Cracks in tax

LAHORE: A major reason for the ongoing economic stalemate is that the state is bent on forcing more and more revenue out of a limited tax base and on top of that it is not even trying to plug the loopholes through which evaders sneak out of the system either by hiding their income or buying those who are supposed to challenge them.

We have distorted our tax system in a way that discourages direct taxation. There are two to three million tax filers out of a population of 210 million.

This at maximum is 1.5 percent of the total population. When we count the tax filers that paid no tax at all, the taxpayers are reduced to less than one percent. But if we look at indirect taxes almost every citizen pays various taxes and levies. Almost every citizen of this country pays indirect taxes from sales tax on goods and services to other government levies like petroleum levy, road taxes, excise duty and many others.

The tax system is so skewed that even 75 percent of the direct tax is collected indirectly as withholding tax. The indirect taxes world over are mostly consumption taxes and are collected from the consumers by the manufacturers and service providers. In other words the indirect taxes are incorporated in the cost.

Many entrepreneurs include even the indirect taxes collected indirectly in their cost and practically pay no taxes at all.

The state punishes non-filers by collecting income tax on utility bills after a threshold varying for different utilities. The service providers or the manufacturers that are not registered in the tax net pay that withholding tax and include it in their cost. The consumers bear that tax.

Then there are numerous cases when tax registered companies conceal their actual production and pay no indirect tax like sales tax and excise on concealed production. But when they market that product they charge the same price as charged on tax-paid production. This way the consumer is forced to bear the tax that has not been paid. The industries frequently accused of indulging in this practice are large-scale manufacturers like cement, beverages and sugar industries.

In fact the federal board of revenue is in the process of electronically monitoring the production and dispatches of manufactures in these sectors. The concealment of production would however continue in the absence of documentation at the retail level. The retailers are not required to furnish purchase receipts in their turnover tax regime.

This is the reason they sell not only the non-tax paid goods manufactured in Pakistan but also the smuggled items that include bulk items like large-sized refrigerators, big LCDs, crockery, tyres, tiles, and numerous other home appliances.

Besides we smuggle and under report production of cosmetics, shampoos, soaps, toothpastes, and whatnot.

We cannot reform our taxation system without full documentation and collection of income tax directly and not through indirect means. The income tax collected through mobile phones, electricity and gas bills are meant to be refunded to the tax filers that regularly deposit their taxes (salaried class) through their employers. The refund should be automatic once a person has filled the tax return with evidence of deducted taxes. Employees do not get tax certificates from some employers that deduct income tax from employees’ salary but fail to deposit it in the national exchequer.

The will to continue with corrupt practices is stronger than the desire of the state to bring full transparency in tax affairs. All restaurants are bound to collect the service tax from eaters.

The restaurants in the past collected the tax on fake receipt but did not deposit it with the government.

The Punjab government then introduced a scheme urging the diners to send the receipt provided by the restaurants through WhatsApp to the Punjab revenue department. After an initial surge even this failed to substantially increase the revenue. Now the Punjab government has reduced the services tax from 17 percent to 5 percent if the payment is made electronically.

This saves a lot of money to the consumers but very few are aware of this scheme. It should be made mandatory that all restaurants prominently display this facility in their premises so that each customer could avail it. Consumers in posh localities are aware of this facility but in numerous cases are informed that the link of the device available with the restaurant is down. What should they do in that case?