Taxing the self-employed
During the fiscal year 2010-2011, FBR expects to collect Rs657.7 billion in direct taxes.
KARACHI:
During the fiscal year 2010-2011, the Federal Bureau of Revenue (FBR) expects to collect Rs657.7 billion in direct taxes and Rs1.12 trillion through indirect taxes.
Direct tax amounts to around 37 per cent of the total revenue collection target. This a challenging task.
There is an urgent need to redouble collection efforts and that means expanding the tax net by eradicating tax evasion, especially by the self-employed and small businesses.
Can this be achieved in a transparent manner? Yes, provided we change our mindset towards the revenue collection system. Certain anomalies need to be removed in order to ensure larger collection through a transparent structure.
At present, only 2.75 million Pakistanis or 1.6 per cent of the country’s estimated 160 million people are registered as taxpayers. Of these, only about two million file their tax returns.
In India, the share of taxpayers to population is 4.7 per cent. Although that is not a very satisfactory ratio, if we take India as a benchmark we should have around 7.5 million tax payers in Pakistan.
If the salaried class is excluded, the share of self employed individuals as tax payers seems to be very little.
These figures suggest that there is something seriously wrong with our tax collection system and that it is deficient in taxing self-employed individuals and small businesses.
If we look at other developing economies where the proportion of direct taxation is fairly high, it is exactly this category of taxpayers that contributes the most in to the government treasury.
The lavish manner in which the government spends the tax payer’s money and the siphoning of money through corrupt practices is also discouraging for taxpayers.
Potential tax payers need to be convinced that their tax money is safe and will be spent on welfare programmes instead of supporting the extravagant style of the ruling government.
There seems to be a direct correlation between good governance and the willingness to pay taxes. In countries with good governance, the ratio of tax payers tends to be higher.
As a consequence, in Pakistan, people prefer to donate money to charities rather than pay taxes to the government.
Whenever revenue collection seems short of the FBR’s target, the existing tax payers are ill treated with excessive tax demands by amending their tax assessments. Efforts to increase direct tax collection should not result in an inconvenience to existing taxpayers.
Any harsh treatment towards these individuals would increase their burden and affect tax paying capabilities at a time when business activities are at its lowest ebb.
The existing tax payers should also be treated fairly to build confidence among the stakeholders.
Suggestions were made to the FBR that if contribution from direct taxation has to be enhanced to a reasonable level, then the self-employed and small businesses should be brought into the tax net.
There arises a need to create mutual confidence between tax collection agencies and tax payers. The World Bank Report has also concluded recently that FBR policies are contrary to this philosophy, which has encouraged corrupt practices that resulted due to discretionary powers of tax officials. The report also claimed that due to declining tax revenue in Pakistan, its economy has entered into a red zone due to the impaired tax structure and recommended drastic structural changes to improve the situation.
The FBR itself seems to have expended little effort to encourage the self-employed and small into becoming tax payers through policies of fair treatment, ignoring innocent omissions and business opting leniency by not asking questions if the anomalies are not material in nature.
Attempts at educating and motivating this segment do not appear anywhere in the tax structure. For instance, a special cell could be created to motivate this section by providing assistance on filing a tax return. The cell could address issues such as who should file the tax return and how to claim tax allowances and refunds? The benefits of being a tax payer should also be publicised on an ongoing basis.
To further encourage the self-employed class to file tax returns, the issue of the question “source of funds” that is in the minds of both tax payer and tax collector alike must be resolved. This is one of the major reasons this segment does not file tax returns and results in the undocumented economy growing. The situation has resulted in economic stagnation and slower economic recovery and it is feared that we may soon become “an international basket case” as we tour world capitals to beg for aid at the cost of our self respect.
The adoption of amnesty schemes and money whitening instruments show that the state was mentally prepared to accept undeclared wealth into economic activity but remained shy to adopt it as a policy.
The FBR should frame clear rules for first time filers specifying that if tax returns meet certain parameters, the income tax returns should be accepted without any questions asked.
It is suggested that they not be asked to prove the sources of their funds if the total wealth invested in business is less than a limit set by FBR.
This policy should apply to all first time filers as a long-term policy, so that more and more new tax payers are registered every year.
This should pave the way for a broader size of the documented economy. It would result in greater revenue collection and less dependence upon foreign aid and borrowings.
We have a serious problem that requires a likewise approach and our policies must reflect a dedicated change of mind set to resolve these issues.
