 10 (c) 2007
Sweden 48.2 (a) 2007
Switzerland 29.7 (a) 2007
Turkey 23.7 (a) 2007
United Kingdom 36.6 (a) 2007
USA 28.3 (a) 2007

The startling feature which emerges from a cursory glance at the above table is that Pakistan has the lowest percentage of tax collection. Indeed the percentage is not even half of the lowest percentage of collection shown by any other country listed above.

The countries showing higher tax collection as a percentage of GDP all belong to the First World. With the sole exception of the United States, all of them have attained a percentage in excess of 30 percent. Countries of Western Europe have the highest percentage. They are all welfare states providing free education, health care and unemployment insurance to their citizens.

On the subject of tax collection-GDP ratio, Pakistan’s very large informal economy cannot be discounted. Some estimate it to be as large as the formal economy itself, if not larger. The obvious implication is that this part of the country’s economy pays no taxes. Inclusion of the informal economy to this analysis will further bring down the percentage under discussion. This low collection of taxes is an important contributor to Pakistan’s fiscal tribulations.

Composition of taxes we collect

Through its history, Pakistan has relied heavily on indirect taxes, such as sales tax, custom duties, federal excise duty and petroleum surcharge, to meet its fiscal needs. Why? Because collecting indirect taxes is easy and meets lesser resistance. A customer does not consciously realize the element of sales tax built into the price he is paying when he buys, for instance, a piece of cloth or of the customs duty when purchasing, say, imported perfume. But a direct tax, like income tax, is demanded by the government when the process of earning income has ended for the tax- year. When the tax is deducted at source, as in the case of salaries, there is invariably bitterness about the amount.  This explains the difficulty a government encounters in the collection of direct taxes.

An examination of the actual tax revenue breakdown will demonstrate the disproportionate share of indirect taxes. The latest available computation is for the financial year 2007-08 and is tabulated below:

Actual Collection for 2007-08²

Rs. In Billion

Tax Heads Actual Collection Percentage
1.  Direct Taxes

2.  Sales Tax

3.  Federal Excise

4.  Customs Duties

388.5

377.0

92.2

150.6

38.56

37.42 ]

9.15 ] 61.44%

14.95 ]

Total 1007.3

Examined superficially, the collection under direct taxes would appear to be 38.56 percent of the total collection. However, this amount does not qualify for the term direct tax in entirety as it includes Workers Welfare Fund, Foreign Travel Tax and Capital Value Tax. Worse still, it includes the Presumptive Tax Regime.

What has changed the character of income tax in Pakistan is the introduction of Presumptive Tax Regime (PTR), although the appellation has not been used anywhere in the statute book. It is euphemistically called Minimum Tax.

A historical review of the development of PTR is, therefore, warranted. According to the universally accepted principles, income tax is charged on income calculated on the basis of income earned by a person after allowing all the expenditures wholly and necessarily incurred in the process of earning of that income. If the result of the venture is a loss, it is not only accepted but allowed to be carried forward to be set off against the income of the subsequent years. It is a long and cumbersome process. But it is worth the effort because only through this process a just and progressive tax can be collected. PTR, on the other hand, has created a legal fiction through which the turnover is presumed to be the income and a percentage thereof is charged as income tax irrespective of the actual profit or loss. A pertinent question arises here. What is the difference between a turnover tax and tax collected under PTR? The short answer is: none. This is patently an indirect tax and invariably included in the cost. So the consumer bears its burden and not the person earning the income. One has personally seen hundreds of tender documents which listed the tax to be paid as part of the cost to the contractor. The situation becomes farcical when a contractor charges the tax in the contract entered into with the government – the latter becomes the payer and the recipient of the tax one and the same time.

