Taxation and tax evasion


Muhammad Javaid

IN the long run, domestic resources to generate self-supporting growth should improve and efforts should be pursued to reduce the budget deficit. Government should concentrate on raising additional resources through direct taxation, both personal and corporate. Indirect taxation is subject to a number of constraints relating to its price effects and economic efficiency. The evident conclusion is that the efforts of the Government to raise additional resources through taxation should be oriented in the first place to an improved collection of direct taxes. This conclusion is reinforced by considerations of income distribution. Indirect taxation discriminate between essential and luxury goods which need not be regressive. Making more expensive the displaying consumption of the rich does not seem effective. Direct taxation on their incomes will be rather more effective. Direct taxation must be broadly based if it is to be effective in raising a substantial amount of revenue. Experience has already shown, however, that in order to improve tax collection, tax avoidance or evasion on the part of rich/business community must be drastically curtailed.
Effective steps should also be taken to close some of the largest loopholes in the system and have better control over tax evasion. Unless such measure are taken any increase in tax rates can only aggravate the sense of social injustice by some groups’ particularly salaried group. Moderate rates and a serious enforcement are far better than higher rates and loose collection. The higher rates of taxation induce tax payers to benefit from such loopholes. The concessions of dividend and investment allowances must be withdrawn. The maintenance of these allowances has little justification and didn’t create any substantial impact to enhance real investment in the past. Similarly, the exemption of agricultural income has provided a convenient means of tax evasion. Thus, even if it is not intended to impose a substantial tax burden on agriculture, making its income liable to tax appears one of the most effective means of reducing evasion on other forms of income. It is recommended that income tax system must be revised keeping in view the typical experiences of the past. A society where around 65 per cent of employed labour-force is engaged in informal sector and most of them are non-tax payers, and effective personal income tax system should be designed. Each employed person whether employer, employee or self-employed must be issued a work permit or work booklet with provision to record income tax paid and his assets, which should be essential to start any economic activity in the country.
The personal income and income tax paid must be endorsed on it yearly basis in order to strictly control tax evasion and to keep an eye on his standard of living to be inconsistent with his declared income. Trade flows and business profits is another important area of tax evasion. The effective steps should also be taken in this respect. A computer network system may be developed to check transactions of business community with each other, which they supply to tax authority. Such systems have proved highly successful in many developed countries and experiences gained by them in this regard may be benefited. Saudi Arabia, UAE and many other countries have already developed the system to check such evasions. We are far behind and unable to close the tax evasion loopholes. Some people claim that taxes are higher and people are paying on every item but the collection is very poor and existing system is providing many loopholes for tax evasion. Not only there is a need to close these loopholes but also need to change the mind-set of people especially business community.
In the past on many occasions the proposals were floated for documentation of businesses but no serious attempt was made due to resistance of business community and fear of losing vote bank. This time the matter has been taken up seriously but again business community is on resistance mode. Recent demands from business community are very funny. The businessman is not ready for documentation. Not ready to provide the NIC copy on the purchase from wholesale, availability of stock, purchase and sale price etc. The business community seems not ready for documentation but this time it has become inevitable for the sake of country’s survival. The documentation will restrict the smuggling, benami purchase & sale, tax evasion and will increase the tax network. The business community urged to withdraw the condition of acquiring a photocopy of the computerized national identity card (CNIC) of buyers of factory products, 17% value-added tax and to restore the old system of zero tax rate facility for five textile export sectors. It is pertinent to note that every businessman charges the sale tax but how much pass to government account. Current Finance Bill 2019 has covered this aspect, therefore in a recent meeting with traders’ community Prime Minister and his team refused to reverse the measures implemented through the budget. If everyone honestly pays due taxes then many checks imposed by the Government may be reduced. Hopefully every citizen of Pakistan will feel his responsibility.
—The writer is ex-Chief, Planning Commission of Pakistan.