If you start with the wrong end of the stick, you cannot expect the right landing. This applies to the current tax overdrive.
The government has set a Rs5.5 trillion revenue target for the current year against Rs4.1 trillion as per the revised estimates of the last year noted in the budget documents – data that is widely doubted. Experts have rightly questioned how you can set such an ambitious target given the fact that the last year’s target was not achieved.
In a country, where the effective literacy level is hardly 30 percent, government facilitation for average traders and wage earners is next to nothing and the cost of doing business is high, the documentation drive is like tilting at the windmill. Like in most developing economies – and in some developed economies as well – informal economic activities form a big chunk of the economic cake and the GDP. This is the cash economy. Transactions are not routed through bank and the turnover is quick. Most small businesses – and they are numerous – do not have time or money or capacity to employ accountants to keep track of sales, purchase and profits.
This is the environment we live in. And this has been so for the last 70 years. This is the mindset and the economic culture which calls for a nuanced, gradual approach if we want to change it. But the new economic team of the government did no think hard over how to go about the task and acted like a bull in the china shop.
Resultantly, businesses went into a tailspin. Sales plummeted as purchasers refused to abide by the condition of submitting copies of their CNIC. A fear psychosis gripped the trading class. With a decline in sales, production also went down, which led to retrenchment and lob losses.
No wonder, all these elements have combined to shrink the economy and the GDP growth rate has been revised downwards. Following taxpayers’ complaints about harassment, the authorities took some ameliorating measures like asking all chief commissioners inland revenue through a notification that there can be “no bank account attachment unless the taxpayer’s chief executive officer or principal officer or owner is informed at least 24 hours prior to attachment and the chairman FBR’s approval is obtained.”
Field formations were also barred from conducting raids on the premises of an existing taxpayer without prior approval of the FBR member inland operations and making approval of the FBR Chairman mandatory before punitive action. The FBR has also ordered that no adverse action will be taken against those who do not use CNIC till September 30, 2019. But too late, this has not eased the fears among traders, who have not withdrawn their threat to launch a countrywide strike if the CNIC condition remains intact.
There are also other complications. The increasing of tax rates for immoveable property – upping them from by 50 to 85 percent on average – has brought all activities in the real estate sector to a virtual halt.
The measures taken so far by the tax authorities show that they have missed the wood for the trees. They are guilty of ignoring the larger picture: like reforming the tax structure which is inequitable as it relies heavily on indirect taxes (whose incidence is greater on the poor relative to the rich). Total indirect taxes are budgeted to generate an additional 40 percent this year in comparison to the revised estimates of the last year while direct taxes would generate an additional 25 percent. On the other hand, the rise in income tax rates for the salaried class has: reduced their disposable income with a negative impact on consumption and consequently productivity as well as employment.
On top of it all, regressively, a major component of income tax collections remains withholding taxes. The government has told the International Monetary Fund (MF) that revenue collections in 2019-20 would rise from the indirect taxes. Sales tax collection would increase by almost 42 percent and customs by 36 percent – a target which was missed in the first month of the current year given the rupee depreciation dampened imports and, therefore, customs revenue. Federal excise collections are to rise by 37 percent.
And interestingly, in the whole debate there is no mention of agricultural income tax.Needless to say, without reforming the present unfair, inequitable, anomalous tax structure, the tax-to-GDP ratio cannot be raised to the desired level.