TAX POTENTIAL : MYTHS AND REALITIES (REVIEW)

In his article, Muhammad Arshad the author has criticized a paper titled, ‘UNLOCKING Pakistan’s Revenue Potential’ published in august by International  Monetary Fund.

The paper concludes that the country has the potential to nearly double its tax-to GDP ration over the long term.

The author was touched by the following points raised in the paper.

The paper says,  the income tax rates in case of individuals is 20 percent. And this low level of direct taxes is mostly a result of weak compliance and enforcement and abundant concessions and exemptions.

Secondly, reducing the tax exempt income threshold, widening tax brackets, adopting more progressive and lower tax rates and rationalizing concessions and exemptions would not only increase revenue yield but also improve the fairness of the tax systems.

His arguments are as follows:

1.       The reference of 20% is not true as para (1) and (1A) of Division 1 of Part 1 of the first Schedule to the income tax ordinance, 2001 clearly specifies the marginal rate of tax in case of a salaried person is 30 % and in case of non salaried person is 35%.

2.       Under normal tax regime the maximum income on which tax is not payable is Rs.400,000/- but if the country’s socio-economic conditions are taken into consideration the situation tells a different story.  Where the average household size is 5-6 persons, and in most cases there is only one bread earner.  So Rs 400,000/- per annum means around Rs.220 per person per day which is hardly sufficient to make both ends meet.

3.       Almost the entire amount is spent on consumable items which are also subject to at 17% sales tax.

4.       Individuals pay with holding taxes in a number of ways, which is otherwise not due for them. They deserve relief not more tax.

5.       There are more than 45 withholding taxes which are paid by millions of common citizens. Most of these WHT have no nexus with the income earned or capacity to earn. For example WHT charged on profit etc.

6.       Even widows and orphans pay taxes on all of their income.

7.       124 millions mobile phone users pay income tax at source. A country where 50% people live on or below poverty line this number is not small.

8.       Every commercial electricity user pays income tax at source.

9.       Business are made withholding tax agents and the tax department is mainly involved in the monitoring of collection of tax at source, levying  penalties and default surcharges making the cost of doing business very high.

10.   Withholding tax becomes an indirect tax when it is treated as a final tax and is passed on to the ultimate consumer as an indirect tax.

11.   There are number of minimum taxes which are levied without any reference to income. Taxpayers are forced to pay minimum tax even in case when they are suffering gross loss and they pay it out of capital. It is not justified.

12.   Sales tax and petroleum development levy prevent passing the benefit of falling oil prices to the Pakistani businessmen.

Pakistan has the potential to increase tax revenue. But sensible taxation is the requirement.  The sole objective should not be the collection of tax, it should be collection of tax based upon the principle ‘ from each according to his capacity to pay’.