ISLAMABAD: A renowned economist has asked the government to resolve the issues of low-tax base, inefficiencies in tax system, and ineffective tax rates to increase revenue collection and meet expenditures.
In an interview with WealthPK, Director General of the International Institute of Islamic Economics (IIIE) at International Islamic University Islamabad, Prof Dr Abdul Rashid said that low tax-to-GDP (gross domestic product) ratio is not only a problem for Pakistan, but for other developing countries as well.
The government has fixed the target of Rs7.4 trillion tax collection by the Federal Board of Revenue (FBR) during the ongoing fiscal year which is sufficient to meet expenditures of the country because of low tax-to-GDP ratio.
“The issue of low tax-to-GDP ratio often emerges due to the imposition of ineffective tax rates, low tax base or inefficient tax system. We need to work on all these aspects in the case for Pakistan to improve tax collection,” he said.
Dr Abdul Rashid underlined that the government needs to make its tax rates effective to get better results in revenue collection. He said that effective tax rate does not mean a higher tax rate, because when the government will increase tax, for example sales tax is increased, it will increase prices of the products which will lead to decrease in demand and ultimately tax collection will decrease due to slump in sales of these products.
“So, while finalizing tax rates, it is important to see that how much tax will be imposed and on which commodities. We need to check the elasticity of the products before fixing tax rate instead of imposing flat tax rate like sales tax. We also need to see that which products are inelastic where tax will be passed on to consumers and, which products are elastic where tax will be passed to producers,” he stressed.
He said increased prices as a result of increase in taxes impact purchasing power of consumers. When taxes are imposed without proper study and by ignoring ground realities, it is possible that these tax rates will not be effective.
“When the government increases income tax it reduces income of taxpayers, and when sales tax is increased then prices will increase, and hence in both cases the purchasing power of the people will be adversely affected. Ultimately, it will reduce consumption, and the aggregate demand will not increase. When sales and purchase will not take place then how tax collection will take place,” he said.
Dr Abdul Rashid said effective tax rate does not hurt demand and consumption, while non-effective tax rate adversely affects net income and purchasing power of the people. He suggested that while deciding income tax rate, purchasing power of the people should be kept in mind because different segments of the population have different income level.
He emphasised that the purpose of the effective tax rate is not only to increase revenue, but also to ensure equal distribution of income, boost economic activities, and create employment opportunities. It should not affect investment and cost of the production.
“The FBR needs to focus on other sectors and bring them in tax net instead of only salaried class. Many people have income from multiple sources, and there is no mechanism to bring rental business in tax net,” he pointed out.
He said Pakistan has a large informal economy which is the main reason for low tax base. He said the government needs to increase documentation of the economy.
“Initially, the government may introduce low-tax rate to bringing informal sectors into the tax net because many businesses are earning handsome profits but they are not paying due taxes,” he suggested.
He said the FBR needs to conduct a comprehensive study about the informal sectors of the economy to bring them into tax net.
“The sectors including tobacco, transport, bakers, food chains, hotels, retail businesses and others have great potential as far as tax collection is concerned. Taxes on the real estate sector also require reforms. Housing societies, stock market, and money market can also fetch handsome tax,” he said.
Dr Abdul Rashid suggested that the business entities which are environmentally unfriendly should be obliged to pay additional taxes. It will not only increase tax revenue, but also protect the environment. The FBR may introduce hard and soft measures to bring new potential sectors into tax net.
-INP
