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Tax collections, so maintains the Federal Minister for Finance Ishaq Dar, have improved significantly and he cited a healthy growth rate of around 13 percent in one of his recent press conferences.
Sources within the Ministry of Finance, however, revealed to Business Recorder, but on condition of anonymity that the actual growth in taxes is no more than 3 to 4 percent as at least 9 to 10 percent can be sourced to inflation as well as the Gross Domestic Product (GDP) growth rate. Thus a high rate of inflation, politically disastrous for any government, would account for higher total tax collections (though significantly it would have no impact on the tax to GDP ratio) as would a higher GDP growth rate. Data reveals, however, that the growth rate has been rather amateurishly manipulated upward (for example the growth rate of construction is cited as three times that of cement) and the rate of inflation manipulated downwards. Ideally from a politico-economic perspective the government would aim for declining inflation with a rising GDP rate to provide support to claims of high growth in tax collections due to its policies. That is not reflected by data and unfortunately the rise in existing taxes has been the major contributor to growth of taxes.
The bulk of the gains in tax collections during the first six months of the current year were from indirect taxes (whose incidence on the poor is greater than on the rich) and included 23 percent growth in customs, 10.8 percent in excise duty, and 6.4 percent in sales tax. Direct tax collections rose from 236 billion rupees in July-December 2014 to 381 billion rupees in the comparable period of the current fiscal year, however, increasing the ambit of withholding tax was the major contributor to this rise – 146.3 billion rupees were collected last year while in the current year withholding tax collections accounted for 243.8 billion rupees or a rise of nearly 60 percent. This reflects the failure of the Dar-led Finance Ministry to either bring more rich and influential into the income tax net or indeed to lure or compel those operating outside the legal economy to begin to pay direct taxes commensurate with their income.
An element that remains the hallmark of our tax system causing much consternation not only amongst the general public but also amongst our bilateral and multilateral donors is the appallingly poor performance of the Federal Board of Revenue (FBR). The Board in its defence is at pains to point out that it is an implementer of government finance bills passed by parliament and absolves itself of all responsibility for the obsolete tax structure that continues to be unfair, inequitable and anomalous to boot. The argument that the responsibility for the structurally very weak tax structure, which accounts for a very low tax to GDP ratio rests with the members of parliament has merit. The fact that subsequent governments, both civilian and military, have not made any significant changes to the tax structure that remains skewed in favour of the influential (including the 40 odd key stock market players) as well as those operating in the parallel illegal economy rather than the legal economy (irrespective of numerous money whitening schemes launched by several governments) reflects the sustained power of the pressure groups in this country.
Not a single military strongman was successful in bulldozing appropriate changes to the tax structure itself as pressure groups are highly organized making one wonder at the relevance of the Competition Commission of Pakistan. Additionally pressure groups in Pakistan are not limited to markets associated with oligopolistic conditions (that are normally evident in products not precisely similar, for example, different types of toothpaste accounting for collusion leading to a price set well above the market rate), as is the case in other countries, but also in products where perfect competition ought to prevail for example sugar and cement. This is why the status quo parties of the PML-N and the PPP as well as military strongmen have not made any changes to the tax structure itself and instead rely on forcing existing tax payers to pay more.
Another example is in order: failure to amend the constitution and include farm income tax payable at the same rate as paid by the salaried class or as much as is paid by the corporate sector has been consistently snowballed by status quo parties – PPP and PML-N. The MQM wrote a dissenting note in the eighteenth constitutional amendment yet MQM refused to entertain the proposal to broaden the tax base. The reason: those operating in the illegal economy also include small retailers and traders who are supporters of the MQM. In effect between these three parties alone the loss of revenue as a consequence of failure to change the tax structure accounts for at least 700 billion rupees per annum.
What is also of relevance is the fact that no government has changed the tax law governing double taxation. Or in other words assets of Pakistanis held abroad (on income that may have been earned abroad or money laundered in the past) have a tax payable to the country where the asset is held and not in Pakistan. This explains why the 200 billion dollar assets held in Dubai, which is a duty-free port, as well as the billions of dollars held in Swiss banks by Pakistanis are not taxable and will not be until and unless the government changes the law. That does not appear to be on the cards.
Other governments also have double taxation exemptions (with the possible exception of the US, which taxes its citizens wherever their wealth is earned or held); however these countries have either concluded or are in the process of concluding their negotiations with the Swiss government to allow them to ascertain whether money laundering has taken place, which is punishable by a hefty jail sentence (14 years minimum in the UK). India as a case in point has suggested revisions in its Double Taxation Agreement with Switzerland; however, the Swiss banks have made it clear that even under the new treaty fishing expeditions would not be allowed. “I believe that India has lodged a request to revise its Double Taxation Agreement with Switzerland… (but) even under the new agreement and according to Organisation of Economic Co-operation and Development Model Tax convention… there must be concrete suspicions and evidence of wrongdoing (for sharing the accounts details),” a top official of Swiss Bankers Association stated.
To date Pakistan has not attempted to propose a new draft agreement and this is raising considerable criticism against the government for allegedly benefiting its leadership as well as that of the PPP as it is the most ill-kept secret that the leadership of status quo parties have millions stashed abroad in moveable and immovable assets (either in their own names or those of their spouse/children). Be that as it may, one must welcome the commitment made by the Finance Minister to the International Monetary Fund that the anti-money laundering act would include tax evaders (though it is not likely to apply to those whose source of wealth is banked abroad); however, skeptics state that this Act is unlikely to be passed and if passed is unlikely to be implemented in letter and spirit.
While FBR hands may be tied with respect to what taxes are levied on whom yet its own internal inefficiencies are legendary. The failure of the World Bank funded TARP (Tax Administration Reform Programme) because it did not have FBR ownership, as stated by a senior Member FBR, reflects poorly on the World Bank as well as the FBR. And little effort is visible to the tax payers as to greater efficiency of the FBR. Our governments, and Dar-led Ministry is no exception, are relying increasingly on (i) advance tax collections to show better results for any fiscal year than is in fact the case, (ii) delays in refunds for the same reason, and (iii) withholding taxes to raise revenue collections rather than to systematically improve the tax structure as well as administration.
To conclude our tax system is as the Americans would say same o same.
