It is an indisputable fact that our tax system is outdated, outmoded and grossly unfair. It is tilted in favour of the rich and powerful and excessively hard on the common tax payer. Experts have repeatedly pleaded for radical revamping and restructuring of the entire tax system, through low-rate, broad-based and predictable taxes and a single national tax agency, but to little avail.
Many times in the past tax policy reforms have been undertaken but they proved an exercise in futility. Various tax reform commissions and committees formed from time to time signally failed to perform their tasks. In some cases, the solutions they suggested further complicated the problem. Result: our tax revenue has remained far below its actual potential. Many well-known professionals, selected for committees announced by the government to remove anomalies and technical issues have failed to even remove the obvious lacunas, what to speak of suggesting a pro-growth and investment-friendly tax policy helpful in creating jobs from agriculture to high tech knowledge-based projects.
Over the years both federal and provincial governments have done precious little to revamp the colonial-era tax institutions to generate enough revenue needed to promote economic growth. Complex tax procedures, growing reliance on indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are responsible for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments from time to time offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society.
In 2020, the federal government obtained a loan of US $ 400 million for the Pakistan Raises Revenue (PRR) Project. The total cost of the PRR Project was estimated at US $ 1.6 billion. The Punjab government also decided to borrow US $ 304 million from the World Bank for tax reforms and it was approved by the Planning Commission of Pakistan in September, 2020. What has happened to these initiatives nobody knows? The past experience shows that such projects launched with borrowed money never yield the desired results.
According to an estimate, there are over 4 million people outside the tax net. Further, tax collection has been showing a declining trend.
According to the Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on October 31, 2021, was 187 million (85.33% teledensity). Out of these, 106 million are 3G/4G subscribers (48.19% penetration), 2 million basic telephony users (1.13 teledensity) and 108 million broadband subscribers (40.08% penetration). Not less than 100 million unique mobile users (many have more than one SIMs) are paying advance/adjustable income tax of 10% reduced from 12.5% from July 1, 2021.
In 2015, the average tax paid by the return filer stood at Rs 23,640, which fell to just Rs 10,914 in 2019. However, the figure crossed Rs 17,000 by tax year 2020. The paradox is that the entire taxable population and even those having no income or income below the taxable limit are paying advance and adjustable income tax at source as mobile users. It is estimated that if all file income tax returns, there will be a refund payable to at least 80 million people having no income or income below taxable limits.
This is a ridiculous situation. A 75-paisa federal excise duty on a cell call exceeding five minutes was levied in the Finance Act 2021, which is a great injustice to the poor. It was also in violation of the Constitution of Pakistan. Needless to emphasise, the PTI government must stop taxing the less-privileged and downtrodden people.
Similarly, taxation on electricity bills and a number of food items and items of daily-use by the citizens is totally unjustified. Tax credits for senior citizens and special people that were available before the enhancement of tax rates by the Finance Act, 2019, should be restored after the higher tax rates were reverted by the PTI government.
The government must lower the rate of taxes and allow capital formation to accelerate high and sustainable growth by investing in productive sectors and heavily tax unproductive investment in open plots, etc. It is possible only through a simple tax model as elaborated in various expert committees’ reports.
All said, there is an urgent need to replace the existing tax system with a lower, flat-rate tax system that is simple, broad-based and easy to understand and apply. Low taxes with a broad base and simple compliance procedure alone can enable the government to collect Rs 10 trillion which is the actual potential of our economy.