Death & taxes

LAHORE: The present regime has wasted three years to unearth corruption of past rulers without documented proofs that could convince the courts.

The economy was badly neglected and we have become loan junkies.

Next two years pose a stiff challenge for not only this government, but also the general public as former would have to muster political will to take transparent and difficult decisions and latter will have to bear the brunt of those measures (it is a sad reality that general public has already paid a high price of three years’ misrule of this regime).

Now the present regime has shown its intent by withdrawing many subsidies but that is not enough and many more exemptions and subsidies in the next budget. Withdrawing subsidies and increasing indirect taxes seems to be an easy way out, which is not true.

Power rates have been increased and if the government succeeds in implanting it fully it would create resources to produce cheaper power after three years (when someone else might be in power). This time around the government would have to take decisions that target the influential segments of society that do not pay their taxes. Only then we will create resources for the welfare of our people.

Inability of the state to fully document the economy is one factor that is promoting black money. Agriculture tax is not a big issue. As a matter of principle agriculture income should be taxed at par with any other income. However we should not pin hope on agriculture tax, plugging our huge fiscal deficit. Naeem Akhtar Sheikh, a former president of Institute of Chartered Accountants of Pakistan conducted a study a few years back that revealed that the maximum potential of agricultural tax was only Rs60-80 billion, which was a nominal amount when compared with our revenue shortfall.

Dr Hafeez Pasha has expressed same views in some of his interviews. The actual evasion occurs after the agricultural commodities land in the hands of middlemen that deal in hundreds of billion rupees but pay no taxes. The state must find a way to document the money that flows through the hands of middlemen in agriculture trade.

Under-invoicing is another major source of tax evasion. It is now a common knowledge that under invoicing is a norm in Pakistan. Products are imported at around 10 percent of the actual value. Assuming that out of total $50 billion imports, 25 percent or $10 billion worth of imports are not under-invoiced, the importers are in fact depriving the exchequer of duties and taxes on products worth $40 billion. The duties, sales tax and other import levies on $40 billion taxable imports at current rates would be over Rs2.25 trillion even if we levy only 15 percent average import duty and 17 percent sales tax on these imports.

All our revenue worries would be resolved if the rulers simply muster the courage to tackle the mafia indulged under-invoicing and the officials that lend them support. Smuggling is another avenue of creation of ill-gotten wealth, which speaks volumes of the ineffectiveness of our border control agencies. The government could net Rs750 billion additional revenue if the smuggling is truly taxed.

Manufacturers conceal production that helps them avoid hundreds of billions of their due taxes. Instances of under-filing of production have been reported in beverages, sugar, paper, and many industries are often reported in the media. Retailers remain out of tax net, though their lavish lifestyle suggests they should be heavily taxed. A strong, determined and dedicated government capable of across the board and transparent action can net all taxes being evaded by businesses.

Every year the taxation experts and economists recommend to every government to withdraw all distorting measures that create black money. If the menaces of smuggling, under-invoicing and under-filing of production are curbed there would be no black money left with the people; hence there would be no need to arrange remittances. In fact if the demand of businesses for dollars overseas is curbed it would force the expatriate Pakistanis to remit more money through banking channels.

The inability to create fear of audit is the biggest failure of the FBR. Fair and transparent audit is the best deterrent against tax evaders. Tax audits in fact should function independently without oversight of the FBR. It should be run by dedicated professionals capable of unearthing tax frauds and creating fear among the evaders that there will be no escape.

In the developed world there is no concept of tax avoidance. There is a famous quote of Franklin Benjamin that goes like “Death and taxes are the two realities of life that cannot be avoided”.