Saturday January 22, 2022

Way off the base

January 14, 2021

LAHORE: If we compare the first two years’ tax collection of this government with the previous, the incumbents collected less than their predecessors; though collection is higher this year, the tax base remains unchanged in terms of size.

This government imposed hefty new taxes in order to obtain the IMF loan two years back and announced an ambitious collection target of Rs5.5 trillion after accepting the IMF conditionalities. Unfortunately, the economy remained in bad shape for a long time after it. The GDP growth was 1.9 percent in the first year of this regime and negative 0.4 percent in the second year.

Naturally, the ambitious revenue targets were not met. Still the revenue collection in both these years was not far from the taxes collected by the PML-N government in its last year. This subdued growth was the result of high taxation imposed by this regime. That high taxation is paying dividends now that the economy has started moving up. The increase now being witnessed indicates enhancement of revenues in absolute terms but without any increase in tax base.

It may also be due to sharp monitoring to discourage evasion of tax by manufacturers concealing actual production. This year for the first time the government is likely to collect more revenue than PML-N in its last year but would not be able to achieve its budgeted target unless it either slaps more taxes or increases the tax base.

Short-filing by domestic manufacturers and by big outlets might have reduced but the under-invoicing in imports goes on unabated. The economic planners would have to differentiate between broadening the tax base and increasing the revenues. The increase in revenue is not keeping pace with the growth in GDP. The size of the undocumented economy is increasing at an alarming pace.

All the previous governments lacked the political will to drag the tax evading sectors into the tax net.

This regime is no exception as it is prone to compromises because of operating on thin majority. Even some of the past governments that were very strong could not implement their will on tax evaders being unable to withstand their pressure.

The Sharif government with two-third majority in the National Assembly in 1997 backed out of imposing value-added tax on traders and compromised on fixed nominal tax that did not document their business dealings. The Musharaf regime with full dictatorial powers buckled under the pressure of traders despite having all evidence of tax evasion by various sectors through the data collected during tax survey.

It looks ironic to the economic experts that the present regime is now boosting to tame the tax evaders because the regime has not been able to establish government's writ in spheres like law and order, corruption, smuggling, and hoarding all of which lead to further evasion of taxes.

Economic experts the world over agree that a value-added tax regime is the best way to document every economic activity in the country by collecting a fixed adjustable tax on every business process. We are now way closer to imposing the value-added tax in true spirit. The sales tax collected at each stage of economic activity in a value chain helps the Federal Board of Revenue (FBR)evaluate the gross sale at each stage without examining the books of the filer (Rs1.7 million sales tax indicates gross sales of Rs1 billion). This is a universal practice. In Pakistan however the provinces collect service taxes on their own. They should share the details of that tax with the FBR, but they seldom do. This deprives the FBR of auto-calculation of gross sales of many service sectors for assessment of taxes after adjusting the documented expenses of the enterprise.

Around the world tax is collected after making and strictly implementing rules and regulations that make it impossible to evade taxes. We might have enacted these rules and regulations, but we are very poor on the implementation side.

The wholesalers, retailers, doctors, engineers, smugglers, and importers involved in under-invoicing are not prepared to come in this tax net.

Many manufacturers that under-file their production also do not want the traders to be brought under GST as it exposes their tax evasion. The tax collectors have their own vested interests as many of them would be deprived of additional income they generate by overlooking under-filling by manufacturers and tax evasion by traders and other sectors.

The government does not have the courage to ascertain the actual productivity of the under fillers through use of electricity and other documented inputs. They do not have the courage to document the stocks of the traders. Its effort to monitor cement production from their mills through technology developed a glitch in less than a month after implementation. Was it a genuine technical error or engineered with the connivance of collectors?