NationalVolume 14 Issue # 06

Taxation system: unfair, inefficient and corrupt

According to experts, the taxation system in the country is extremely unfair, inefficient and corrupt. Those who are in the tax net are fleeced while many who should be in the net are not there. The state gets money from wherever it can impose taxes, a lot of times on a presumptive and withholding basis, irrespective of the impact that its actions have on the incentives of the players in question. One need not say anything about corruption in the system: anyone who has dealt with tax officials and tax issues will know what is meant here.

Salaried persons pay some 20 per cent of their income as income tax. This is deducted before salary is paid. For most of the goods they buy they pay a 16pc sales tax on them. In addition, there are excise taxes that are charged on a number of goods. And a hefty tax amount is paid when one buys petrol: there is lack of transparency in how much tax the state is charging on every litre of petrol, but it is a significant amount. So, out of every hundred rupees one makes, at least Rs40 go to the state through various forms of taxation.

The other side of the equation is about what people who do pay taxes get in return. Most salaried people in the tax net do not send their children to state schools or state-funded health services, even their water and security are, in many cases, privately paid for. But, for many, even this would be acceptable if their tax money was reaching the poor and deserving. There are crucial questions about the efficiency of public expenditures as well as expenditure priorities. The quality of education being given in public schools is, by and large, very poor. The state-funded health sector is limping. Even taking the Benazir Income Support Programme into account, there is little in the way of a “welfare state” that is available to the poor.

The real rub lies in the unfairness of the tax system. Hardly one million or so people file their tax returns. Even among the filers, most of the non-salaried underreport their income significantly. The doctor does not give any receipts for consultations unless one insists on it. Even small operative procedures are off the books. This extends to most professional service providers, businessmen and traders.

The state has failed miserably in both extending the tax net and in being able to reduce underreporting of those who do file returns. And it is not simply due to lack of data that the tax authorities have been unable to extend the net or catch underreporting. The main reasons seem to be embedded in the political economy of the structures we have created.

With most sizable transactions in society now linked to national identity card numbers, the tax authorities have a lot of data that can be used to find non-filers and get a better handle on underreporting. But the information is not being used. All who book and/or buy cars have to submit their identity card numbers. Why are tax authorities not asking non-filers about their source of income for buying cars? As a company we are required to deduct a certain amount on behalf of every vendor who provides us with any good or service. A lot of banking transactions also generate similar information. Moreover, one of the reasons we started the distinction between filers and non-filers, even though the distinction creates unwanted inefficient consequences, was to get more information on non-filers. Why is that information now not being effectively harnessed?

The inefficiencies in the tax system are just too many to point out. Service providers and vendors, filers or not, quote their prices net of the withholding tax. It is understandable on part of non-filers but even filers of income tax force us to pay withholding tax on their behalf. These filers are not declaring their full income and so cannot get the withholding tax adjustment. The result is that where we do not have the option of not buying a service from such vendors we end up paying income tax on their behalf. How is that fair? And why are we penalising those who pay taxes to pay for those who are not paying their share? This is just a small example of the kind of distortions we live with.

With the arrival of provincial revenue authorities, with the same mindset as the federal authorities, compliance costs have ballooned and unintended consequences have exploded exponentially. But the pressure on tax authorities, to generate more revenue any which way they can, is such that it is unlikely that any rationalisation will happen.

The overriding need is to lower individual tax rates, widen the tax net, come up with a scheme to repay the refunds owed to taxpayers, reform certain corporate taxes that are adversely affecting capital formation. The way the tax system stands, it is the system of a predatory and extortionist state. Let the new PTI government introduce elements of equity, fairness, progressivity, efficiency, universality and honesty in it.