Collection dilemma: flat-taxation is the anwser
At present, both the centre and provinces are not collecting taxes according to their respective potential due to weak enforcement and inherent problems of an out-dated tax system. Total tax potential of Pakistan is around Rs. 12 trillion if agricultural income tax and other provincial and local taxes are also collected efficiently.
As shown below, at federal level alone, income tax alone can be collected to the tune of Rs. 7 trillion provided the entire undocumented economy is brought into tax net. So far all efforts to achieve this objective have miserably failed. The existing tax system itself is the root cause for encouraging parallel economy, the reform of which is a fallacy. Patchwork here and there is just an exercise in futility and no matter how many tax reform commissions or committees are constituted the consequence would be curing the incurable.
Remedy lies in dismantling the existing oppressive tax system and shifting to a flat-rate that is pragmatic, growth-oriented, workable and acceptable to all stake-holders. Under this flat rate taxation, those not coming into tax net or avoiding true disclosures would opt to pay voluntarily as rate is minimal and compliance cost almost nil. Tax system is meant to incentivize growth and not otherwise as the present one is doing.
Also read: Public Manifesto: Taxation for prosperity-I
After levying all kinds of oppressive taxes, the federal government has failed to bridge the ever-increasing fiscal deficit that is creating a greater debt burden—at present 65% of tax revenues are going towards debt servicing alone. On the other hand, provinces are critical of inefficiencies of the FBR due to which their share in the overall divisible pool is insufficient to meet their annual budgetary requirements.
Since the share of every province in federal taxes under the National Finance Commission (NFC) is dependent on how efficiently taxes are collected by FBR, it is important that centre and federating units actively participate in the tax collection apparatus/processes/efforts.
No serious debate has ever been initiated on the issue as to how we should increase the size of the cake to ensure that both the centre and provinces flourish as sufficient funds are made available to run the governments and fulfill the needs of the people.
Tax System in Perspective
The ever-growing size of parallel, undocumented economy has much to do with the way taxes are being administered for the last many decades—from a tax compliant public to a tax rebellious one, from high tax-to-GDP ratio to an obnoxiously low one, from greater revenue from fewer taxpayers (2 million) to very low revenue from a broad-based population (approximately 20 million), from a relatively thriving economy where debts were at their lowest to an apparent prosperous one where share of debts is 77% of the GDP, from a comparatively greater reliance on direct taxes to a complete turn-around towards indirect ones (even in the garb of income tax law which is essentially a form of direct tax), from relative simplicity of compliance to complicated procedures both at the federal and provincial levels especially in the aftermath of the Eighteenth Constitutional Amendment for which the earlier government takes immense pride.
Even the Inland Revenue Service has transferred a major portion of its responsibilities of collecting tax on withholding tax agents leaving very little to justify its own existence.
In short, all that could have been done has been done to make the life of a compliant taxpayer as miserable as possible and snatching from him that little iota of motivation that was egging him on to be an obedient citizen of this country.
The helplessness of seeing one’s hard-earned money going down the drain has compelled many to look for greener pastures around the world where their taxes would trickle down in the form of some benefit coming back to them.
With this in mind, it becomes imperative at this stage to rethink and devise a scheme that would alleviate the sufferings of the common man and help generate substantial revenue for governments to function comfortably.
Our country is rich in resources and its people are very generous. There is no doubt that a logical scheme of things capable of sucking in large revenues without disrupting the common man’s life would be a welcome respite from the constant lashing by tax collectors.
Another important factor that discourages compliance with tax laws is the extremely complicated and cumbersome nature of procedure involved in being registered with the revenue authorities. Even the corporate and educated class finds it difficult to comprehend, follow and observe the simultaneously applicable innumerable legal obligations, what to talk of the illiterate and ordinary man on the street.
If a survey is conducted with respect to merely the advance tax provisions (almost 75 in number), it would reveal how a person is supposed to be aware of so many avenues where either tax is being withheld or he is himself paying income tax and the consequences of these taxes, the credit of which he may or may not be allowed to take while filing his return.
In the first instance, a highly meticulous record of all such transactions that invoke taxes would have to be maintained and secondly, an even higher level of grasp over the law would be required to apply it.
Considering the present level of inflation and the high cost of living, the minimum threshold of income (Rs. 400,000) where no income tax is to be paid nor a return needs to be filed is within reach of an overwhelming population including people who are earning income from simple employment, trade and vocations.
With the prevailing standards of literacy in the country how can it be expected that the common man has any cognizance about tax laws let alone complying and then tackling the authorities who are perpetually ready to whip anyone—innocent or guilty. Had it been restricted to simple arithmetic, things could have improved but the cruel methods adopted to teach the nation lessons in paying taxes have only proved detrimental rather than motivating.
People take pride in beating the authorities, no exemplary punishment has been meted out to confirmed evaders, no effort has been made at the grass root levels to educate the public about its obligations and instead of serving the nation, officials of the revenue department are poised to pounce upon the first stray taxpayer to squeeze him dry. Revenue officers are trained to look suspiciously at every registered taxpayer—their motto being “guilty until proven innocent.”
Even though law requires that officers should counsel and guide the taxpayer with respect to his duties and rights, he is conveniently forced to engage a tax consultant who, if professionally unethical, is capable of causing much more financial damage to his client than the amount of tax in question.