Reliance on indirect taxes promotes avoidance

LAHORE: Successive governments in Pakistan always preferred to generate revenues from indirect taxations after succumbing to the political pressures.

The most lucrative avenue of revenue generation is the general sales tax. The government is currently charging 17 percent general sales tax (GST) on almost all the products and services. This rate is extremely high. Most of the under invoicing and under filing is because of high GST. 

Government lowered the import duties on all the smuggling prone items, bringing them to as low as five percent. But, the GST rate continued increasing. In the past, the smugglers took advantage of high import duty and smuggled goods in the country. Now, they make hefty profits even if the duty is zero but they save 17 percent by avoiding GST.  The importers that indulge in under-invoicing also do so to avoid the GST, which is 17 percent on imports and rather 18.7 percent after duty paid value. This is a great incentive for the importer to indulge in under invoicing. 

Economic managers should take some concrete steps to address these inconsistencies in economic policies that tend to benefit the rich and burden the poor.

The common man is not prepared to pay heed to the oft-repeated slogan of trusting the government and bear some present pains for future wellbeing. 

The theory of unpopular economic decisions to generate more revenues was recommended by the International Monetary Fund (IMF) around two decades back only after its failure to convince the rulers to generate revenue from the rich. 

Now, the IMF never insists on documentation of economy and on taxing agricultural income but instead proposes high petroleum levies when global prices are low, thereby increasing the indirect taxes when taxing the rich is politically impossible.

Pakistan is facing resources-crunch. The government expenditures are higher than its income. There is a need to sensibly increase the income by plugging the loopholes in the tax machinery. This could only be done through brining in 100 percent transparency into the government affairs. 

The economists said the finance minister Ishaq Dar, after assuming the charge, said the resources would be generated according to the capability of each segment of the society. But, his team has yet not come up with any sound and tangible strategy to ensure equitable taxation that spares the poor and targets the affluent segments of the society.

Time has come when each citizen should be forced to pay taxes according to his capacity. The minister said it was criminal to generate 65 percent of the taxes indirectly, which were shared equally by the poor and the rich. 

Even most of the direct tax (income tax) is collected through withholding. The tax, thus paid, is taken by the payer as part of cost and is passed on to the consumers. Petrol levies, gas surcharges, sales tax, excise and custom duties are recovered with interest by the rich from the poor.

An analysis of the income tax collected by the Federal Board of Revenue will prove that 80 percent of this tax is collected from 100 corporate sector companies. The salaried class comes next, contributing over seven percent of the total income tax, while thousands of the manufacturing and trading firms contribute only 13 percent; out of which five percent comes from traders and transporters. 

That means the local manufacturing sectors, including cement, textile, sugar and engineering pay almost the same income tax as paid by the salaried class. These sectors claim that they pay billions in taxes, which, in fact, are sales and excise taxes they recover from the consumers.

The government should ensure that all the tax evaders and under-fillers pay their due taxes as well as share their profits duly with the workers by providing them daily use items at subsidised rates.

The failure to document economy encourages the moneyed class to shift from manufacturing to non-productive avenues, like property and financial sectors and capital market where profits are high and taxes low.