Prescription for Increasing Tax Revenues

Tax Revenue

By:

Omer Zaheer Meer,

CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)

           Prof DP 051918 original

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Preamble:

Taxation is an extremely important source of funding for any state to finance the running of the Governmental functions. Even the oil rich Arab states recognized the importance of this and started to shift towards a lasting economy with citizens contributing to the national treasury with their share of the taxes. To put it simply, in all global economies, there is both direct and indirect taxation (in different combinations). Direct taxation is a tax directly levied on an individual or institution’s income while indirect taxation entails taxes on products and services whereby consumers are made to pay taxes when they consume these.

Taxation is therefore an essential subject warranting attention from all concerned. In this write-up we’ll identify key issues in this regard and propose solutions to solve them amicably which have been presented by this writer at various think-tanks and as Chairman of taxation committees of key professional bodies such as ACCA. These have been published and publicized but unfortunately still awaiting implementation by the decision makers.

In developed countries, realizing that taxation is necessary for providing them with necessary facilities, most citizens contribute their share to the state finances. The situation is different in developing countries, being marred with corruption and mismanagement; there is a lack of public trust by the masses demanding evidence of delivery before they’re willing to pay their due share. As if that wasn’t enough the subjective nature of taxation laws resulting in harassment and the structural tilt towards indirect taxation further erodes the confidence of the populace in the taxation system.

With all the natural resources at our disposal, a high proportion of population being young and hardworking and with cheap labour availability, a fairer system of taxation culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan

As a result of the above, the unresolved challenge faced by Pakistan on the taxation revenue shortfall front isn’t that surprising. A culture of tax avoidance has long engulfed the business horizons. An ongoing cat and mouse fight between the tax authorities and the taxpayers, with the later believing that it would be a waste to pay off their tax bills due to the deep pockets of the corrupt government officials, harassment emanating from the taxation system and/or lack of public services. The FBR officials, on the other hand, feel overwhelmed and underappreciated with issues of career paths, promotions and understaffing.

While the FBR officials rightly point out that no state can perform the necessary duties with the empty coffers, the tax payers also strongly put forward the argument that they don’t see any real delivery of essential services but instead are greeted with stories of herculean corruption rife all around coupled with undue persecution once they enter the tax net. Hence, there seems to be a massive break-down of trust between the taxpayers and the “tax-man”.

This serious trust deficit in Pakistan has lead to a difficult situation where finance ministry overemphasizes on indirect taxation to try to bolster its coffers.  Unfortunately this approach has serious negative ramifications for Pakistan’s economy and people which has manifested in worsening the already declining economic situation of the country.

Another misconception is that since only 0.66% of the total population files their income tax returns, hence majority of the people do not pay any taxes. On the contrary, Pakistanis are taxed indirectly on just about everything. However, this way of collecting taxes indirectly leads to a regressive system where those earning more pay a lower proportion of their income as taxes and it results in inflationary pressures within the economy as the increased costs translates into increased prices for just about everything including the commonly used commodities. The effects are hyper-inflationary in nature because there is a multiplicative rather than an additive element in the inflation passed-on at every level.

The mess created by the taxation policies pursued by the previous governments needs to be undone. What is critical to achieving the success in taxation reforms is to restore the faith of the taxpayers by implementing a multi-dimensional tax reforms agenda, where:

  • The biggest harassment tool of the “fishing” audits should be eliminated. Instead the audits should be limited to the cases where either there is specific information and/or the taxpayer is taking some benefit from the state such as an exemption or refund.
  • An alternate can be the introduction of an incentive based system introducing an option of no audit in case of payment of 25% higher tax compared to last year. Such measures have proven to be success in the past.
  • Focus should be shifted on using e-systems like “STRIVE” for verification of withholding taxes and their deposits in the treasury.
  • Issues of FBR such as under staffing, lack of full automation and career prospects along-with just compensation should be properly addressed.
  • Taxpayers should be facilitated by making the processes easier and fairer, focusing on maximum automation in order to stem out corruption.
  • Instead of increasing the tax rates the tax net should be constantly widened.
  • More focus should be given to direct taxation, with more affluent contributing more to the treasury.
  • Meaningful tax rebates and reliefs should be introduced for the less able sections of the society.
  • Certain exempt sectors should be brought into the tax-net (subsidies can be given for assisting any under-pressure areas).
  • Tax rebates and incentives should be focused to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, e.t.c. as may be required in a particular sector.
  • Tax money should be seen to be actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.
  • The massive corruption in public contracts/projects, now routinely in the range of 20-40% of tender values, should be eradicated for better and efficient use of public money through revamping the pay and accountability structures.

With all the natural resources at our disposal, a high proportion of population been young and hardworking and cheap labor availability, a fairer system of taxation culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.

The key reforms outlined above, if properly implemented, can resolve the current enigma facing the treasury. Should such reforms be made with reliance on local resources and a will for change, there is no reason, why Pakistan cannot stand on its own feet and become an economic hub not only for the region but the whole world.

The writer is a leading economist and tax expert who holds five top professional finance, investment and accountancy qualifications CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money Laundering Specialization along-with substantial experience and represents Pakistan on Global Tax Forum while sitting on the boards of several think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about