On the contrary some radical changes - like broadening of tax base and reduction of exorbitant sales tax rate, simpler and fairer tax codes - will encourage investments and savings. Pakistan needs to re-prioritise its tax goals for 2005 to improve tax-to-GDP ratio, attain better compliance and collections, coupled with rapid industrial and business growth.
It is heartening to see that the Central Board of Revenue (CBR), on the instructions of the Prime Minister, has started renewed vigorous reform campaign with amended motto of 'vision, mission and value' (previously 'value' was missing!).
The "mission" of broadening tax base has suffered numerous setbacks in the last five years. People are not inclined to come into the tax net despite a host of incentives extended by the State and hectic all-out efforts of CBR.
The Finance Act 2004 made some significant pro-business changes in the Sales Tax Act, 1990 (hereinafter "the Act") and Income Tax Ordinance, 2001 (hereinafter "the Ordinance"). One such change was deregistration of persons having a turnover up to Rs 5 million under the Sales Tax regime and giving them an option to file statements under the Income Tax law by paying 0.75% on their declared annual turnover.
According to conservative estimates there are at least 2.5 million retail outlets having a turnover of up to Rs 5 million. It is sad to note that despite this unprecedented concession, the overwhelming majority of such retailers failed to file statements under section 115(4) of the Ordinance, on 30th September 2004.
Since all these outlets pay advance income tax with electricity bills between the range of Rs 60 to Rs 2000 per month, the CBR must issue notices to those who did not file regular returns under section 114 or statement under section 114(5) of the Ordinance for tax year 2004.
This exercise alone will bring at least 1.5 million new persons on the tax roll. If a retailer is paying Rs 24,000 annually as advance income tax under section 235 of the Ordinance, one wonders what can prevent him from taking advantage of section 113A that requires payment of 0.75% on annual turnover. If he has a turnover of Rs 5 million, tax liability under section 113A comes to Rs 37,500.
In other words, he is required to make balance payment of Rs 13,500 with the statement under section 115(4). Is it not surprising that such a person, even after paying Rs 24,000 as advance tax, wants to remain a non-filer? This shows the real malady of the existing system. Instead of enjoying the status of a taxpayer, he seems apprehensive of being harassed by the tax officials if he files a return or statement.
According to the Economic Survey of Pakistan - 2003-04, the total number of persons paying advance income tax with commercial electricity bills is 3.7 million. CBR's mission to broaden the tax base must start by bringing all such persons on the tax roll.
These "taxpayers" are non-filers and need to be coaxed into becoming part of the national tax roll. Their non-reporting testifies to the failure of the tax reform process so far pursued by the government.
The CBR needs a "radical camp" (or at least a "prudent" camp) because the "traditional camp" has failed to broaden the tax net and accelerate the pace of tax reform ensuring tax-to-GDP ratio at a respectable level. This ratio cannot be improved with the present income taxpayers (roughly1.2 million) and just over 100,000 registered sales tax persons.
The tendency to squeeze more and more from the existing taxpayers and giving a free hand to non-filers has eroded the tax base to the extent where voluntary compliance and tax enforcement have lost their relevance.
Nullum tributum sine lege expresses the requirement that rule of law must be applied to assessment and enforcement of taxes. CBR must comply with the enacted laws (eg should issue refunds as promptly as it collects taxes at source) and taxpayers must be able to predict in advance the consequence of their transactions.
In case of non-compliance with the rule of law, legal remedies must be provided to protect the individual or the corporate body concerned. Faith in the system will never be restored unless rule of law is enforced both for the tax machinery as well as the taxpayers.
How to achieve tax compliance is the main challenge before the government. The State must remember that if taxation is viewed as being unfair or favouring some taxpayers, it remains counter productive in the long run.
The crisis with Pakistan is that general acceptance of tax system is undermined. Special efforts and rational policies are needed to restructure the tax system and restore public confidence in the tax officials. Even a good tax system will not work if the prevalent negative mindset of the tax official persists.
There is an immediate need to improve both the system and the human fabric that controls it.
THE TAX SYSTEM MUST PROVIDE:
-- Rule of law and predictability of the authority to tax
-- Principles of proportionality, efficiency, effectiveness, flexibility, continuity, reciprocity, fairness and equity
-- Tax harmonisation
-- No double taxation or intentional non-taxation
-- Non-discrimination
-- Strict anti-tax evasion rules
The present tax system imposes greater and undue incidence on the poor and middle-class people (eg 15% GST takes larger portion of low-income groups compared to high- income groups).
The rich and mighty are enjoying complete tax exemption as their colossal agricultural income and enormous profits made through speculative transactions made in real estate and on the money/share market are outside tax net. Since they are not paying a single penny as tax, the vast majority of citizens argue that why should they be subjected to exorbitant and multiple taxes?
In 2004 we miserably failed to improve universal tax compliance and the situation in 2005 will not improve unless the government takes some concrete and positive steps in taxing capital employed in unproductive areas thus ensuring its shift to productive sectors that generate more goods and services and bring a lot of employment possibilities.
(The writers having rich experience of serving in Pakistani tax administration, are author of many books on Pakistani tax laws.)