~~with focus on tax education~~

Skewed Taxation Policy

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THE State Bank of Pakistan is worried over what Governor Shahid Kardar describes as a ‘structural shift’ of incomes towards the untaxed sectors.

“With this shift of incomes away from the tax-paying sectors to non-tax paying sectors, the tax-to-GDP (gross domestic product) ratio is structurally destined to be hovering around lower levels,” he told Reuters in an interview last week.

Experts estimate that an additional amount of Rs300 billion has shifted to the rural economy in the last one year on the back of rising global commodity prices. This trend is likely to continue for some time to come, according to some commodity experts. Yet the incomes from agriculture remain out of the tax net.

Pakistan’s economy has shown signs of improvement, according to him. But, Mr Kardar says, quick steps are needed to broaden the tax base to benefit from the growth in the untaxed sectors, such as agriculture. Like many others, Mr Kardar is also of the view that the structural shift now needs to be addressed in the next budget. “All sectors of the economy need to be taxpayers beyond a certain level of income irrespective of its source,” he emphasises.

The government appears to be cognizant of the need to increase its revenues and is reported to be considering various proposals for boosting taxes. Its finance managers have already indicated a strong “resolve” to implement the reformed general sales tax (RGST) regime in the next budget to replace the existing sales tax system.

Some media reports suggest that the government is also contemplating re-imposition of wealth tax, which was withdrawn by the previous government under Gen Pervez Musharraf.

The Federal Board of Revenue (FBR) has already made certain moves to tax the agriculture supply chain by bringing ‘arhtis’ or middle-men into the net. Last month it also withdrew sales tax exemptions to some agricultural inputs like fertilisers and tractors.

Now it wants the provinces to tax income from agriculture, effectively and directly. The rupee value of the agricultural goods produced during the last fiscal also grew to over Rs3 trillion and has stoked demands from different quarters to tax the income of big landholders.

The government also announced a few tax measures last month to collect additional revenues of Rs53 billion during the last quarter of the current financial year in order to restrict its ballooning fiscal deficit to less than 5.5 per cent. The experts, nevertheless, do not find the “temporary” tax measures adequate enough to stabilise the sliding economy.

They are of the opinion that the government needs to do a lot more in the next budget to show its seriousness to put the economy back on the road of growth. “While it is important to tax the agriculture sector in view of the rising rural incomes on account of escalating global commodity prices, it will not be enough to overcome our revenue woes,” according to Mr Mubashir Bashir, a chartered accountant from Lahore.

He says the successive governments have created incentives for tax evaders and avoiders to protect the financial interests of the wealthy. “Our tax policy is heavily skewed in favour of the rich and powerful segments of society.

It rewards and protects tax evasion and avoidance rather than punishing it,” argues Mr Bashir. “No effort for a sustained increase in the tax revenues will succeed without taxing every untaxed or partially taxed sector (including all the services and property), abolishing tax exemptions to incomes from certain sources, withdrawing tax incentives to some sectors and getting rid of money whitening schemes,” according to him. He argues that the distortions created by the elite in the tax system to protect its interests have been responsible for the increased incidence of taxes on the lower income segments of the population over the years.

The government’s inability to tax the wealthy because of their political clout has resulted in the mushrooming of indirect taxes, which ultimately hit the salaried and poorer classes, he insists. “Thus, the government is required to undertake a serious exercise to revamp the tax system in order to tax the incomes of the wealthy directly and irrespective of the source of their income to boost the contribution of the direct taxes to the overall tax revenues as well as to remove distortions that ultimately hurt the poorer and middle classes,” he says.

“A fair and equitable system taxes people according to their capacity to pay. If it does not, it means something is terribly wrong with it. And something is terribly wrong with our tax system and it needs to be fixed immediately.”

posted @ 5:54 PM,


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