Taxing the taxpayers?

[Leader]

It has been extremely disconcerting for the past two months to listen to Finance Minister Ishaq Dar's constant harangues commencing on 5th June, the day the budget was announced in parliament, and continuing to date in all subsequent discussions that the 0.5 percent Income Support Levy (ISL) was a tax dedicated to poverty alleviation. He is on record in one programme claiming that the ISL may be viewed as a portion of the zakat. These claims are counterproductive and at best indicate his lack of understanding of how a tax that he has imposed will be implemented to a deliberate attempt to mislead the general public. A few home truths may be in order.

First and foremost, the ISL is designed to be levied on all those who are required under the law to file their income tax as well as wealth statements to the Federal Board of Revenue (FBR), or in other words, a group that pays tax on its income. This group does not consist of the rich agriculturists who, as per the constitution, do not pay income tax to the federal government and who comprise over 80 percent of all parliamentarians; nor does it include the rich who, in spite of large incomes, remain outside the tax net as they are engaged in the black economy that comprises nearly 50 percent of the legal economy; or indeed those who have fractured their assets which disables the federal government from levying the 0.5 percent tax on their moveable assets.

In short, the major contributors to Dar's ISL would be the already burdened salaried class and his levy would simply render the tax system even more inequitable post-2013-14 budget, than in the past. Dar would do well to acknowledge that one of the major reasons why tax collections have been so poor in this country is the general perception of poor governance that is indicative of not only a large-scale corruption but also of a tax system that is simply inequitable, unfair and anomalous. Pakistanis as a nation make the largest contributions to charities in the world - a fact reflecting the taxpayers' serious concerns over the government's corruption and deliverability of basic utilities.

Secondly and equally importantly, Dar has not formulated a mechanism whereby the tax collected under the ISL would indeed be dedicated to support the vulnerable. Money collected by the government is fungible and there is no mechanism put in place that would ensure that the money collected under this levy would indeed be spent towards poverty alleviation. Dar's record to ensure that a dedicated fund will be used for the purpose intended is rather poor given that while chairing the July 2 Economic Co-ordination Committee meeting he approved transference of a dedicated Universal Service Fund with the objective of promoting the development of telecommunication in underserved and underdeveloped areas to the Federal Consolidated Fund. This enabled him to use the amount collected under the USF for his budget deficit.

Thirdly, the ISL is expected to fuel capital flight given that those who have moveable assets above the taxable threshold have the necessary wherewithal to open accounts in foreign countries. Pakistan's domestic savings rate is already abysmally low that is not able to meet the investment requirements for infrastructure development, both social and physical infrastructure; and hence this latest tax may well increase our reliance on expensive foreign savings to meet our infrastructure needs and last but not least, how will non-Muslims paying this levy treat it as part of their zakat contribution.

Reports indicate that, as expected, the levy has been challenged in the Lahore High Court. It is unfortunate that the Finance Minister, in his overriding desire to reduce the budget deficit through an increase in tax collections, deemed it prudent not to first evaluate the new levy's pros and cons with tax lawyers as well as constitutional experts; and not to heed the argument put forth by analysts that the levy was simply over burdening the lot of existing taxpayers.

Taxing the taxpayer | Business Recorder

 

[Panther 57]

Very right this is double taxation for those who already pay taxes. Cars also come under movable property and it can be purchased by only those who possess NTN. So taking the already taxed.

A small article which might be of interest to you
According to CIA statistics, Pakistan’s a per capita income is estimated at US$2900 . Considering this income calculated on a population of 160 million indicates a consolidated number of US$ 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 . 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) , 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
35,000 57,570
40,000 14,393
50,000 4,606
60,000 2,678
70,000 1,828
80,000 1,323
100,000 853
150,000 411
200,000 245
300,000 118
400,000 71

Had corporate been taxed by another 1%, relief could be vice-e-versa. Such measures of giving relief to Corporate 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 . 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.

 

[Saleem]

well they cant tax the feudals, robber baron tajir class or themselves so who is left???? those already paying taxes.....so unless this criminal class is removed ..more of the same....

 

[Panther 57]

100% agreed.