Flaws in taxation: Collection remains low due to evasion and administrative weakness

500b rupees is lost every year due to alleged corruption in the FBR.

KARACHI:

Revenue collection procedure seems to be one of the typical remains of colonial era in Pakistan. The ambiguity of its objectives is very clear as the tax system is designed on the basis of achieving the target without having to know who is liable to pay and how much someone has to pay.

Irrationality in the tax system is a trigger which has left behind the economy to collect the revenue according to its potential. In addition, tax collection has not improved significantly mainly due to inherent structural problems, such as a narrow tax base, massive tax evasion and administrative weaknesses.

Despite the fact that the industrial sector faces serious challenges like energy shortage, poor law and order situation and lack of competitiveness in international markets, it contributes the highest in taxes. The share of industrial sector is 63% in tax revenues and 18.9% in gross domestic product (GDP). On the other hand, the agriculture sector contributes 20.9% to GDP while its share in taxes is a mere 1.2%. Such imbalance is a reason behind the insufficient tax target in the country.

In agriculture, the views are entirely different and rational. The stakeholders in this sector link taxes with development. According to them, they do not have such infrastructure as the industrial sector is enjoying, then why the government expect to collect revenue from them according to the proportion of their income. I partially agree with this argument that the government should ensure viability of the sector first and collect taxes thereafter. The mechanism should also be implemented in the case of industrial sector.

Documentation of economy is a prerequisite for an effective tax system. There is a growing debate on this, but on the basis of absurdity that documentation could only be done through tax levy. There are a number of ways through which economy can be documented, for instance transaction in real estate and bank deposits.

The tax system of the country seems to have continuously benefited the elite. A huge amount of taxes comes from the poor through indirect taxes compared to the very little contribution of direct taxes from the affluent class.

Another distress here is a conflict of interests, the individuals who benefit from conventional tax policies are those who are in power constantly. They never include themselves in the tax net, the delay in tax on agriculture income is a real example of this phenomenon. So taxes from indigents and gains to wealthy are basic flaws in the fiscal policy.

Tax exemption and avoidance are also the causes behind low collection. Exemption is aimed at giving incentives to step up production in some neglected and lucrative sectors, for instance textile. However, there are a lot of income tax exemptions such as salary allowances and privileges given to certain groups, the armed forces, civil servants and research organisations, which remove responsibility from a large number of individuals.

Administrative weakness is a key obstacle in tax collection as a former finance minister has admitted that corruption in the Federal Board of Revenue (FBR) eats up Rs500 billion annually. Such incompetence not only cause a dent in the government’s exchequer, but also promotes distrust among regular taxpayers.

There is a need to rationalise taxes, widen the tax base, restructure the collection mechanism and improve institutional capability of FBR. These are measures which may lead to rapid improvement in taxes.

The writer hosts business talk shows on FM 101 and Radio Pakistan and is pursuing an M Phil degree in Economics.

Published in The Express Tribune, July 9^th, 2012.