Taxation in Pakistan is oppressive, lopsided and counterproductive -- there is only 2 per cent of corporatisation of total business. By heavily taxing corporate sector vis-à-vis firms and association of persons, the successive governments have been encouraging undocumented sector.

The country has less than 65,000 companies with annual addition of less than 3500. In countries like Malaysia and Turkey, the number is in millions. If Pakistan is to discourage undocumented economy, it needs rapid industrial expansion through corporatisation. Taxation can play a key role in the process by reducing corporate tax rate to 20 per cent. For non-corporate business entities, rate should be enhanced to 30 per cent. Sales tax should also be single-digit and single stage as is the case in Japan and Singapore.

Taxation should serve as a catalyst for industrial expansion and economic growth creating more jobs. In Pakistan, the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled trade and industry. Had the successive governments concentrated more on economic growth, there would have been substantial rise in taxes as a consequence. It is impossible to enhance revenues with stagnation in economy -- over-taxing ailing economy, as has been done in Pakistan, is bound to destroy the revenue system as well.

Fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth is our real dilemma. In a country where there is no security of life or property, notwithstanding the availability of some tax benefits, investors would never come forward.

The Federal Board of Revenue (FBR) creates uncertainty by resorting to Statutory Regulator Orders (SROs), withholding undisputed refunds, making excessive tax demands and resorting to all kinds of negative tactics to meet its budgetary targets. Such actions of the tax machinery are detrimental for business. The FBR, despite these actions, has failed to meet the revised targets for the last many years, what to speak of realising the real revenue potential.

Economic managers must concentrate on increasing productivity, efficiency and growth -- these alone can ensure more revenues for the State. Successive governments’ onerous tax and regulatory policies have pushed millions of people below the poverty line. Pakistan will have to move quickly and decisively to reverse this trend.

The revenue performance is nothing but the best and optimal use of resources. Since the composition of investment is an important determinant of growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing higher taxes on luxuries and other low priority items (such as motor cars, air conditioners, and jewellery), the government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors.

The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of the Pakistani tax managers is highly disappointing as fiscal deficit remained high during the last decade and the revenue targets fixed annually were revised downwards many a times and even then the same could not be achieved. The Tax-GDP ratio at 8.5 per cent is pathetically low.

The second equally important function is to reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan, there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has effectively transferred the burden of taxes from the rich to the poor.

Economic justice relates largely to distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, and racial and religious tolerance in a society.

Tax policy is a democratic method to influence the distribution of income and wealth on desired lines. The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by low-income groups. In Pakistan, we are moving from progressive taxation to regressive taxation. It is a dangerous step as our society is already divided on economic, geographical and religious divisions.

Our tax potential is around Rs8 trillion. If there are 10 million individuals having annual taxable income of Rs1.5 million (a very conservative estimate), total income tax collection comes to Rs3750 billion. If we add income tax from corporate bodies, other non-individual taxpayers and individuals having income between Rs400,000 to Rs1,000,000, the gross figure comes to Rs5000 billion. The FBR collected only Rs715 billion as income tax in 2012-13. Total direct tax collection is shown at Rs739.7 billion which included income tax and other direct taxes i.e. capital gain tax, workers welfare fund and workers profit participatory fund.

The contribution of income tax in total direct taxes is around 97 per cent. About 35 per cent of direct taxes are indirect taxes collected under the garb of presumptive taxes. Thus not only is there a whopping gap of Rs2784 billion in income tax alone, but the actual contribution of direct taxes much lower than what is claimed by the FBR: "direct taxes have contributed 38% in the total tax receipts collected during FY: 12-13".

In the income tax collection of Rs716 billion, the share of presumptive taxes is at least Rs250 billion, thus actual income tax collection is not 716 billion but Rs466 billion -- its share in total revenue comes to around 24 per cent and not 38 per cent as claimed by the FBR.

Another shocking fact is the dismal performance of the FBR field officials in collecting taxes through their own efforts; out of total collection of Rs739.7 billion under the direct taxes, there was a decline of 31 per cent as compared to collection on demand of Rs130 billion in 2011-12. This confirms the pathetic state of affairs prevailing in the FBR where officers are getting double salary, bonuses and honourariums.

Out of total direct tax collection of Rs739.7 billion, the FBR received Rs436 billion (59 per cent) from withholding agents. In this area as well, massive corruption is prevailing with the connivance of tax officials -- the withholding agents collect/deduct taxes and do not deposit in the government treasury, or the payer and the payee join hands to deprive the exchequer of billions of rupees. The real potential of withholding taxes, based on estimates for total GDP for FY 2012-13, was not less than Rs600 billion.

Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection in 2012-13 was only 25-35 per cent of actual potential. In fiscal year 2012-13, the FBR collected Rs841 billion under the head sales tax, Rs119 billion under federal excise duty and only Rs239 billion under custom duties. Total indirect collection of Rs1939 billion was pathetically low. It should have been at least Rs5000 billion.

Poor enforcement and corruption are the real weaknesses of tax system. Tax codes are mindlessly amended each year through Finance Bill and in between, by way of SROs. The solution lies in complete re-engineering of the system which was deferred year after year in the name of short-term compulsions.