Tax regime sieves

In a document on direct tax reforms for inclusive growth, Dr Hafiz Pasha, former Finance Minister of Pakistan has made certain startling disclosures. According to him, the Federal Board of Revenue (FBR) was suffering a massive revenue loss of Rs 361 billion per annum (equivalent to 1.6 percent of the GDP) as a result of exemptions and concessions to various sectors. Estimates reveal that losses on account of tax holidays (lifetime) to Independent Power Producers (IPPs) were Rs 63 billion, under-recovery of capital gains on securities and property at Rs 70 billion, accelerated depreciation allowance at Rs 64 billion, tax deduction on provisioning by banks at Rs 24 billion, exemption of business income of trusts and foundations at Rs 12 billion, concessionary rates Rs 34 billion, tax deduction on WWF and WPPF payments Rs 11 billion, low rates of AIT Rs 40 billion and other revenue losses Rs 43 billion. The data reflects both individual and corporate tax evasions. Fiscal reforms recommended by Dr Hafiz Pasha included elimination of tax concessions, introduction of inheritance tax and taxation on foreign income of residents (citizens) from countries where Pakistan had inked avoidance of double taxation agreements. He also suggested introduction of corporate assets tax at 0.25 percent to finance cost of floods/IDPs, levy of withholding transactions tax at 0.5 percent on securities and rationalisation of several other rates and schedules. Implementation of reforms as proposed by Dr Pasha could raise additional revenues to the tune of Rs 200 billion. While some of the proposed measures may be non-starters because of decisions by courts and some because of infirmities in tax administration, a concerted effort in this direction is certainly warranted.

Certain other observations of Dr Pasha were also depressing. Collection from direct taxes had declined by 0.4 percent of GDP from 3.8 percent in 2007-08 to only 3.4 percent in 2013-14 and share of such taxes was now only 35.5 percent of total tax revenues. According to the figures from latest tax directory of FBR, top one percent of companies accounted for 79 percent of the corporate income tax while top one percent of individuals contributed 29 percent to the personal income tax.

Details regarding tax policy, implementation and culture in Pakistan as revealed by Dr Pasha are, of course, highly gloomy and disappointing. This is also a hard fact that it is difficult to argue against his observations because he himself has been the minister in charge of the overall finances of the country including the affairs and the internal working at the FBR. As such, whatever he says carries weight and needs to be properly thought through. A noticeable contribution of Dr Pasha is that while everybody was aware about the losses to the exchequer due to tax exemptions and concessions, he has gone a step further and revealed the quantitative impact of such loopholes. Such an exercise would give a fairly good idea to the policymakers about the negative impact of their omissions and motivate them to plug these loopholes for fiscal stabilisation. It needs to be pointed out, nonetheless, that it is not the FBR, which is suffering a huge loss due to concessions etc but the nation and the country, which is bearing the brunt of a flawed fiscal policy in the form of higher fiscal deficit, greater indebtedness of the country, inflation, depreciation of the rupee, etc. It also needs to be noted that Dr Hafiz Pasha is only talking about revenue losses on account of tax exemptions and concessions. If losses due to tax evasion and the existence of a huge informal economy are added, total revenue losses due to mismanagement of the economy and inadequacy of the tax system could be simply colossal. Revenue mobilisation is not the only factor which has distorted fiscal policy and led to mismanagement of the economy. On the expenditure side, which is equally if not more important, the picture is dismal too. Both the development and current expenditures are not optimally utilised due to rampant corruption and inefficiency, leading to the conclusion that fiscal policy and management need vast improvement for ensuring equity in taxation, fiscal consolidation and plugging of loopholes in revenue mobilisation and public expenditures. It is indeed regrettable that out of a total population of more than 180 million, only about 0.8 million file income tax returns and out of these filers, only 60 percent are taxpayers. To the outsiders such statistics may be ludicrous, but for Pakistanis, Dr Pasha has said something really serious to ponder over.