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Extractive tax policies discourage compliance

By Jawaid Bokhari 2017-11-06
MOBILISATION of adequate tax revenue for slashing fiscal deficit and funding social uplift and security is a stubborn problem that defies any meaningful, long-term solution.

The current tax culture is identified as the main culprit a culture that is forged by tax policies, efficiency, the tax administration`s integrity level and a complex and deep-seated blend of formal, informal and diverse economic activity.

In the realm of policymaking, the absence of equity in taxation is a major issue that discourages voluntary tax compliance. The problem is aggravated by frequent tax amnesties.

Some business tycoons complain that a few sectors of the economy are disproportionately burdened while others are taxed lightly. They say that the manufacturing industry is the most heavily taxed, and that the tax system is revenue-oriented instead of development-oriented as unabated government expenditures continue to outpace revenue.

Some critics, however, paint a different picture. They maintain that over decades the tax policies have nurtured crony capitalism, leading to a continuous decline in direct tax revenue.

Fortunately, a segment of the economy is opting for the latest business models and technologies.

In recent months balancing, mod-ernisation and expansion of the textile industry has provided impetus to production and exports. It must, however, be conceded that Finance Minister Dar is gradually phasing out unnecessary tax exemptions and questionable subsidies.

Given the potential loss in revenue from direct taxes, reliance is heavily placed on indirect taxes and withholding tax to shore up public finances. The federal and provincial governments exercise their right to collect taxes but shirk much of their responsibility to provide civic facilities and ensure social and economic uplift of the people, except on the eve of the general elections.

The common citizen frets that though he pays the lion`s share of indirect taxes, he is denied the essentials of life. There is a shortage of piped clean water and electricity, and the quality of education and health facilities are substandard in public institutions.

The pace at which public schools and hospitals are being upgraded through public-private partnership, or by empowering communities, is painfully slow; tax revenue is not productively and efficiently utilised either.

There are huge cost overruns for development projects and leakages of funds both in current and development expenditures. The social acceptability of tax policies is thus eroded.

According to the provisional fig-ures, the revenue from federal taxes as a ratio of moderately growing GDP has dropped from 11.6pc in FY2016 to 11.4pc in FY 2017. One reason for this is the tax incentives given for exports, investment, industry and farming which have improved the performance of these sectors and spurred economic growth.

On the other hand, the federal current expenditure has edged up from 10.9pc to 11pc of GDP over the same period.

Apparently there is no serious effort to undertake effective administrative reforms and reduce the size of the federal government to enlarge the fiscal space for development spending. Despite the presence of the Council of Common Interest and inter-provincial coordination departments, the centre still retains some subjects.

Even bleeding state enterprises, accumulating enormous losses, have not been able to find strategic buyers. Nor have big entities been made financially viable and they continue to remain a burden on taxpayers. Financial discipline is deeply linked with voluntary tax compliance.

Not much thought has gone to recognise the fact that the country`s security lies in economic development of backward regions and wellbeing of its people. That is, however, the primary responsibility of the provinces. But federal policymakershave been dragging their feet in the long delayed merger of Fata with Khyber Pakhtunkhwa to update its administrative, legislative and political system, and modernise its economy.

There is a strong need for a lean, thin but agile government capable of steering the country`s future course by offering centralised guidance to the people-a government that is not stuck with a centralised dysfunctional apparatus brewing divisiveness in both thought and action instead of creating a national consensus on how to resolve key issues facing the economy.

Apart from reducing the gap between revenue and expenditure, tax policies need to be revised.

Many taxpayers feel that the tax regime is devoid of any rationale; such levies as regressive withholding tax (WHT) and the way it is implemented are extractive in their nature as well as in their implementation.

With collection falling short of the officially set targets over the years, the government has resorted to more extractive tax measures in a bid to enhance revenues and improve its balance-sheet, not realising that it becomes more difficult to sell such a policy to the taxpayers.

The resistance of the market and individuals has finally gathered momentum in some sectors. For example, the WHT on non-cash bank transactions of non-filers has reduced growth in bank deposits. The objective of documentation of the economy through the banking system is being defeated by unwittingly encouraging cash transactions.

The WHT did lead to some increase in number of tax filers.

Salaried people who were already paying income tax but not filing returns started to do so to qualify for the adjustment against advance tax payments. In its analysis on `impact on withholding taxes on cash withdrawal and banking,` the SBP, however, points out that the non-tax filers still remained around 70pc of the registered number in FY2016.

Simultaneously in the same year, the number of sales tax non-filers witnessed a secular increase. The delays in refunds are stated to have also discouraged potential and current sales tax filers from filing returns.

In FY 2017 the federal collection from sales tax on goods (and services still not transferred to the provinces) fell to4.2pc from 4.5pc a year ago.

Somehow the FBR lacks a system of prompt and automatic release of refunds that pile up, denying businesses of much needed liquidity.

When the pressure mounts, Finance Minister Ishaq Dar intervenes. Critics say that refunds are held up for showing improved performance of the revenue authority.

Owing to the surge in imports, customs duty has increased but rest of the federal taxes have either remained constant or declined year-on-year as a ratio of GDP in FY 2017.

Unlike the marginal decline in overall federal tax receipts, the combined provincial revenues have maintained their share at one per cent of GDP in moderately growing provincial economies.

The solution lies in encouraging voluntary tax compliance by rationalisation of taxes, free from extractive policies and practices and anchored on equity. Voluntary tax compliance can also be enhanced by increasing spending on tax revenue and observing financial discipline. •