Doubling the tax revenue with current policies?
Taxes are an important source of revenue generation for any government
The writer is a PhD Fellow in Economics and Visiting Faculty Member at the School of Social Sciences and Humanities, NUST, Islamabad
Taxes are an important source of revenue generation for any government, especially direct taxes which make it possible for the government to finance the necessary level of public spending in equitable way for the development of society. Our finance minister claims to double the revenue from tax collection in a year but there are many problems in our taxation system, which makes it inefficient, and we are unable to collect enough revenues.
Although the new government took an initiative to increase revenue by reducing the tax exemption slab from Rs1.2 million to Rs0.8 million from the deprived salaried people. Yet, this decision will have negligible effect on the revenue as salaried people are already contributing a lot in direct taxes. In this way, there will be serious welfare consequences on the deprived segment of society.
In the last decade, Pakistan’s average tax-to-GDP ratio was around 9%, while in India it was 16% and in developed countries it was around 35.8%. Due to a low tax-to-GDP ratio, we are relying heavily on indirect taxes. In the past decade, Pakistan on average collected direct taxes of around 3.5% of the GDP, while in India the number was around 6.5% and in the developed world this was around 14-15% of the GDP.
Our net revenue collection for 2017-18 is 11.2 per cent of the GDP, which we collected through direct and indirect taxes, 6-7% and 4%, respectively. In order to increase the net revenue generation we must increase our revenue collection through indirect taxes. What needs to be done is that in order to double the tax revenue as enunciated by the finance minister, the government should plan a comprehensive strategy to address the structural flaws of our tax system. Secondly, the contribution of revenues coming from direct taxes in net revenue should be increased.
There are many pragmatic ways that can be adopted to increase the tax revenue as targeted by the government. One of the reasons that our direct taxes collection is low is irrational tax rates and a narrow tax base. The government must take a number of measures to have large tax bases with relatively low and consistent tax rates such that they do not create distortions in the allocation of resources. This can be done by reducing tax exemptions and concessions by extending the value-added taxes only to the goods and manufacturing sector, and to the capital gain.
Tax evasion is another hurdle in the way of achieving the set target. In order to minimise tax evasion, exemption on agriculture income should be controlled so that big wigs cannot misuse it for their vested interests. Same is happening with the tax-free zones, and past experiences show how these had been misused by industrialists to avoid taxes. Besides that, a system of rewards that is linked to the amount of tax evasion identified could be established for tax officials.
Furthermore, tax administration should be revamped because a tax system that is both equitable and efficient needs competent and effective tax administration. Tax officials should be free from political interference and pressures from vested interests. Moreover, corrupt practices can be minimised through moral training. Any granting of powers to tax officials must not become a source of harassment or corruption. It is essential that taxpayers have access to a fair and judicious appeals process against tax officials.
Last but not the least, the procedure of filing returns is lengthy in Pakistan as compared to other countries in the region. This can be reduced by simplifying procedures and making them more taxpayer-friendly by linking the filer National Tax Number with the National Database and Registration Authority. Electronic filing of returns will not only be more convenient for taxpayers but it will also minimise contact with tax officials and reduce the incidence of bribes.
Published in The Express Tribune, September 26th, 2018.
Although the new government took an initiative to increase revenue by reducing the tax exemption slab from Rs1.2 million to Rs0.8 million from the deprived salaried people. Yet, this decision will have negligible effect on the revenue as salaried people are already contributing a lot in direct taxes. In this way, there will be serious welfare consequences on the deprived segment of society.
In the last decade, Pakistan’s average tax-to-GDP ratio was around 9%, while in India it was 16% and in developed countries it was around 35.8%. Due to a low tax-to-GDP ratio, we are relying heavily on indirect taxes. In the past decade, Pakistan on average collected direct taxes of around 3.5% of the GDP, while in India the number was around 6.5% and in the developed world this was around 14-15% of the GDP.
Our net revenue collection for 2017-18 is 11.2 per cent of the GDP, which we collected through direct and indirect taxes, 6-7% and 4%, respectively. In order to increase the net revenue generation we must increase our revenue collection through indirect taxes. What needs to be done is that in order to double the tax revenue as enunciated by the finance minister, the government should plan a comprehensive strategy to address the structural flaws of our tax system. Secondly, the contribution of revenues coming from direct taxes in net revenue should be increased.
There are many pragmatic ways that can be adopted to increase the tax revenue as targeted by the government. One of the reasons that our direct taxes collection is low is irrational tax rates and a narrow tax base. The government must take a number of measures to have large tax bases with relatively low and consistent tax rates such that they do not create distortions in the allocation of resources. This can be done by reducing tax exemptions and concessions by extending the value-added taxes only to the goods and manufacturing sector, and to the capital gain.
Tax evasion is another hurdle in the way of achieving the set target. In order to minimise tax evasion, exemption on agriculture income should be controlled so that big wigs cannot misuse it for their vested interests. Same is happening with the tax-free zones, and past experiences show how these had been misused by industrialists to avoid taxes. Besides that, a system of rewards that is linked to the amount of tax evasion identified could be established for tax officials.
Furthermore, tax administration should be revamped because a tax system that is both equitable and efficient needs competent and effective tax administration. Tax officials should be free from political interference and pressures from vested interests. Moreover, corrupt practices can be minimised through moral training. Any granting of powers to tax officials must not become a source of harassment or corruption. It is essential that taxpayers have access to a fair and judicious appeals process against tax officials.
Last but not the least, the procedure of filing returns is lengthy in Pakistan as compared to other countries in the region. This can be reduced by simplifying procedures and making them more taxpayer-friendly by linking the filer National Tax Number with the National Database and Registration Authority. Electronic filing of returns will not only be more convenient for taxpayers but it will also minimise contact with tax officials and reduce the incidence of bribes.
Published in The Express Tribune, September 26th, 2018.