The concept of PTR was introduced in the Income Tax Ordinance, 1979 for the first time in 1980 in respect of presumed income from shipping and air transport business of non-residents. Previously, they were taxed on the basis of net income on Pakistan receipts, taken at the ratio which their total world receipts bore with their total world income. The concept was introduced primarily because it was observed that non- resident ship operators and air transporters generally declared losses on their world operations, a claim which could not be verified by the tax authorities. A compromise formula was, therefore, worked out to charge tax on the basis of a fixed percentage of gross billing rather than on the net income basis. This amendment made enormous sense because, firstly, it was confined to non-residents in whose case change in mode of taxation from direct to indirect did not adversely affect the taxation system. Secondly, it was practical because of the ease of processing and because it plugged evasion. It was an honest effort to tax the non- residents and no one at that point in time, thought of using this method as an exercise in window-dressing, calling indirect taxation as Income Tax. But the finance managers of the succeeding years did not have enough strength of character to resist the obvious temptation of collecting an indirect tax and calling it Income Tax. In 1987, another section, section 80 AA was inserted in the Income Tax Ordinance to tax the incomes of non-residents from fees for technical services. Once again the section proposed to tax the income of non-residents which escaped proper taxation. A lot could be said in its defence. It was an honest move and could not be attributed to lassitude, indolence and indirect admission of inability to collect income tax. However, there can not be a greater travesty of Income Tax law than the provisions of Section 80D, inserted by Finance Act, 1991. The mind boggles in imagining the paradox: the section charges Income Tax on the assessed loss.

A new statute, the Income Tax Ordinance 2001,4 was formulated, but this fiction was not done away with and continued to exist in the shape of Section 113, until it was deleted by Finance Act 2008. However, some more provisions of PTR have been added in recent years like taxes withheld on electricity consumption, turnover by some retailers (Section 113A and 113B of the Ordinance), import of raw material, import of machinery, import of vehicles in CBU condition [Section 148(7)]. Therefore, the contribution of PTR in the income tax collection remains largely undisturbed.

Returning to the figure of collection for F.Y 2007-08, it is observed that the apparent contribution of direct taxes amounted to Rs.388.5 billion out of a total collection of Rs.1007.3 billion, representing a percentage of 38.56 percent. The element of indirect taxes under this head is roughly estimated at 39 percent. When the element of indirect taxes, as explained above, is excluded the figure falls down to Rs.237 billion, which represents 23.52 percent of the total collection.

Let us now consider the estimated figures of collection for the F.Y. 2008-09. They are:

2008-095

Tax Heads Budget Estimates for F.Y

08-09

Percentage
1.  Direct Taxes

2.  Sales Tax

3.  Federal Excise

4.  Customs Duties

499

470

112

169

39.92

37.6   ]

8.96 ] 60.08%

13.5   ]

Total 1250

The contribution of direct taxes is ostensibly 39.92 percent but it will be reduced if we exclude the element of indirect taxes. Taking into account, the deletion of provisions of Section 113 by Finance Act, 2008, let us estimate the element of indirect tax at 30 percent this year. By this calculation, the contribution of direct taxes falls to Rs.349 billion or 27.92 percent of the total taxes which would be hopefully collected by the end of the current financial year.

In economically advanced countries, the contribution of direct taxes is around 46 percent. Even in a developing-country like Iran it is 40 percent. Unfortunately, in our case, the indirect taxes, which are mostly borne by the poor section of the society, amounted to 76.48 percent of our taxes last year and will be in the vicinity of 72 percent by the time the current financial year ends. It is noteworthy that this analysis has not considered the non-tax revenue consisting mostly of petroleum development surcharge. It is collected by the Ministry of Finance directly and not through the Federal Board of Revenue (FBR). This surcharge further adds to the misery of the poor. Despite drastic fall in the price of crude in the international market, only a miniscule reduction has been made in petroleum prices by our government.

