May 2, 2010

Why more taxes?

The Chairman of Federal Board of Revenue (FBR) has launched a vigorous media campaign for "more" taxes so that the revenue target of Rs. 1380 billion is met. He is also pleading for Value Added Tax (VAT) from July 1, 2010. The nation has already been crushed under the burden of price hike in POL products coupled with 18 percent power and 26 percent gas tariff increase.

These measures have been taken at a time when our industries are on the verge of collapse and there is great recession all around. The increasing cost of doing business and power shortage are proving to be disastrous for the entire economy. The government, instead of reducing wasteful expenses is bent upon increasing prices of inputs utilised by business houses, without realising its impact on the lives of common men. Due to diminishing purchasing power, businessmen can no longer recover the cost of various inputs from the end users.

Untapped avenues of resource mobilization — introduction of progressive taxes and increase in production — are being totally ignored by the government, resulting in the overall industrial slump, closures of more and more units, rising unemployment, and poverty.

The FBR does not seem to be interested in broadening tax base; instead, it is perpetually squeezing out more and more money from the existing taxpayers. The government is reluctant in taxing the rich and mighty e.g. absentee landlords and property owners. Agriculture accounts for 22 percent of the GDP but contributes merely one percent towards tax revenue. This sector alone has the potential to generate at least Rs. 200 billion.

Industrial houses, generally, are already facing multiple problems. The government, instead of bailing them out, has increased power and gas tariffs enormously in recent months, pushing businessmen against the wall. If the present situation persists, it would lead to closure of more industrial and manufacturing units, rendering thousands of workers jobless and making our exportable products highly uncompetitive in international markets.

The existing conditions do not justify any increase in tariffs and taxes. The country is confronting several macro-economic challenges. Foreign direct investment (FDI) has already posted a decline of 65 percent and exports have fallen by 11 percent in the first nine months of the current financial year. Under these circumstances, irrational increase in utility tariffs and taxes are causing further decline in economic activities apart from discouraging investment.

It is a fact that our economic managers and tax collectors have utterly failed to remove fiscal imbalances. Their tax policies are largely dependent on collecting taxes at source and without bringing the mighty sections of society within the tax ambit or even collect what is actually due from them — absentee landlords are not paying a single penny as income tax. The lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax and petroleum development surcharge has pushed an overwhelming majority of Pakistanis towards the poverty line.

In reality, the persistence of large fiscal deficits, among other reasons, remains one of the primary causes for the rise in public debt and a major source of macro-economic imbalances. It is now reported that the government may suffer fiscal deficit of 7 percent of the GDP during the current fiscal year.

The FBR relies heavily on import-based taxation that results not only in huge current account deficit but also unprecedented surge in imports of luxury goods. We should tax import of such luxury goods heavily and give relief to local industry. Instead of exporting yarn, we must concentrate on producing value added textile products. A paradigm shift is immediately needed in all areas. FBR collected tax revenues to the tune of Rs. 1130 billion in fiscal year 2008-09, yet it was just 8.8 percent of GDP.

On the one hand, we are not exploring the actual potential of taxes of Rs. 4000 billion and, on the other, whatever is collected is being wasted by the ruling elite. Due to a huge fiscal deficit, the government is constrained to borrow more and more money laced with harsh conditions by the IMF and World Bank.

The government could collect taxes of Rs. 4000 billion by bringing all persons having taxable income within the tax net. There should be no exemptions. Serious efforts should be made to use taxation as a catalyst for economic development and industrial growth. We need progressive taxes like inheritance tax, wealth tax, capital gain tax etc, rather than regressive taxes like VAT.

Indirect taxation is causing havoc in this society. The burden of such taxes is borne by the end users. VAT, being a regressive tax, will take larger portion of meagre income of a poor man but a very thin slice of a rich man’s cake. Our rulers, at the behest of IMF and WB, are keen to levy regressive tax like VAT but they are not ready to pay income tax, wealth tax, estate duty, capital gain — all progressive taxes — on their colossal incomes and wealth. If heavy taxes on enormous wealth and wasteful consumption are imposed and collected, we can easily collect Rs. 4000 billion and there will be no need to burden the masses with VAT, other regressive taxes and cumbersome conditions of the donors.

Over reliance on indirect taxes that constitute over 65 percent of total collection proves beyond any doubt that the tax system is directly contributing to rising cost of doing business and abject poverty. In a true democratic society, those possessing more income and wealth should contribute more to the public exchequer and vice versa. It is tragic that in a country where billions of rupees are earned by the rich absentee landlords as rent of land and lease of orchards, no income tax is taken from them. Big investors at stock exchanges make enormous money but pay no tax on speculative transactions. Rich generals and unscrupulous politicians own properties worth millions, but pay taxes in thousands.

Demanding more taxes from the poor and exempting the rich will never improve the economy. The priority of government should be in improving productivity and economic growth that would ultimately result in more revenue generation. At present, our economy is faced with a dilemma, where it can neither afford to give any meaningful tax relief package to the common people, trade and industry [due to huge fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to regressive tax measures]. This is a vicious circle that only the government can and should break so that it emerges out of this tangle to make Pakistan a competitive economy where investors, both domestic and foreign, find satisfactory conditions to live and invest.

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