LAHORE: Knowing well that indirect taxes are recovered by businesses from consumers with interest, the coming federal budget would again lean on this approach instead of strengthening the Federal Board of Revenue (FBR) for sustainable growth.
Even 75 percent of the income tax is collected indirectly by the revenue authority. Many imports are subjected to withholding income tax, and in supplies, a fixed income tax is deducted by the buyer, which is considered as final tax liability of the seller.
The shopkeepers or traders pay a fixed turnover tax on the annual non-verifiable sales they declare. All these measures increase tax revenues, but in almost all cases these revenues are paid by the consumer.
For instance, if a trader imports some item he has to pay the import duty, sales tax on duty paid value of the invoice, and 3-6 percent income tax on the sales tax paid amount. In most cases, the income tax paid at the import stage is considered his final tax liability.
Since all the government levies are collected indirectly, the importer (suppliers as well) consider even the income tax they paid indirectly as withholding tax, as cost. While calculating their cost, they incorporate all indirect taxes as part of cost.
Then on this cost they charge their profit margin from the consumers.
The income that they thus earn is tax free.
Technically these businessmen are tax-compliant, but the spirit of income tax is to deposit revenue on the basis of pure income they earn on sales.
They pay income tax as withholding tax which they charge from consumers and pay no tax on their actual income.
There is an inbuilt flaw in the system and businessmen world over take benefit from such loopholes.
Most of the countries have plugged these loopholes through technology. In Pakistan, since the revenue growth has remained constant through indirect taxation, the situation has gone out of control.
The FBR that consumes a large chunk of tax revenue in its operations has lost the ability to confront tax evaders.
Businesses exploit this weakness in many ways, including through under-invoicing, which flourishes due to indirect taxation, since the FBR collects levies at import stage. But the FBR is not bothered about subsequent sales of imported products.
It is because in most cases the importer has officially paid all taxes including income tax at the import stage. The revenue collection authorities world over, keep track of imported goods till their final disposal, and charge income tax on the basis of final sales.
This cannot be done in Pakistan as income tax is collected as withholding tax as final tax liability. If the FBR finds out the retail price of the under-invoiced item, advantages of under-invoicing could be nullified.
This is a well know fact that many imported items are cleared at 10 percent of their actual value to save sales tax, withholding tax and customs duty.
A trader has to pay average government levies of 37 percent on import. There is a need to strengthen FBR with technology to determine the actual profits of the businesses.
The collectors need to know that if a tile imported at Rs200 per meter is retailed at Rs1,000 per meter, either the seller is making a huge profit or it is under-invoiced.