An indirect tax is the bete noire of any tax structure. This observation calls for elaboration. Equitableness of a tax is determined by the enquiry with regard to the persons or class of persons who are hit most by its imposition. It would give rise to the two following questions: “Who pays the tax” and “who bears the burden of the tax.” They can have quite different answers. Determining who pays the tax is a simple matter of tax liability as defined by the tax statute. But persons paying the tax may not be the ones that eventually bear the burden of the tax. Every smoker knows that Federal Excise Duty imposed on cigarettes, although paid by the cigarette manufacturers, is not borne by them. Instead it is passed on to the smokers themselves in the form of higher prices. Tax incidences are translated in the form of our earlier question “who bears the burden of the tax” is a more relevant question to determine. The determination of this question is important for a simple reason: Does the person bearing the burden of that particular tax has the ability to pay? But what is the measure of determining a tax payer’s ability to pay?

The answer is obvious – his income. The concept of ability to pay also requires inflicting an “equal sacrifice” on each tax payer. It is argued that a rupee has lesser value for a wealthy tax payer than to a poor person. A progressive tax system is based on the reasoning that ability to pay taxes increases faster than income; that is, if one tax payer has twice the income of another, the wealthier tax payer has more than twice the ability to pay taxes. A progressive tax system places a relatively greater burden for funding government expenditure on higher income tax payers. Thus a graduated rate structure is a means of redistributing income in comparison to a proportional tax. A progressive tax produces a more equal distribution of after-tax income.

At this juncture, definition of progressive tax would be in order:

“a structure of taxation in which tax is levied at an increasing rate as income rises. The marginal incidence of taxation therefore rises to some pre-determined upper limit…… The greater the individual’s earnings, the greater the rate of tax which is levied. Virtually all western economies exhibit some form of progressive taxation structure as a means of redistributing income from the more affluent members of society to the poorer. This type of Ability-To-Pay principle is regarded, as far as earned personal incomes are concerned, as the most equitable form of taxation.6 In contrast “regressive taxation” is defined as:

“a structure of taxation in which tax is levied at a decreasing rate as income rises. This form of taxation takes a greater proportion of tax from the low-income tax-payer than from higher-income tax-payer.  Indirect  taxes  such  as  value  added  tax  or  excise duty become regressive when taken as a proportion of total net income.”7

A tax structure which has a component of indirect taxes having percentage point in high 70s, like that of Pakistan, is inequitable, with scant regard for a tax payer’s ability to pay. This is an unfailing recipe of making the poor poorer.

Some glaring distortions in our System

The most glaring aberration in the fiscal policy adopted by every government in Pakistan is to leave the income from agriculture untaxed. The tenet governing income tax is that all incomes, irrespective of their source, are to be brought under taxation. Even in Pakistan, barring income from agriculture, incomes from all sources are taxable. Why, then, make an exception to agricultural income, given the facts of our chronic fiscal deficit, poor tax-to-GDP ratio and 24 percent contribution the agriculture sector makes to our GDP? The answer to this question is too obvious to need elaboration. If any elaboration is needed, a quotation from an editorial of the Dawn commenting on the debate on the proposal of taxing agricultural income should suffice:

“Members of the provincial legislature (Punjab) forgot their political affiliations and rose in unison against the tax even though its imposition is still some way from becoming a reality. This is not the first time that the Punjab Assembly has echoed with cries against agricultural income tax. In the 1990s too legislators from Punjab were at the forefront of opposition to the tax.”8

It is obvious that the imposition of the tax is opposed by those having large land holdings and who populate our legislatures, both national and provincial, much out of proportion to their numbers on the ground. No such protest is ever staged by classes representing common men or the tax payers in other sectors. On the contrary, they vociferously cry out against the discrimination, going to the extent of justifying their own tax-evasion on this pretext.

Let us examine the alleged reasons against the imposition of tax on income from agriculture:

a)      Income from agriculture is already over-taxed.

Various heads of provincial taxes, like land revenue, cess, octroi, water tax etc., are named which an agriculturist has to pay. But by this very argument the commercial and industrial sectors can also claim exemption. Consider that they pay customs duty, federal excise duty,  sales  tax,  workers  welfare  fund,  professional  tax, etc., in the process of carrying out their commercial or industrial undertakings.

