Plugging loopholes must to promote compliance culture

LAHORE: Tax culture is not created through appeals or soft approach as no one likes to part with money voluntarily. Prudent governments plug loopholes that facilitate people to reduce taxes and introduce reforms to make it impossible for anyone to avoid taxes.

Governments lacking political will are afraid to touch influential sacred cows in the society; they instead resort to increasing tax rates and increasing indirect taxes that burden poor more than the rich.

Take for instance the sales tax that nets government the highest revenue. The manufacturers and the retailers do not bear the burden of this tax.

They simply pass on this burden to the consumers. If sales tax is levied on sugar for instance, each consumer would pay according to amount he/she consumes.

The poor incidentally consume more sugar than the affluent that eat healthy protein diets like goat or chicken meat that are not taxed. Some may say that chicken and goat meat is also consumed by the poor, but the proportion of this food in their diet is very low.

The tax on petrol for instance is borne by the entire society. In fact it burdens the poor more than the rich as its increase impact prices of daily use items because of higher transport cost and high travelling charges.

We do see many large business houses, including the foreign investors claiming that they pay a huge amount as taxes to the government. But the devil is in details.

Almost 95 percent of the taxes that they pay are indirect taxes in the shape of sales tax. They recover the entire sales tax amount from the consumers while their income tax contribution is very low.

The highest income tax contributions in fact come from the public sector entities like Oil and Gas Development Company Limited (OGDCL), Pakistan State Oil (PSO) or Pakistan Petroleum followed by the commercial banks where tax evasion is extremely difficult because of prudent regulations and monitoring by the central bank.

Successive governments in Pakistan cite International Monitory Fund (IMF) pressure as a reason to increase the petroleum, electricity and energy rates, which is not true. In fact, the IMF sets macro-economic parameters within which a recipient government is advised to operate.

That could be done by reducing the expenses or by increasing the revenues. The reduction in expenses should come from the non-development side so the development programme which ensures future growth is not disturbed.

All governments in Pakistan compromise the development programme instead of curtailing non-development expenses, because these are recurring expenses pertaining to monthly salaries and government services in various sectors including health and education.

In fact, the non-development expenses tend to increase every year as salaries have to be increased and services have to be improved. Cutting development expenditure taxes the infrastructure development in the country and reduces chances for future growth.

That puts pressure of the government to generate more revenues. As far as global donor agencies and economists are concerned, increase in revenue should come from direct taxes specially if there is a space available in this regard.

In Pakistan, most of the services sectors are not under the tax net. The 1.8 million traders are mostly non-documented. The transport sector is predominantly unregulated. The doctors and the engineers and other professionals are not in the value-added tax mould (GST).

Even those that pay taxes under report their income and production. The big landlords, enjoying their business tycoon lifestyles, do not pay any tax.

The unnamed properties worth billions of dollars are the parking avenues of ill-gotten wealth. The capital market has produced billionaires’ without payment of actual taxes because of various exemptions granted to them.

The smugglers operate without fear of tax authorities, depriving the exchequer of billions of rupees in revenue. The government lacks political will to bring most of the tax evading sectors into the tax net.

Moreover, the institutions lack the capability to nab rampant tax evasions. Years of reforms have failed to strengthen these institutions with the result that the tax to GDP ratio is very low.

The indirect taxes are the easiest way to jack up revenues. It is easier to increase the electricity, gas and petroleum product rates than to bring to book corrupt businessmen and corrupt officials that according to some reports eat away Rs700-900 billion per month. It is a pity that we lose 30 percent electricity revenue due to theft and incompetence and make up the loss by increasing the tariff for the consumers.