Political will must to get rid of dependence on foreign loans

LAHORE: Our politicians may blame world powers for suspending foreign inflows to Pakistan, but they ignore the fact that every economic planner knows resources for development can be generated within the country if rulers show political will.

The issue of tax collection was first debated openly by the former US secretary of state Hillary Clinton during the first term of Obama. During a visit to Pakistan, she advised the government to increase its tax base and tax compliance and reduce dependence on external resources for development.

Other friendly countries also openly advised the government to tax the rich to generate resources for development. It is unfair and ridiculous that the same amount of documented income is taxed in one sector and exempted in another.

How could the rent collected from agricultural land be treated differently than the rent collected on urban property? All incomes should be taxed equally. Tax compliance in Pakistan is hostage to various vested interests. The traders have successfully used their ‘shutter power’ to avoid documentation of the economy.

The farmers exploit their voting power to avoid income tax on agricultural income. The most influential businessmen are sheltered from open competition through SROs. Real estate remained nominally taxed, and has become the parking avenue for illegally earned money. The government asks no question for whatever foreign remittance is brought in the country, providing smugglers, drug pushers, and corrupt bureaucrats a window to whiten their money.

The services sector has mostly been spared from the GST or value added tax. The provinces are now authorised to collect the services tax.

Most of the lucrative avenues of services tax have been spared. These include doctors, engineers, and lawyers. The provincial service tax collection has created a flaw, because the record of services tax collected by provinces is not shared with the centre. The Federal Board of Revenue assesses the total turnover of a business through the sales tax it collects. It cannot calculate the turnover over of an entity whose services tax has been collected by the provinces. Thus, services tax collected by the provinces is not a value-added tax. Provinces are reluctant to tax properties judicially. Provinces mostly lack the tax collection capacity but the FBR faces no such problems. It has not been able to increase the tax base. Hardly half percent of the Pakistanis pay income tax. The revenue authority claims that it is adding new taxpayers every year.

However, the new taxpayers increase by 50,000-100,000 each year. At this speed, the number of income tax payers would increase to one percent (at current population of the country).

This means Pakistan would remain starved of revenues for next several decades. The revenue authority has over-used its power to increase tax rates on existing tax compliant businesses. During the last decade, almost all increase in revenues has been generated by increasing levies and duties on petrol, diesel, phone calls, electricity, and natural gas. This impacted the poor more than the rich because higher tax rates forced many businesses to either close down or go informal; resulting in job loss for the poor.

Had VAT been imposed in the true spirit of value-added tax, it could have brought a visible change in tax culture. In its present form this tax might increase revenues for a while, keeping most of the politically protected sectors out of the tax net.