However, this argument loses its relevance when we take into consideration the fact that income tax is levied only when income arises, when the receipts from a venture exceed the expenditure incurred wholly and necessarily in earning that income. In the opposite case i.e., when the expenditure has exceeded the receipts, loss ensues and no income tax is attracted. What is more, the determined loss will be carried forward for adjustment against the possible profits of the succeeding years.

b)      The tax will hit the poor farmers badly:

This argument does not hold water. An income of Rs.100,000 or less does not attract any income tax. Given the income levels in our country, an individual earning Rs.100,000 annually cannot be termed as poor.

c)       Agricultural produce would be adversely affected:

Despite a number of land reforms (which were intended to be ineffective to begin with), most of our system is run by absentee landlords. The primary agent of production is the hari or the poor farmer. Tax on agriculture will not touch him even a wee bit, as explained above. Perhaps an augmented revenue collection may help the government redress some of his miseries. Further, if an enlightened approach is adopted, imposition of tax can even improve the yield from farms. Payment of taxes necessitates some form of record keeping, a record of income and expenditure. This begets financial discipline. It is a verifiable reality that this discipline can throw up improved results. It is not entirely unrealistic to hope that such a situation would oblige the landlord to take greater interest in his calling.

Exemptions, as a rule, create economic distortions. Our governments have been extending them with the purported intent of promoting investment in capital-shy industries, development of industrial estates in underdeveloped areas etc. But blanket exemption to income from agriculture right from the inception of our country had no raison d’etre except to provide undue favour to the privileged and the powerful. What is even more disconcerting is that this exemption from the tax did not bring forth any improvement which could be attributed to the efforts of the agriculturists.

Another abuse of this exemption is that the income from this source masquerades as legitimate income. Thus income from illegal sources like drug trafficking, bribery, tax evasion, extortions, theft, receipts from abroad for funding terrorist activities etc., are laundered.

The untaxed income from agriculture rarely, if ever, stays in the villages where it was earned. All the landlords are known to maintain their palatial houses in the cities and indulge in conspicuous consumption. It generates frustration amongst the have-nots who are paying more taxes than them.

One apprehension of the agriculturists in this regard, however, is justified. Their foreboding is that they may become a permanent hostage in the hands of the corrupt tax administration. This problem has already been addressed to a fairly large degree by the introduction of Universal Self Assessment Scheme. Under Section 120 of Income Tax Ordinance

2001, filing of a Return of Income is taken to be an assessment order. The acknowledgement of the receipt of the Return is taken to be an assessment for all purposes of the Ordinance. Thus the contact between the tax-payer and the Income Tax officials is eliminated to a large extent. To encourage the agriculturists to pay their taxes, this provision of the Ordinance can be liberally applied.

Large scale tax evasion can be monitored and curbed by adopting a number of measures. The tax-payers can be asked to file their Wealth Statements (as distinguished from Wealth Tax Returns) under Section 116 of the Ordinance. Through these statements, it can be determined whether the assets of a tax-payer were acquired through the duly taxed income or not. The Wealth Statements filed by the agriculturist for the first time should be accepted without any argument. Subsequently such statements can be pressed into service for detecting any possible evasion.

Sales Tax

Another serious distortion in our tax structure is the modus operandi being adopted by the unscrupulous tax-payer in evading sales tax. This tax is being implemented in our country in the mode of Value Added Tax (VAT). At each stage a manufacturer, a wholesaler and a retailer is required to pay tax only on the value its business activity adds. In other words the tax paid at an earlier stage, called the input tax, is adjusted or refunded at the subsequent stage. Some time ago large fortunes were built on the evasion of Central Excise Duty on cigarettes, cosmetics and beverages. Now fortunes are being built on evasion of sales tax. It is a difficult tax to administer in a poorly documented economy like ours. There are innumerable cases of tax evasions through what are called “fake and flying vouchers” in the parlance of the Sales Tax department. On the basis of fake vouchers, refund of input tax is claimed where no tax was paid in the first instance. This evasion is far more harmful to the nation than the one effected through direct taxes, for two reasons. One, obviously the public exchequer is denied what is its rightful due. The second reason has far graver implications. The tax is not paid to the government but is, nonetheless, passed on to the consumer. Thus, both the government and the consumer are poorer by this act of evasion. Only the tax-evaders is richer, and by a hefty margin, given the high rates of taxation.

