Govt runs short of indirect tax avenues

LAHORE: The government has exhausted all the options of generating revenues through indirect taxations after making the record revenue collection in the fiscal year of 2015/16.

The professional accountants have time and again pointed out that all indirect taxation was considered as a cost by the taxpayer and was passed on to the consumers. So much so that some of the income tax collected at import stage and considered as final tax liability was added in the cost; the profit margins were determined after absorbing all indirect taxes in the cost.

Around 70 percent of the income tax is collected indirectly through various avenues. This is the reason that the gap between the rich and the poor is constantly widening.

The government at the same time is withdrawing subsidies and under spending the allocations for development, further marginalising those with meagre resources. The government needs to target the influential segments of society who do not pay their taxes.

It is essential to strengthen the macro economy by curtailing even the development expenditures. However, in its pursuit of achieving macroeconomic stability, the government has stifled growth.

In order to achieve budgetary deficit targets, it had to curtail the annual development outlay if the revenue target or the expected foreign assistance did not materialise. Though governance is a major issue, in the final analysis, it is the ability of the government to fully exploit the revenue potential that matters.

As far as income tax, the only direct tax on actual income, is concerned, the state has provided several exemptions and facilitations to avoid this tax. Black marketers, smugglers and those indulged in under invoicing and misreporting of imported goods, and corrupt bureaucrats can parade their ill-gotten wealth openly by arranging remittances through Hundi operators at two percent. No questions are asked on foreign remittances.

Almost every year, the Institute of Chartered Accountants of Pakistan asks to close this money whitening window, and to permit tax free remittances only in cases where they are sent to blood relations by overseas Pakistanis. The inability of the state to fully document the economy is one factor that is promoting black money.

The issue of agriculture tax is raised by trade and industry, although studies by all creditable economists, including Dr Hafeez Pasha, reveal that potential of agricultural tax is only Rs50-60 billion and we are facing resource shortages of over Rs1.3 trillion. Agricultural tax would create upheaval which is not worth this amount.

The real potential for revenue generation is in income tax, sales tax and customs duty. Under invoicing is a major source of tax evasion. Products are imported at around 10 percent of the actual value. Assuming that 25 percent of the total imports are under-invoiced, the importers are in fact depriving the exchequer of duties and taxes on products worth over $45 billion.

The duties, sales tax and other import levies on taxable imports at current rates would be more than Rs1.5 trillion; even if we levy only 15 percent average import duty and 17 percent sales tax on the imports.

All our revenue worries would be resolved if the rulers simply tackle the under invoicing mafia and the officials who support them. Smuggling is another avenue, which if controlled can help the government net Rs750 billion.

The government can take action against manufacturers, who conceal production and evade billions in taxes. Instances of under-filing of production have been reported in beverages, sugar, paper, and many other industries.

Retailers remain out of the tax net too, though their lavish lifestyle suggests they should be heavily taxed. A strong, determined and dedicated government capable of across the board and transparent action can net all taxes that are being evaded by businesses.