The lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax and petroleum development surcharge has pushed an overwhelming majority of Pakistanis towards, and a substantial number, below the poverty line.
According to various studies, especially one conducted by the Centre for Research on Poverty and Income Distribution (CRPID), there are 63 percent of poor in Pakistan in the category of 'transitory poor'. This has also been observed by the State Bank of Pakistan (SBP) in its various annual reports that the standard definition of 'transitory poor' includes those households that are below the poverty line for most of the time but not always during a defined period. The rest of 32 percent and 5 percent of the population that subsist below the poverty line were found to be 'chronic' and 'extremely poor', respectively. Chronic and extremely poor are households that are always below the poverty line, all the time during a defined period. Similarly on the other side, 13 percent and 21 percent of total non-poor (above the poverty line) were classified as 'transitory vulnerable' and 'transitory non-poor', respectively. This portrays a frightening and shocking situation as more and more people are moving from transitory category to chronic category, courtesy regressive tax system that is the main cause of income inequalities. In an egalitarian socio-economic order, taxes are used as a principal tool of income redistribution to reduce inequalities amongst different socio-economic strata.
Strangely, neither the CRPID nor SBP have tried to interlink growing poverty with prevalent oppressive tax system. It is an undeniable fact that in Pakistan, regressive and unfair tax system is widening the existing divide between the rich and the poor. Look at the sprawling bungalows coming up fast - especially in urban centres - and growing number of people having either no shelter or living in subhuman conditions in ghettos. By taxing the rich (living in sprawling houses), the money could have been collected by the state for providing basic facilities of housing, transport, education and health to the poor. Alas! No government in Pakistan - civil and military alike - has ever thought about it seriously (there is lot of lip-service but no action).
Many people in Pakistan, who include economists as well, argue that "why we should pay taxes to the corrupt and incompetent government". They miss the vital point that the issue is not merely of tax collection and or its quantum, but just incidence of taxes and more importantly their spending - the poor of Pakistan are the most heavily taxed in entire South Asia and get nothing in return from the state which has miserably failed to fulfil its basic constitutional obligations under Articles 3, 37 and 38. On the one hand, the rich and mighty are not paying personal taxes according to their ability [Article 3 of the Constitution] and on the other, adding insult to injury are thriving on the money collected from the ordinary citizens in the name of taxes.
The sole stress on indirect taxation [even imposed under the garb of income taxation] without evaluating its impact on the lives of the poor should be a serious cause for concern in any research in Pakistan. The contribution of direct taxes as percentage of GDP was merely 2 percent in the fiscal year 2011-12, though fraudulently it was shown as 3.5 percent by the Federal Board of Revenue (FBR). The pathetic state of affairs in respect of tax-to-GDP ratio in Pakistan from 1999 to 2012, highlighted in Table A, not only depicts inefficiency of FBR but also confirms the dismal share of direct taxes in overall tax collection. Disastrous impact of indirect taxes [on an imported article of public consumption where the effective rate of tax before any further supply is 35 percent] and levy of surcharges on POL products has crippled the purchasing power of the people. Resultantly, a large segment of the lower and middle-classes is being pushed below the poverty line - at present, the total number of poor and transitory poor is not less than 60 million ie nearly one-third of the total population.
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Table A: Tax-to-GDP Ratio-1999-00 to 2011-12
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Total Total
Year Direct Indirect Total
Taxes Taxes Taxes
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1999-00 3.1 6.1 9.2
2000-01 3.0 6.4 9.4
2001-02 3.2 5.9 9.1
2002-03 3.1 6.4 9.5
2003-04 3.0 6.5 9.5
2004-05 3.1 7.0 10.1
2005-06 3.1 6.2 9.3
2006-07 3.1 6.4 9.5
2007-08 2.9 7.3 10.2
2008-09 2.3 6.5 8.8
2009-10 2.2 7.3 9.5
2010-11 2.1 6.5 8.6
2011-12 3.5 5.6 9.1
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Source: FBR YEAR BOOKS & ECONOMIC SURVEYS Collecting revenues by keeping the rich outside the ambit of personal taxes is a criminal act - in fact, a national scandal. Our revenue potential is not less than Rs 8 trillion but FBR is not even collecting half of it - it managed merely Rs 1,883 billion during fiscal year 2011-12 (Rs 738.8 as direct taxes, Rs 804.8 billion as sales tax, Rs 122.5 billion as federal excise duty and only Rs 216.9 as customs duties) although we could have easily collected Rs 8.5 trillion to eliminate fiscal deficit and generate sufficient funds for our total needs.
In fiscal year 2011-12, we had 10 million individuals having taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection from them at the prevalent tax rates should have been around Rs 3,750 billion. If we add income tax collectable from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000, the gross figure comes to nearly Rs 5,000 billion.
Similarly, due to rampant corruption in sales tax, federal excise and customs duties, the total collection has been only 20-30 percent of actual potential. By merely bridging the prevalent tax gap, the total revenue collection could not be less than Rs 8,500 billion, without imposing any new taxes.
(This was the first part of a two-part article. The second and concluding part will be published on Sunday, 9 December 2012)