Suggestions for improvement

What is the remedy of the ills with which our taxation system suffers? There are no quick fixes. It is going to be a long and troublesome effort. But a journey of thousand miles has to start with the first step. We have no time to waste and have to start now, continue striving and be patient. Some suggestions are:

Political Will

As noted above, no one pays tax willingly. This axiom was echoed by Edmund Burke, when he said “to tax and to please, no more than to love and be wise, is not given to men.”9 Therefore, it follows that there has to be an element of persuasion, even coercion, in governmental efforts in collecting its dues. All governments in Pakistan, whether military dictatorships or quasi-democracies, have lacked the will to implement an equitable tax system. The financial history of the country is replete with     examples when the government in power got cold feet and rescinded perfectly justifiable and legitimate tax proposals. In contrast, it is ironical that a number of unpopular decisions outside fiscal policies were taken and adhered to. A president in uniform is only one such example. The inescapable conclusion is that the unpopular tax measures are often unpopular not only with the citizens but with the decision makers as well.

Resolve to implement the declared intentions

That  the  desire  is  boundless  and  the  act  a  slave  to  limit  – Shakespeare10

If mere declaration of intentions could arbitrate on the bona fides of the resolve and the honesty of purpose, the government of Pakistan would have attained the highest place of honour. It was never found wanting in declaring its grand designs concerning almost the entire range of its activities. Eradication of smuggling, curbing of tax evasion through conducting survey, weeding out corruption, reducing the budgetary deficit etc., are all declared intentions of the government. But alas, mere declaration of intentions does not result in their achievement. They have to be authentic and well-thought-through after weighing all the relevant factors. Unfortunately, such exercises were seldom undertaken and all the failed targets illustrate our faulty planning.

No Exemptions should be allowed

Exemptions, as a rule, create distortions. There has been a surfeit of exemptions in the financial history of Pakistan. We have attempted to use these exemptions for the promotion of investment, development of industrial estates in under-developed areas etc., by granting exemptions of income tax, sales tax and excise duty. In the overwhelming number of instances, they were misused and almost never yielded the desired results.  We  have  already  considered  the  most  abused  exemption, that of agricultural income. This source has never been taxed in our history. Through the Finance Act 1977, the late Zulfikar Ali Bhutto attempted to impose agricultural income tax on big land owners. But before the measure could be implemented, General Zia staged his coup and rescinded it. The incumbent Advisor on Finance has expressed his intentions of taxing this source. Let us hope his declared intentions are implemented because the revocation of the exemption of agricultural income is vital for the country’s fiscal health.

Eminent to bear the burden as well

The affluent must be made to bear the burden of tax commensurate with their riches and standard of living. Greater privileges must give rise to greater sacrifice. A poor person who is barely able to keep body and soul together cannot be asked to make sacrifices when the rich of the land enjoy  the fruits of their privileges without making any, or at best only a  trifling, contribution to the national exchequer. Social justice has to be the guiding principle in the formulation of tax policy. This is also essential for the stability of society – an island of prosperity can not sustain itself in an ocean of poverty.

Broadening the Tax Base

There have been countless attempts to broaden the tax base. In the summer of 2000, a survey was trumpeted as the elixir to our sick economy. It was alleged that it would be instrumental in contributing additional billions to the national exchequer. Like all half-baked and quixotic plans, it failed because of the resistance from the traders and the industrialists and the lack of expertise on the part of people conducting the survey. Some years ago, the government at the time announced its intention of increasing tax-GDP ratio to 20 percent. As we have already seen, it remains a pipe dream. Instead of going out in the market, trying to estimate the value of the goods stocked in a shop or the quantum of goods manufactured by the industrialists, we can achieve our aim only if coordination between the various governmental agencies and the FBR is established. What is being proposed is internal survey as distinguished from external survey which was undertaken sometime ago and failed miserably.

