Fair and Reasonable Taxation
According to CIA statistics, Pakistan’s
a per capita income is estimated at US$2900[1].
Considering this income calculated on a population of 160 million indicates a consolidated
number of US$ 464 billion. Current exchange rate applied to this figure, corresponds
to PKR 46 trillion. Theoretically speaking, Government of Pakistan can earn
revenue of PKR4600 Billion for fiscal year 2013-14 by collecting 10% income tax
on PKR46 Trillion, which is PKR 614 Billion more then Budget 2013-14 projected
expense of PKR3985.4 Billion.
Unfortunately, this simple trick to have surplus income
cannot be implemented. Sixty percent of
Pakistan's population is living below poverty line[2]. International
poverty line is at income of two dollars or PKR 200 a day. Total Income of 60% Pakistanis (living below
poverty line) is approximately US$70 billion per annum; it is their right to claim
tax exemption. Tax Exemption for population below poverty line leaves PKR45.9Trillion
as taxable income. Thus 40% of Pakistan population
falls in the ambit of tax net, equaling 64 million people.
An average Pakistani household has
under 4 members; for calculation sake, considering 6 member per household with
one earning member (2007-2008 figures)[3],
16 million people earn PKR 45.9 Trillion in Pakistan, whereas only 1.7 million pay
taxes i.e. 10%. According to budget it is estimated that an amount of PKR914
Billion will be collected under income tax. These statistics indicate that PKR914
billion is contributed by 10% of tax payers. Question arises where does remaining
90% tax payers have gone and why they are not paying any income tax.
%age of Tax Payers
|
Tax Paid in PKR Billion
|
10% (A)
|
914
|
90% (B)
|
914X9 = 8226
|
Total Budget Expense (C)
|
3985.4
|
Surplus (A+B-C)
|
5154.6
|
Both the above scenarios indicate
sufficient revenue generation with reasonable tax rate, no sales tax, and
enough surplus to support high investment projects like bullet trains
underground subways, better health and education facilities for all. It will also provide relief to those who are
already paying taxes and have been taxed directly or indirectly 30- 40% in
current budget revenue generation schemes.
Finance Minister in his budget
speech stated that regular tax payers have not been taxed any further; yet,
bottom line remains that those paying taxes have been taxed further. Lets have a look at the gift government has
given to genuine tax payers.
“Final Tax Regime” was introduced
by Gen (R)Pervaiz Musharaf; prior to FTR, surplus income tax deposited /
deducted was never refunded, at least not to original tax payers. “Final Tax Regime” came as a relief to genuine
tax payers, where withholding agents were authorized to give tax credit based
on evidence provided. Withdrawal of
Final Tax Regime will burden those who pay taxes and file return regularly.
Under present scheme each year tax withheld would invariably be more then the obligation.
History suggests that this surplus amount will never be reimbursed, at least not
to the original payer. It has opened
gates to yet another way of syphoning public money by holders of public offices
and provides opportunity to corrupt officials to exercise their powers in self-interest.
Wealth tax was withdrawn in Gen
(R) Musharaf’s era on the pretext of double taxation, as wealth declared is
after tax has been paid. Those who have black money do not declare their wealth
in “Wealth Statement”. In current budget
an Income Support Levy has been imposed at the rate of 0.5% on all moveable
assets above one million, that too w.e.f. from June 2013. It is a known fact that Wealth Statement is
filed by only those who pay income tax and file IT return. Thus, genuine tax
payers are squeezed yet again to compensate for those who evade tax.
Profit earned by Corporates is
distributed among shareholders; most of the time these are individuals who have
invested money and are enjoying return on their investment, in shape of
dividends. Finance Bill 2013-14 has
reduced tax rate for Corporates by 1%.
Thus, benefit is for those, whose majority does not works and rely on
income from dividend. On the other hand,
burden to meet short fall has been shifted on regular tax payers, especially
salaried class.
Engro paid PKR2,015 million as
tax for year 2012, at a tax rate of 35%.
If, Engro’s taxable income is same for 2013, it will have tax liability
less by one percent, against 2012. This
reduction in tax rate will allow Engro PKR57.57 Million an additional after tax
profit, which ultimately goes to shareholders as dividend. To compensate for this amount, a large number
of salaried tax payers have to contribute. A sample of salaried people required
to compensate for this short fall is:
Monthly Salary
|
Number of Salaried Person needed to cater for PKR
57.57 Billion
|
Monthly Salary
|
Number of Salaried Person needed to cater for PKR
57.57 Billion
|
||
35,000
|
57,570
|
100,000
|
853
|
||
40,000
|
14,393
|
150,000
|
411
|
||
50,000
|
4,606
|
200,000
|
245
|
||
60,000
|
2,678
|
300,000
|
118
|
||
70,000
|
1,828
|
400,000
|
71
|
||
80,000
|
1,323
|
500,000
|
51
|
Had corporates been taxed by
another 1%, relief could be vice-e-versa.
Such measures of giving relief to Corporates are expressive of rulers’ mentality,
competence and intentions. This is case of a single Corporate. A large number of public and private limited
companies operate in Pakistan and earn profits in billions.
Government had been showing
intent to increase tax net since long. However, practically the pace of
including all eligible tax payers in tax net is rather slow. This slow process
is because of multiple reasons like political influence and corrupt tax
officials.
An out of the box thinking can
change perspective of complete income tax system. At one hand, all direct and indirect taxes
can be abolished in one go and on the other maximum number of people can be
brought in tax net. A simple system can replace prevailing complicated and
inefficient system, yet effective enough to generate sufficient funds.
Implementation of such system should not be any problem in this era of technology.
Solution to a simple and efficient tax collection system is
three step formula.
1.
Abolish prevailing income
tax, sales tax, FED, Income Support levy etc.
and implement Final Tax Regime.
2.
Implement policy of no cash
transaction for amounts more than PKR5000. The policy already exists for
corporates, which should be extended it to individual as well.
3.
Put a tax of 2% on all (in
and out) transactions through banks.
According to the State Bank of
Pakistan total amount transacted through banks between July-Sept’12 was PKR
40.549 Trillion[4]. It
can be safely estimated that PKR162.199 trillion was transacted in year 2012.
Thus, PKR3.24 Trillion can be collected as full and final income tax. By ensuring all transactions above PKR5,000 through
banking channel will increase amount bank transactions by at least 100%. It can be safely estimated that through this
procedure government will be able to collect more than PKR 6 trillion per
year. It will bring maximum number of
people in the tax net and allow participation of tax payers towards national
development. No further taxation will be required by the government,
whatsoever. It does not require any
explanation as to what will be the effect of such taxation system, yet few
benefits are outlined
1.
Negative inflation of
15-20% will be observed in first year of implementation, which would be an
instant relief to each and every citizen of Pakistan.
2.
No one will escape tax net
and country will have well documented economy.
3.
Equal percentage and proportionate
contribution by maximum number of taxpayers will be ensured.
4.
Requirement for higher denomination
currency notes will reduce, thus circulation of black money can be controlled
by removing PKR5000 and PKR 1000 currency notes from market.
5.
Less cash with people will also
help in reducing crime rate.
Why our financial and economic gurus do not come up with
simple things rather then complex and intricate methods of squeezing those who
have already been squeezed.
