Findings: Poor pay tax equal to middle income groups, reveals WB

Study highlights flaws of Pakistan’s system that favours indirect taxation.

ISLAMABAD:

As the writ of the government weakens allowing even the registered persons to slip from the net, a latest study by the World Bank reveals that the country’s poor are paying as much in taxes as the middle income groups.

Sharing the findings of World Bank’s (WB) study and addressing inequality in South Asia, Martin Rama, the lender’s chief economist for South Asia, said that relative to their means, taxation on poor was equal to that on the middle income group.



Households in the lowest decile pay about 2.4% of the total taxes while consuming only 3% of the total consumption.

The study’s findings came at a time when the Federal Board of Revenue (FBR) is struggling to increase the tax collection and broaden the tax base. Till November 21, only 525,000 people filed income tax returns, 33% lower than the number in the previous fiscal year, further shrinking the base.

The FBR is heavily relying on indirect taxation to enhance its revenues. It introduced several withholding taxes, which the analysts say are highly regressive. Manufacturers and suppliers add the cost of withholding tax into goods, which the poor and rich pay alike.

According to findings of the Institute for Policy Reforms, the share of withholding taxes in the income tax regime went up sharply from 56% to almost 63% in the last fiscal year 2013-14.

“Some of the withholding taxes are regressive in nature,” it adds. While within indirect taxes, 30% revenue came from petroleum products.

Rama said despite some improvements in the tax administration, tax enforcement has remained weak in Pakistan, creating incentives for evasion. He said a large proportion of the taxpayers formally registered with regional tax offices, and even with large taxpayer units fails to file tax returns. This situation clearly points to weak tax enforcement by the FBR.

While the study highlights flaws of the taxation system, the tax authorities blame the WB for its miseries. They argue that the WB-funded reforms project destroyed the entire tax machinery. The authorities are contemplating to revert back to old system when they used to have presence in almost every town of the country.

Pointing out flaws in data for calculating poverty in Pakistan, WB’s Country Director Rachid Benmessaoud said that inequality was rising in the country. He, however, said that official data on Pakistan was not reliable and due to gaps and ‘under reporting’, it was difficult to accurately measure poverty.



Citing a report of Shahid Javed Burki, Rama said that about 4,000 families in Pakistan earn more than half a million dollars a year. Rama said the probability of violent attacks by insurgents, sectarians, and terrorists are also related to the socioeconomic characteristics of the district.

Based on data collected by the Pakistan Institute of Policy Studies, the probability is found to increase with food insecurity and land inequality. The report further states that in Pakistan, a 6,000-person nationally representative survey was conducted to measure attitudes toward four militant organisations.

“Contrary to expectations, poor Pakistanis dislike militants more than middle-class citizens. The dislike is strongest among the urban poor, particularly those in violent districts, suggesting that exposure to terrorist attacks reduce support for militants,” it states.

A sizable number of households in parts of South Asia are directly affected by conflict. For example, in a World Food Program survey carried out in parts of Khyber-Pakhtunkhwa and federally administered tribal areas, 16% of households reported high levels of insecurity from strict rules imposed by militants, curfews or bans on freedom of movement, military operation against militants, displacement, and property damage.

Published in The Express Tribune, December 5^th,  2014.

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