All  owners  of  properties,  residential,  commercial  or  industrial, should be required to declare their National Tax Numbers (NTN) in all the documents pertaining to their properties, from Purchase Deeds to Property Tax Bills, periodically issued by the relevant agencies. Those owners of properties who are not tax-payers and consequently do not hold NTNs, should be required to clearly state so. The internal survey should, initially, be confined to those owners who are not tax-payers. This process is bound to unearth a large number of potential tax-payers, because every owner of a property, in all likelihood, will have a taxable income but has managed to evade the tax net. In the second phase, the value of the properties could be determined by taking into account the size and the value of the plot, the built-up area, its cost etc., and matching it with the declared income.

An identical process can be adopted in respect of vehicle owners which would include private cars, sports utility vehicles, buses etc., being used for private or commercial operations. Though limited in its scope and sweep, this proposal has the obvious advantage of avoiding public resistance.

The limited aim of the proposed internal survey targets the assets which are already on the books of government agencies, though not all of them on those of the FBR. As their registration is an essential condition of their ownership, the exercise does not have to start from scratch.

Automation of F.B.R. Record

For this scheme to succeed two preconditions are indispensable. Firstly, the FBR has to undertake a massive exercise to spruce up its record keeping through computerization. It already has an in-house agency called Pakistan Revenue Automation Ltd., but it has not shown any worthwhile results so far notwithstanding the huge expenditure incurred on acquiring the hardware and the software. Every tax-payer, existing or potential, has to have a separate file and all the data collected from him or her should find its way to that file without any delay or hindrance. The capability of collating the data, matching it with the declared ones and detecting discrepancies, if any, is critical to the success of this scheme.

Secondly, cooperation between various governmental agencies and the FBR must be ensured. The scheme should not be allowed become a victim to bureaucratic and inter-agency turf wars.

We have already discussed the massive evasion of sales tax. The Sales Tax Department has computerized its operation through the Sales Tax Automation Refund Repository (STARR). But there are many snags and lacunae in its operation. These have to be corrected so that the evaders are promptly caught and genuine tax-payers are given their refund/adjustment without delay.

VAT mode of Sales Tax be discarded

We should do away with the VAT mode of Sales Tax Collection because of the poor state of documentation in the country. This mode can only be successfully implemented in a fully documented economy with conscionable tax-payers. In Pakistan’s case, the bulk of tax payers do not maintain any record or maintain double set of account books. Thus to determine the veracity of their claims with reference to their books of accounts becomes almost impossible.

The tax should be imposed only at one stage, thus denying the potential tax evader the facility of claiming refund of input tax which was not paid in the first place. Secondly, the rate of 16 percent is far too high. It should not be more than 7 to 8 percent.

Another important feature of sales tax is that it is a provincial subject in most  countries of the world. Indeed it was collected by our provincial governments up to the year 1976. The Fifth Amendment to the 1973

Constitution assigned it to the Federal Government.¹¹ The transfer of powers of collection of sales tax to the provinces will also contribute to provincial autonomy.

The Ability to Pay

The most equitable criterion for levying a tax, as already discussed at some length, is the ability of the tax-payer to comply. It was seen that Pakistan collects a lamentably low percentage of its revenues from direct taxes. Thus there is an urgent need for enlarging the base of direct taxes and reducing the country’s excessive reliance on indirect taxes. This measure will provide much needed relief to the poor. Poverty engenders crime. With the decline in poverty, crime may also decrease.

