Regressive taxes

Successive governments in Pakistan have imposed increasing indirect taxes in lieu of doing their jobs and ensuring that the wealthy pay their fair share of income taxes. The burden of regressive indirect taxes like the General Sales Tax hits the poor the hardest, who end up paying a larger share of their total income on such taxation. The tax on prepaid mobile phone cards has been particularly controversial. After the federal and provincial governments end up taking their share and mobile providers pay GST on the cards, the consumer is left paying nearly 30 percent of the total value of the card in taxation. Since the rich tend to have post-paid connections – which carry a much lower rate of taxation – the poor are hit even harder than they would be by other forms of regressive taxation. It is this reasoning which was used by the Supreme Court to immediately suspend the tax on mobile phone cards. On one level, the decision is understandable since the government is using such taxes to balance the budget on the backs of the poor. The state’s addiction to indirect taxation needs to be broken and this could be the first step.

An argument could be made, though, that repealing just this one form of taxation without a major overhaul of the entire taxation system will be counter-productive. The government needs to raise a certain amount of revenue and the suspension of such taxation has to be accompanied by extra revenue elsewhere to ensure that the country’s budget targets are met. The suspension will also hurt provincial governments unduly since they are reliant on sales taxes to raise revenue since we do not have a separate provincial income tax. In all, it is estimated that the provincial government will lose Rs75 billion and the centre Rs48 billion. This decision could end up leading to a challenge against the entire GST system since the Supreme Court ruled against it on the basis that it ends up forcing those people to pay tax who otherwise are not liable to pay income tax. That same logic could be used to suspend taxes on every good and service on which GST is currently being charged. The fault ultimately lies with the state for not improving income tax collection and for consistently failing to meet revenue targets. The state seems to have decided that it would make up the shortfall by going after the most vulnerable among us. Now, with the suspension of the tax on prepaid mobile phone cards, it should finally realise that it needs to do its job.