Published in The Express Tribune, August 16th, 2010.
During the fiscal year 2010-2011, the Federal Bureau of Revenue (FBR) expects to collect Rs657.7 billion in direct taxes and Rs1.12 trillion through indirect taxes.
Direct tax amounts to around 37 per cent of the total revenue collection target. This a challenging task.
There is an urgent need to redouble collection efforts and that means expanding the tax net by eradicating tax evasion, especially by the self-employed and small businesses.
Can this be achieved in a transparent manner? Yes, provided we change our mindset towards the revenue collection system. Certain anomalies need to be removed in order to ensure larger collection through a transparent structure.
At present, only 2.75 million Pakistanis or 1.6 per cent of the country’s estimated 160 million people are registered as taxpayers. Of these, only about two million file their tax returns.
In India, the share of taxpayers to population is 4.7 per cent. Although that is not a very satisfactory ratio, if we take India as a benchmark we should have around 7.5 million tax payers in Pakistan.
If the salaried class is excluded, the share of self employed individuals as tax payers seems to be very little.
These figures suggest that there is something seriously wrong with our tax collection system and that it is deficient in taxing self-employed individuals and small businesses.
If we look at other developing economies where the proportion of direct taxation is fairly high, it is exactly this category of taxpayers that contributes the most in to the government treasury.
The lavish manner in which the government spends the tax payer’s money and the siphoning of money through corrupt practices is also discouraging for taxpayers.
Potential tax payers need to be convinced that their tax money is safe and will be spent on welfare programmes instead of supporting the extravagant style of the ruling government.
There seems to be a direct correlation between good governance and the willingness to pay taxes. In countries with good governance, the ratio of tax payers tends to be higher.
As a consequence, in Pakistan, people prefer to donate money to charities rather than pay taxes to the government.
Whenever revenue collection seems short of the FBR’s target, the existing tax payers are ill treated with excessive tax demands by amending their tax assessments. Efforts to increase direct tax collection should not result in an inconvenience to existing taxpayers.
Any harsh treatment towards these individuals would increase their burden and affect tax paying capabilities at a time when business activities are at its lowest ebb.
The existing tax payers should also be treated fairly to build confidence among the stakeholders.
Suggestions were made to the FBR that if contribution from direct taxation has to be enhanced to a reasonable level, then the self-employed and small businesses should be brought into the tax net.
There arises a need to create mutual confidence between tax collection agencies and tax payers. The World Bank Report has also concluded recently that FBR policies are contrary to this philosophy, which has encouraged corrupt practices that resulted due to discretionary powers of tax officials. The report also claimed that due to declining tax revenue in Pakistan, its economy has entered into a red zone due to the impaired tax structure and recommended drastic structural changes to improve the situation.
The FBR itself seems to have expended little effort to encourage the self-employed and small into becoming tax payers through policies of fair treatment, ignoring innocent omissions and business opting leniency by not asking questions if the anomalies are not material in nature.
Attempts at educating and motivating this segment do not appear anywhere in the tax structure. For instance, a special cell could be created to motivate this section by providing assistance on filing a tax return. The cell could address issues such as who should file the tax return and how to claim tax allowances and refunds? The benefits of being a tax payer should also be publicised on an ongoing basis.
To further encourage the self-employed class to file tax returns, the issue of the question “source of funds” that is in the minds of both tax payer and tax collector alike must be resolved. This is one of the major reasons this segment does not file tax returns and results in the undocumented economy growing. The situation has resulted in economic stagnation and slower economic recovery and it is feared that we may soon become “an international basket case” as we tour world capitals to beg for aid at the cost of our self respect.
The adoption of amnesty schemes and money whitening instruments show that the state was mentally prepared to accept undeclared wealth into economic activity but remained shy to adopt it as a policy.
The FBR should frame clear rules for first time filers specifying that if tax returns meet certain parameters, the income tax returns should be accepted without any questions asked.
It is suggested that they not be asked to prove the sources of their funds if the total wealth invested in business is less than a limit set by FBR.
This policy should apply to all first time filers as a long-term policy, so that more and more new tax payers are registered every year.
This should pave the way for a broader size of the documented economy. It would result in greater revenue collection and less dependence upon foreign aid and borrowings.
We have a serious problem that requires a likewise approach and our policies must reflect a dedicated change of mind set to resolve these issues.
Published in The Express Tribune, August 16th, 2010.