Tax realities versus business expectations

LAHORE: Government’s expectations on collecting more revenue next fiscal without new taxes are high, while the expectation of businesses on tax concessions, are even higher. Neither would the government achieve its targets nor would the businessmen get desired concessions.

This government has promised that there would be no new taxes in the next budget and yet it aims to collect 25 percent more tax revenue. This means that the trust of economic managers would be on tax compliance.

They know that even most of the documented businesses are not fully tax compliant. They avoid taxes through under-invoicing, under-reporting and claiming higher expenses than they actually incur.

The non-documented businesses are another headache for the economic planners. Ground realities show that the chances of increasing tax revenue are very grim.

It is not because of the lack of tax potential, but due to the dependence on the same tax collecting machinery that facilitate businesses in evading or under-reporting taxes at a price. The dilemma of the conflict of interest of tax collectors has to be eliminated before we expect realistic tax collection.

As far as the common men are concerned, they do not benefit from the connivance between the tax collectors and the businessmen.

For instance, if a local manufacturer under reports production, he will not pass on the benefit of saving 17 percent sales tax to the consumer, but would instead pocket the entire amount. Of course the businessmen would reward the tax collector who helped them in this crime.

In the same way, the importer who resorts to under-invoicing would save the taxes and duties to fatten his/her purse against a paltry gratification he/she has to pay to the tax collectors. The consumers get the product at the cost calculated on the actual duty.

This nexus between the tax collectors and the businessmen is the reason that impedes actual tax collection. This nexus ensures that the revenue targets remain elusive.

Economic planners are hostage to the bureaucracy that dictates the operation of the state according to their rules. The economic managers would definitely try to facilitate trade and industry, but within the limitations of the resources at their disposal.

The promise that there would be no new taxes in the next budget does not in any way mean that there would be concessions in taxes. It simply indicates that neither new taxes would be imposed nor the tax rates would be enhanced.

In the past, whenever the governments stated that no new taxes were being imposed they used to enhance the sales tax by one or two percent, or increased income tax rates. But when you plan to enhance revenues without new tax measures, it is impossible to provide further tax concessions to the businessmen.

The most this government would do would be to reduce import duties on raw materials, as promised by the advisor on commerce, buts its impact on revenues would not be very high.

Businessmen from various sectors are expecting reintroduction of zero-rating on exports and domestic corporate dairy sector. There is a strong lobby working in this regard citing the impact of Covid-19 on exporters’ finances and the decline in the sales of corporate sector’s dairy products.

This will deprive the government of almost Rs200 billion of revenues (after accounting for refunds on exports) that it collected this fiscal from domestic textile sales and the sales of all value-added dairy products except dairy products. The refunds to the exporters posed problem in the current year, but the system has finally started delivering. Most of the exporters have overcome the difficulty they faced in documentation for refund purposes and the automated refund system has worked where documents were complete.

The exporters should suggest ways to further improve the process to make it more efficient instead of demanding reverting back to zero-rating. Our exporters cannot be an exception from what the Bangladeshi and Indian exporters are offered. They pay the government taxes first and get refunds when exports are made.

As far as the dairy sector is concerned, look at the retail price of their value-added products that are four times the rates charged by the non-documented sector.

The price of curd is an example in this regard. When the consumers are made to pay very high price for corporate sectors’ curd why can they not be asked to bear the reduced sales tax of 10 percent? Regarding FDI in this sector, it may be noted that all the FDI is for domestic consumption. We need FDI that boosts our exports. Dairy exports by foreign corporate dairy producers remains negligible, and sales tax should not be withdrawn rather imposed on UHT milk as well.