WEB DESK: A former Finance Minister, Dr Hafeez Pasha, addressing the eighth South Asia Economic Summit stated that “Pakistan has failed in increasing the tax-to-GDP ratio as it is being held hostage by entrenched powerful vested interests, people who do not allow the individuals to change the system.”
This damning observation has been made several times before by numerous economists and tax experts with insurmountable evidence to prove its veracity. This is evident from: (i) Sustained failure of all provincial governments to tax the rich agriculturists in the same manner as the salaried class is taxed by the federal government and (ii) imposition of taxes on pressure groups in the budget such as traders and wholesalers who then resort to nation-wide strikes paralysing the country thereby compelling the government to withdraw or at best to negotiate a lower rate.
Protests, on occasion violent, have become so much the norm after the levy of new taxes or enhancement of existing taxes on pressure groups that there appears to be little room for the government in general and the Finance Ministry in particular to begin to reform the tax structure with a view to rendering it more equitable and fair.
Dr Pasha also referred to the culture of exemptions or loopholes that is causing a loss of 900 billion rupees per annum or 30 percent of existing collections. While loopholes are not illegal and it is the government that must seek to plug them yet Dr Pasha’s observation is disturbing as the amount of revenue lost as a consequence of loopholes is a lot higher than what is prevalent in other countries.
Ending of the SRO culture that is to the advantage of influential groups has already been agreed by the Finance Ministry in deliberations with the International Monetary Fund (IMF). One would hope that rescinding of such SROs is not reversed for political reasons once the Fund programme is completed by the final quarter of 2016.
Be that as it may, there have been some visible lacunae in collections of sales tax. It must be borne in mind that collections under the sales tax contribute the largest revenue to the federal government, budgeted at an estimated 1.25 trillion rupees in 2015-16.
Collection under income tax is projected to yield a higher amount than sales tax at 1.32 trillion rupees in the current year. However, because of the heavy reliance on the withholding regime this tax has lost its character as a direct tax as it is passed on to the consumers in numerable instances.
Be that as it may, sales tax at the rate of 17 percent at present is in the VAT mode in which there is an input-output adjustment on each stage of a transaction. Data, however, reveals that only about 8 to 9 percent is actually realised from this tax and the basic objective of this mode of sales tax, namely to bring in the parallel illegal economy into the legal economy, clearly has not been achieved.
Sales tax levied at a single stage (end stage namely at retail stage like in the US) therefore maybe a better mode of sales tax which would include the full value of all transactions relating to a product. However, the single stage sales tax is rarely, if anywhere in the world, in double digits and hence the government would have to reduce the rate from the existing 17 percent – a decline that economists argue may still fetch in more revenue than at the existing rate.
Sales tax only at the retail stage would be a non-starter in Pakistan as most retail outlets and wholesalers are outside the tax net despite best efforts by the FBR. So a single stage sales tax would have to be a replica of the scheme that was in vogue prior to the switch to the VAT mode. In other words, we would have come full circle but this should not be made a matter of bloated egos and decided in the best interest of the national economy.