Tax-free budget: myth and reality

The government always boasts of presenting the tax-free budget. Nothing could be further from the truth. In fact, the government intends to fix the targets at Rs4.14 trillion for the next financial year against the expected collection of Rs3.5 trillion in the current year. How government could come up with a tax-free budget and still achieve roughly 18% revenue growth is serious issue that needs to be examined. Time-tested way would be to enhance the existing rates of current withholding taxes, said a distinguished tax expert. Similarly, sales tax is likely to be enhanced on industries which are posting double-digit growth such as cement, sugar, cigarettes and may be steel-melters and re-rollers. Another easy thing is to sit on the sales tax, income tax, refunds and customs duty-draw backs. If this is not enough, more customs tariff lines may be made subject to 5% instead 1%.

There is always a claim in the budget that remaining balance after these measures will be met through administrative measures. What is the impact of these measures is yet another question. The FBR’s yearly book 2015-16 states that even less than one percent was collected through the efforts of field formations. Many studies indicated that the gap between what FBR collects and what should it collect is roughly 80% in the sales tax alone. We will try to find reasons why it failed to plug the revenue leakage over the years.

That government will achieve 6% GDP inclusive growth has been repeatedly resolved. One renowned economist wondered that how could GDP be equitable when whole emphasis is on indirect taxes. Inclusive growth improves when its benefits trickles down to common man, creates more jobs, alleviate poverty level and quality of life.

As stated earlier, government depends heavily on withholding taxes. Such measures spark hue and cry from the business community that tax-payers are burdened without broadening the tax-base. The principles of withholding tax negates this narrative as this tax becomes the part of cost of the goods incidence transferred to the end user, the poor sections of society. To avoid this, economists all over the world now emphasise upon taxing the income. Share of the direct taxes should be much more than the indirect taxes. This is easier said than done as taxing the income needs data on current values and profit in different businesses and professional expertise to defeat tax avoidance as corporate clientele hire competent chartered accountants for the purpose.

There is no denying the fact that business in Pakistan Stock Exchange is booming and so is the real estate sector but these sectors hardly provide any employment or play its role in providing basic immunities to poor people in subsectors like education, health and social welfare. The FBR must focus on such sectors which are posting huge profit on stock exchange but either pay no tax or even claiming losses.

The withholding tax on the cash withdrawal is the easier way, however, the strategy is under question. Nowhere in the world such tactic is used. The objective of taxing the non-filer was broadening the tax-base and to curtail the black money. The banks’ deposits have dwindled as people prefer to keep their money in cash. The strategy failed to achieve its objective of adding new tax-payers. To some extent it has a logic to tax them but what is point in taxing the filers. Besides, filing of return is of no avail unless filer makes some payment. FBR has data of customs, sales tax and income tax which means loads of information. It has put such data not to any analysis otherwise it would not have to penalise the non-filers. One could presume that FBR has not developed any analytics who could decipher the relation between these data and point out the discrepancies.

International experts of general sales tax emphasise upon keeping one standard rate as only one could detect abnormal tax profile. The FBR is maintaining 2%, 5%, 10%, 17% besides some specifics rates. It will be beyond any innovative analyst to plug to leakage in such tariff regime. A serving FBR officer confided that while sales tax and input tax credits have decreased and the sales have also followed the same trend. Resultantly, the growth in net tax from the domestic collection on the sales tax side is marginal sans “managing advances”. When questioned whether FBR looks at the per unit value on which the goods are sold, the answer was in negative. Unless per unit value is checked, there is no way to check the tax evasion and tax-gap will continue to grow. It is to be pointed out that the impact of raising standard rates of GST will be negligible as it will by same proportion raise in-put tax credits.

Paying the tax on destination basis is the cardinal principal of cost in the VAT mode. Surprisingly in Pakistan, exports suffer quite fewer FBR, provincial and as well as local taxes in the country of origin, for which no refund is permissible. How can exporters bear the burden of taxes such as on packing material etc, and how can they compete with very competitive regional players, wondered a prominent exporter.

Concerns are common in industry regarding bulging size of black economy. Government too declares it as a challenge in every budget. But none has bothered to take concrete steps as it disturbs the easy way of collection of the taxes.

One prominent manufacturer said that special regime for commercial imports is its root cause. Commercial imports are taxed at 3% extra value-addition tax and enhanced withholding taxes as final liability. Commercial imports are at much under-invoice value but after clearance are sold to informal market at original prices. Such commercial imports include finished articles, food items as well as raw materials auto-parts and automobiles in CKD conditions and plastics-rubbers-granules as scarp. These are refurbished or manufactured and occupy reasonable share in the market. It is easy for the buyers as usually there is no trail of any transaction of purchase or sale. One can easily see that market is flooded with imported goods and it would have been next to impossible to import these and file the returns without paying the value-addition tax.

It will be unrealistic for the FBR to rescind commercial regime that too when it is an election-year budget but at least subject them to filing of monthly return. Other impediments standing in the way of tax broadening and feeding informal economy are (1) complicated tax procedure, (2) repeated changes in the prescribed statements/returns, (3) frequent filings of returns and statements, and lastly (4) unrealistic revenue targets which compels the tax man to harass even compliant tax-payer.

Prudent fiscal way will be that Ministry of Finance and FBR calculate the expected revenue and accordingly make the expenditure budget. It would be easy for the FBR to accomplish the target or face the music. In any case, any person having bank accounts of less than Rs1 million should not be subjected to withholding tax on cash withdrawals. Besides, exemption thresh-hold needs to be raised to Rs1 million. The neighbouring countries have given incentives in the form of concession in due taxes where the transaction is made through ATM cards. In Pakistan, the situation is contrary, the banks charges FED on the purchases made through ATMs. The government may develop a culture to encourage payment through banking channel, visa card or through inter-net banking which would be stepping stone towards the documented economy. Is government serious for the right step or the rich steps?

The author is fiscal analyst

Email shafqatanand@gmail.com

Twitter @Chafqat