Reward and Punishment

It is self-evident that a taxation system, like any other system, cannot effectively work unless a just mechanism of reward and punishment is in place. This   has to include both the tax payers as well as tax collectors. Those who honestly pay their taxes should be rewarded. Conversely, evaders should be punished. High penalties should be imposed on the tax evaders. Similar treatment should be meted out to tax collectors. Rewards, pecuniary or otherwise, such as higher salaries and accelerated promotions would provide the motivation that is so desperately needed. The dishonest should be demoted and even dismissed in proven cases of gross impropriety.

Freedom from political influence:

Some of the jobs in tax collecting agencies are attractive and therefore susceptible to negative influences. These “lucrative” slots are contested bitterly and sifarish or patronage is, more often than not, the deciding factor for securing   appointment. The unfortunate reality in contemporary Pakistan is that the corrupt also wield enormous influence. The criteria for appointment to these coveted jobs at all levels should be entirely merit-based in which integrity and competence are of paramount importance. To achieve such an outcome, the FBR should be made autonomous. Without such autonomy, it will be vulnerable to extraneous influence and pressure.  If meritocracy is to be established as a norm, then a competent officer once appointed should be allowed to perform his duties without interference from powerful lobbies and individuals.

How the revenues are used

It is vitally important that the benefits of revenue should trickle down to the masses. The government should be able to provide internal and external security, undertake developmental work, and provide social services, like education and health care, efficiently and honestly. If these measures are taken there will be less resistance to pay taxes. One reason for tax evasion is that people perceive that a substantial portion of their contribution is waylaid by the inefficient and the corrupt or is spent on unproductive or vainglorious projects.

Tax evasion is only symptomatic of the ailment we suffer from as a nation – the ailment of moral turpitude. This ailment is responsible for all the ills found in our society, including tax evasion. The moral turpitude is not confined to any one class or any group of people. All of us are prey to this malady. Perceptible degeneration is evident in all our national systems and institutions. Expecting a tax structure with minimal evasion and corruption would be unrealistic in the prevailing environment of moral degradation. Only a high sense of morality can give rise to high tax compliance. Professor Groves in his book “Trouble Spots in Taxation” remarks:

“The income tax is a prime example of a tax that could not be applied at all if moral levels were very low.”

The morality of the tax administrator, too, has sunk dismally. We have tried many systems, modifications and amendments. But we are the greatest sellers of quack remedies. In our hands, any system will sell better than it is. And all the selling is done in bad faith, without believing a word of what we say. It is time for us to realize that more than 60 years of our existence as an independent country have been wasted in deluding ourselves that duties are the province of the other person or the other section of the society and that we can escape the retribution of history by passing on the buck and blaming others for our own shortcomings.

Notwithstanding the moral degradation that afflicts us, it is still possible to resuscitate our individual and collective conscience. We will have to realize that our misdeeds cannot remain individual for long. The chaos, which is this country, is the cumulative effect of the individual rejection of laws governing our society.

References:

1.            a)            Revenue Statistics 1965-2007. 2008 Edition – Organization for Economic Cooperation and Development (OECD).

b)   Ibid – 2007 Edition.

c)            “Tax-to-GDP ratio stands at 10pc” By Mubarak Zeb Khan – Dawn, June 11, 2008.

2.            FBR Quarterly Review – Vol. 8. No.1. July-September 2008- page 2.

3.            Income Tax Ordinance 1979 (XXXI of 1979), amended upto 1991.

4.            Income Tax Ordinance 2001 (XLIX of 2001). Published by Facilitation and Taxpayer Education Wing, FBR, Islamabad, amended upto 2008.

5.            FBR Quarterly Review – Vol. 8 No.1. July-September 2008- page 2.

6.            Collins Reference Dictionary of Economics – First Published 1988 – ISBN 0 00 434353 0 – pages 424-25.

7.            Ibid – page 453.

8.            Daily Dawn – Editorial, November 24, 2008.

9.            “On American Taxation” (1775) page 49.

10.  Troilus and Cressida (1602) Act 3, Scene 2.

11.  Substituted by the Constitution (Fifth Amendment) Act LXII of 1976. Section 19 for original entry 49, with effect from 13-09-1976.