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Heavy reliance on sales and withholding tax

By Mubarak Zeb Khan 2013-06-17
`THE focus of the budget 2013-14 is to improve the taxto-GDP ratio to finally reach the targeted 15 per cent by 2018,` said Finance Minister Ishaq Dar while presenting budget proposals in his speech to the National Assembly on Wednesday.

Mr Dar spelt out nine steps of his government`s taxation policy taxing those who are not paying taxes, enhancing the tax machinery efficiency, removing anomalies, simplifying tax procedures, broadening the tax base, rationalising tax rates and exemptions, encouraging corporatisation and documentation, facilitating taxpayers and eradicating malpractice and corruption from the tax administration.

However, most of these measures are not reflected in the tax proposals announced by Mr Dar in the budget, and therefore, look like political rhetoric. No innovation is visible, and the same old measures have been used to pocket easy revenue to reach the revenue target. The focus of the new tax proposals is to raise indirect revenue, and provide incentives to industrialists. But it lacks any direction to lure fresh investment.

The government has imposed Rs209 billion worth of new taxes to meet the revenue target of Rs2,475 billion for 2013-14 an increase of over 23 per cent from Rs2,007 billion in the outgoing fiscal year. At the same time, the government expects that the economic growth and rise in inflation will add an additional Rs259 billion to the kitty.

Meanwhile, the target for direct taxes has been projected at Rs975.7 billion, while that for indirect taxes has been set at Rs1.499 trillion. The government is expected to realise an additional amount of Rs63.5 billion through sales tax, Rs18.5 billion through federal excise duty, Rs1 billion through customs duty and Rs35 billion through administrativemeasures like plugging loopholes in income tax and sales tax regimes.

Most of the income tax revenue measures, worth Rs83 billion, are proposed in an effort to help the documentation of the economy. A relief of more than Rs3 billion in income tax has been given mostly to industrialists. Meanwhile, the one per cent increase in general sales tax from 16 to 17 per cent will alone contribute more than Rs40 billion in sales tax collection in 2013-14.

Federal Board of Revenue (FBR) chairman Ansar Javed said that the revenue measures would help the government achieve the tax revenue target for the next year.

The proposed measures may help the FBR achieve the target, but most of them will also have an adverse impact on consumers, as these are inflationary. The increase in the tax rates can encourage corruption through fake and flying invoices, besides tax evasion, and may also induced to reduce consumption. These two factors might actually bring down revenues, instead of raising them.

And higher tax rates may also discourage the documentation of economy. The taxation measures will increase the burden for some existing taxpaying sectors, while easing it for others. Exemptions have been given on those products or accessories, or industries which are not willing to compete, and prosper behind high tariff walls.

There is also no vision in the tax policy to lure fresh investment , except the enhancement of the tax holiday from five to 10 years in special economic zones.

Meanwhile, the duty exemption on hybrid cars is likely to benefit the elite, and has nothing to do with promotion of industrialisation. It will be difficult to argue that the tax measures in the budget may promote economic growth. There are sectors where monopolies are impeding economic growth, and thriving on domestic sales.

Meanwhile, major tax exemptions stood at Rs239.5bn in 2012-13, 16.3 per cent higher than Rs205.9 billion in 2011-12. And the new fi-nance minister has extended these exemptions for certain lobbies and industries.

In 2012-13, income tax exemptions had cost the exchequer Rs82.39 billion, against Rs69.61 billion in 201112, indicating an increase of 18.37 per cent. And this number will increase further following the exemptions given in the new budget.

Customs exemptions had hit government revenues by Rs119.71 billion in 2012-13. A range of exemptions given in the new budget will increase the figure to roughly Rs150 billion in the next year.

These additional exemptions will benefit lobbies that allegedly supported the PML-N in the May 11 elections.

Moreover, some major sectors like agriculture and services continue to be under-taxed, while still others are not taxed at all reflecting thenarrow tax base.

For instance, agriculture contributes hardly Rs1 billion to the total tax receipt, while its share in the national income stands at 21.4 per cent. Similarly, the services sector contributes 36.7 per cent while it has a major share of 57.7 per cent in the GDP.

There is a broad consensus that the tax-to-GDP ratio can only be enhanced if all sectors of the economy proportionately contribute into tax revenue. But nothing has been done to correct these imbalances.

For broadening the tax net, the old practice of relying heavily on withholding agents has again been proposed.. More than seven new adjustable withholding taxes have been introduced, with the government claiming that these will promote documentation of the economy. But this will simply increase thecost of doing business for firms and would be borne by the end consumer.

These and other measures, like increasing the tax on cash withdrawals from banks, will not increase the tax base and only act as easy revenue getter for the government.

Nadra data shows that there are over 3.8 million potential taxpayers.

One must then ask what is it that stops the FBR from bringing these people into the tax net, given that only 0.8 million people filed tax returns in 2012.

In short, there is no innovation in the tax proposals presented by the new government, which seem to evolve around the age-old practice of withholding and sales taxes. No announcements have been made regarding audit of taxpayers or use of Nadra data to help bring non-taxpayers into the tax net.