Indirect taxes: Easier to collect difficult to pay

LAHORE: The taxation system in Pakistan has developed in such a manner that generating revenues from indirect taxes like GST and customs duty is not a problem for tax collectors and instead provides them an opportunity for graft.

Indirect taxes are easy to impose and easier to collect. Businesses plead for reducing the income tax rates, but rarely protest against indirect taxes.

This is because the burden of these taxes is passed on to the consumers. Another advantage of indirect taxes is that it is possible to avoid these taxes with the connivance of tax officials.

They do it at the import stage through under-invoicing and at domestic stage by under-reporting the production or value of the services provided. The tax collector also benefits on all these illegal activities nominally per transaction, but hugely when the number of transactions that tax official handles in a day or month.

These corrupt practices not only deprive the government of revenue, but also penalise the consumers that are charged the same

price that businesses have deemed to pay on taxes.

No government including the incumbent has been able to arrest these corrupt practices. The reason is simple; the officials that are asked to control under-invoicing or concealment of production are partners in crime. Income tax is paid on their documented income by the businessmen.

Amount of under-invoicing or under-reporting of production or services is always out of books and is not part of their gross revenues. It is now common knowledge that over 50 percent of our economy is not documented, but in fact the percentage is much larger.

Under-reported products are as free from taxes as smuggled items. Under-invoiced imported products save 80-90 percent of government levies compared to the product imported on its real value.

To add salt to the injury more than 70 percent of direct taxes collected as presumptive or withholding tax are in fact indirect taxes as their burden is passed on to the consumers. Taxpayers usually calculate the indirectly paid income tax as an expense and mostly charge it from the consumers.

These malpractices are increasing the burden as the state tries to generate all additional resources from indirect taxes instead of mustering political will to tax the rich. All governments opt for an easy way to generate the much-needed resources. Indirect taxes hurt the poor more than the rich.

Government could have collected larger revenues had it mustered the courage to nab tax evaders like traders, transporters and many other players in the service sector.

Increasing import duties leads to under-invoicing and smuggling. Domestic industries that are fighting to stay competitive would be further marginalised as smuggled or under-invoiced items flood the markets.

There is a need to improve governance at customs level to eliminate the chances of under-invoicing.

As far as the poor are concerned, we have seen their incomes declining or stagnant during past two years. They live without basic amenities like proper sewerage or water supply but they cannot survive without some edibles and essential items.

These items have also gone beyond their reach.

It would be prudent if the government freezes the rates of seven items for the next three years. These items include wheat flour, ghee, salt, sugar, tea, and kerosene and gram pulse.

At the same time government should withdraw all tax exemptions that are available to the influential segment of the society.

Even the tax exemption to registered NGOs is unjust.

They pay huge salaries to their staff from charity to do charitable work. A certain percentage of the contribution made by businessmen and big companies is exempt from tax.

The overall contribution of these NGOs in charity work is much smaller than the philanthropic activities of non-registered charities that do not even pay fat salaries to their workers.

The registered NGOs should maintain proper record. If they spend the entire amount they received on charity they would naturally not be taxed, but if they have huge reserves those should be taxed.

More often than not the government functionaries succumb to the pressure of capital market barons by extending them bailout package whenever big brokers are in problem.

Has the government ever realised that most of them are now the wealthiest people in Pakistan?

They do not share their booty with the government the same way as other registered businesses do. They should manage their affairs in time of distress from their own resources. Moreover, it is now an open secret that 10 percent investors control 90 percent of the floating stocks.