Federal govt must document economy, focus on revenue collection

LAHORE: The way forward for the federal government is to give priority to revenue collection that remains the number one problem in Pakistan. After the 18th amendment, income tax is the only avenue of tax collection for the federal government.

Tax laws are cumbersome and provide discrete opportunities for corruption. In the current technological era, everything should be computerised. Technology should facilitate the taxpayer to know their liabilities in cases pending for years.

Sales tax on services is under the domain of the provincial governments. It is regrettable that the provinces have not exploited the huge potential of services tax. Most of the service sectors like doctors, beauticians, lawyers, hair dressers and many of the restaurants operate outside the tax net.

Provinces are not pushed as well to collect more revenue as they get ample amount as their share from federal taxes to operate on surpluses. The property tax rates in Karachi for instance were evaluated in 1990s and property tax is collected on that evaluation.

At the current property rates, the tax could multiply many times and fulfil the entire development and social sector needs of the mega city. This is true for all other urban centres of Pakistan.

A major flaw in taxation is where the informal economy marginalises the documented sector that pays 17 percent sales tax, corporate tax and income tax. The informal sector pays no taxes at all.

We are increasing the burden of taxes on the compliant sectors without making efforts to bring the informal sector into the tax net. The solution lies in the documented evidence available with the Federal Board of Revenue (FBR) that states that there should be 3.2 million taxpayers in Pakistan instead of the current one million.

Parties across the political divide should muster the courage to achieve this even if it hurts some most influential member of the society. Tax reforms need strong support from all political forces in the country. Documentation of the economy is linked to political consensus. Are we ready for that?

There are certain areas in the tax regime where the government could collect taxes and no political consensus is required. Under invoicing and smuggling is depriving the country of at least Rs800 billion in revenues.

High duties whether import duty or sales tax, encourage smuggling and under-invoicing. It has been evaluated through various studies that the cost of under-invoicing and smuggling is to the tune of 15 percent of the average price of the product.

If the government makes sure that the cumulative duty and sales tax on any product would not be more than 15 percent, these two menaces would be adequately addressed. Surge in revenue would be enormous.

At a discussion programme, experts from various fields pointed out that sustainable high economic growth in Pakistan has remained elusive because of numerous self inflicted factors.

Infrastructure has to be modernised. Transporting oil around on trains is an obsolete technology. We need a far greater pipeline infrastructure to ensure seamless flow of oil round the clock.

The government should launch development projects in partnership with private sector that could provide 66 percent of the equity. India has successfully completed many mega development projects in collaboration with the private sector.

These include Delhi Metro and Hyderabad airport. We have similar successful examples in Sialkot where private sectors built the dry port and the airport. But these were comparatively minor projects and have not been replicated anywhere else in the country.

Pakistan enjoys demographic advantage that provides it the opportunities to increase productivity to global level by 2030. In contrast, all advanced economies and many developing countries on the other hand have to increase productivity through technology only, as they lack young and fresh workforce due to aging population.

However, these opportunities will fizzle out if needed actions are not taken. It is a well-known fact that rising worker productivity results in higher wages and increase in disposable income.