Tax reform, the need for the economy
THE main objective of the tax reform agenda is to increase the tax-to-GDP ratio to 15% of GDP by 2024- 25 and to make the tax system significantly more progressive.
Compare the tax-to-GDP ratio.Compared to countries like China, Egypt, India and Malaysia, Pakistan has a relatively low tax-to-GDP ratio.
However, it is more than Sri Lanka and Bangladesh.We Pakistanis are generous with zakat, donations, etc.- but our moment of concern is that out of a population of 220 million, only 3 million people file taxes and, interestingly, out of 2.9 million people.
Nearly one million people file zero returns – only 1% of our population pays direct taxes and the remaining 99% of the country’s population is out of our direct system.
The number of companies paying taxes is 43,426.The limit of personal income tax exemption is RS.600,000.There are twelve slabs, and the maximum rate is 35%.The corporate income tax rate is 29%.The top 1% companies contribute 83% to corporate income tax revenue.
A few years ago, the Institute of Public Policy (IPP) conducted a survey of taxpayers’ perceptions of Pakistan’s tax system.
The answers highlight, firstly, the state’s grip on the state through massive waivers and concessions and high levels of tax evasion by the elite, which is either pardoned by the tax machinery or combined with it.
Second, the reluctance to pay taxes on a large scale is limited by the misuse of public funds and the lack of correlation between the taxes paid and the benefits received.
There is a basic principle – there will be no income tax in your society – unless justice is established in your society – there are some basic reasons why our tax base does not grow – the first reason is the feudal elite.
They enjoy the full range of tax benefits in direct and indirect taxes.The biggest tax deduction is in the provincial agricultural income tax.
Tax rates are very low and in 2018-19 the real income from the country was RS.3 billion which was equivalent to 0.03% of agricultural value added.
If the tax rate on non-agricultural income on a tax-based basis is brought closer to them in 2020-21, additional revenues of Rs 105 billion could be achieved.
Most of the other tax expenditure is in indirect taxes which adds up to Rs 90 billion.
Overall, the loss of annual income to the feudal elite due to tax breaks increases to Rs 195 billion on conservative grounds.
Another reason for not expanding the tax base is big business.Pakistan’s wholesale and retail sectors have the lowest tax rates.
This sector is characterized by high taxation and tax evasion.The loss of revenue in this sector is estimated at Rs 226 billion.
Let me give you an overview of Pakistan’s retail sector, then Pakistan’s retail sector is about 7 trillion rupees – our total economy will be about 45 trillion rupees — of which the retail sector alone becomes about 10 to 15% of us.
There will be shops in between 30 lakhs in Pakistan.And there will be about 90 lakh people who will be in direct employment.
About 18% of Pakistan’s total workforce – now the most important thing – is only 10% part that is documented – and 90% part that is not documented – which I think there is something that needs to be targeted by our economic team.
It will have a lot of development in the country – it is a routine nature in the world – that your point of sale system is linked to your tax collection agency – I think it will be a huge development – for this government – if this point of sales system succeeds in implementing.
Let me give you an example.The population of India is 5 times more than our population.The retail sector they have is 90 trillion rupees.We have 7 trillion rupees.15% more than us.If we talk about per capita income/GDP, then they have Rs 2200 – and we have Rs 1600 – there is a difference of Rs 600.
Shockingly their organized sector would be around 20 to 25%.We are still at 10% – they were like us for a while – but they took things seriously and they went ahead of us – we have to take some steps if we want to make our point of sale more effective.
We should give our people an awareness of point of sale system and also reduce the tax rates.
On the other hand, high value people.The estimated cost of tax evasion and the potential severity of tax evasion is estimated at Rs 386 billion.
Personal income tax includes a number of tax credits and benefits.One of the biggest concessions is scheduled income taxation instead of taxing composite income.
This has greatly slowed down the development of the income tax system.In addition, there are many tax credits.In addition, a conservative estimate of the amount of income tax evasion is Rs 400 billion.
Mechanisms will need to be identified to prevent this theft.We need to consider our fiscal side – why we can control it – we can improve it – we can tax the wealth – we can tax the rich – instead of 350 Billion Additional General Sales Tax – We have to think for ourselves how fast these direct taxes are increasing in our country – Second we need to control our expenditure – How long will our fiscal deficit last for the last 20 years?
It have gone to 7, 5% – we have to see Argentina – that they have imposed wealth tax – for the next two years we also have to think – how long we will depend on these direct taxes – there is no rocket science in this thing.
This thing could get in the way of a very deliberate and concise way – if there is political consensus.
There will be no country – except our country where these indirect taxes have exceeded 75% – the disease we have been suffering from since 1980 – that we have achieved the required tax target.
The basic question is achieved the target – How did we achieve it – If we achieved this by raising his tax target on petrol by raising the general sales tax – then in my opinion this is not a big success for us.
We should give incentives to file returns – Finally, the following incentives may be given to encourage higher income earners to file tax returns: An individual taxpayer who files a tax return for the first time in the first three years.
Will be exempt from audit.An individual who has been an active taxpayer for at least the last three years, if the declared income is 20% higher than the previous year, will be exempted from audit.
We have to think individually and collectively as a nation – what do we have to do – do we ever have to go to Saudi like this all our lives – sometimes we have to go to China – sometimes we have to go to the IMF – We have to stop somewhere – an additional IMF loan installment of one billion dollars – it is not going to make much difference to our macroeconomic indicators.
—The writer is contributing columnist.
