Achieving revenue targets by keeping the rich and mighty outside the ambit of personal income tax according to their actual ability to pay is the real dilemma of Federal Board of Revenue (FBR). The stalwarts sitting in the Ministry of Finance and FBR are totally indifferent towards a fair, growth-oriented tax system. Their single-minded, target-oriented approach is the root-cause of prevalent fiscal crisis. They want to stick to narrow tax base with higher taxes, rather than broadening tax base with lower rate of taxes.

Fiscal consolidation should be as growth-friendly as possible. Tax-base-broadening reforms are identified as growth-oriented if aimed at reducing distortions in economic decisions, saving, investment and consumption, increasing output and improving social welfare. Unfortunately, this is not the vision of our economic managers.

It is tragic that in a country where billions are spent for the luxuries of the elites -- militro-judicial-civil complex and ruling-predators -- the majority of population lives below the poverty line. Tax evaders are buying plots and luxurious bungalows, but the high-ups of FBR express their helplessness in taxing them and rather begging them, through amnesty schemes to pay just a few thousands and get everything whitened.

The definition of ‘business’ given in section 2(9) of the Income Tax Ordinance, 2001 covers even speculative transactions being "adventure in the nature of trade" and yet the apex revenue authority is sitting idle causing colossal loss to the national exchequer. It is not taxing buying and selling in real estate as adventure in the nature of trade but wants capital gains tax on it which is a provincial subject.

Our tax-to-GDP ratio can rise to 15 per cent in one year if we tax absentee landlords, real estate developers, beneficiaries of State lands under section 13(11) of the Income Tax Ordinance, 2001 and confiscate assets created out of untaxed money by deleting section 111(4) of the Income Tax Ordinance, 2001.

Pakistan’s tax potential at federal level alone is Rs8 trillion -- Unlocking Pakistan’s revenue potential, Country Report 16/2, January 2016, IMF. According to Household Integrated Economic Survey (HIES) 2011-12, conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs1.5 million. If all of them file tax returns, income tax collected from them at the prevalent tax rates would be Rs1650 billion.

If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs400,000 to Rs1,000,000 is added, the gross figure would not be less than Rs4500 billion -- FBR in 2015-16 collected only Rs1216.9 billion as direct taxes (which includes almost 40 per cent of indirect taxes in the garb of income taxation). Income tax collection in fiscal year 2014-15 was Rs1033.7 billion and projection for 2015-16 was Rs1307 billion. The actual collection, reported by FBR, is Rs1220 billion -- showing shortfall of Rs87 billion. Collection of sales tax in 2014-15 was Rs1088 billion and projection for 2015-16 was Rs1230.3 billion.

By raising sales tax on POL products from 17 per cent to 30-50 per cent, the government managed to collect Rs1329 billion in 2015-16. Customs collection in 2014-15 was Rs306 billion and projection for 2015-16 was Rs348.5 billion. After levying regulatory duty on over 300 items, it was increased to Rs404 billion in 2015-16. Federal excise collection in 2014-15 was Rs162 billion. Against projection of Rs200.9 billion, actual collection for 2015-16 was Rs177 billion.

The government is not making any effort to improve productivity and economic growth. Resultantly, Pakistan is facing a dilemma: neither can it afford to give any meaningful tax relief package to the common people, trade and industry [due to huge fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers find themselves trapped. Time and again in these columns we have presented ways and means to come out of this tangle; to make Pakistan a place where economic growth takes place with development for all and not just a handful few.

Regressive taxation, non-realisation of actual tax potential and wastage of whatever is collected is our real predicament. The existing unfair and unjust taxation is not only destroying Pakistan’s trade and industry but contributing significantly to rising poverty by:-

levying exorbitant sales tax and forcing the importers into forced value addition even before actual sales take place;

imposing indirect taxes on services under the presumptive tax regime in the garb of Income Tax Law, which is violative of Constitution of Pakistan;

imposing withholding tax obligations without any facilitation and then taking punitive action or using the same as revenue collection tool;

blocking undisputed refunds under one pretext or the other;

making excessive tax demands which in 99 per cent cases do not stand the test of appeal; and

resorting to all kinds of negative tactics and highhandedness to meet budgetary targets.

These actions of the tax machinery are detrimental for economy, social justice, business and industry. The way forward is introduction of lower, certain and predictable taxes -- see details at http://primeinstitute.org /wp-content/uploads/2016/08 /Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf. A complete roadmap for low-rate, predictable taxes has been given that can accelerate economic growth and yield substantial revenues for the government -- much more than what is being presently collected. Below is the working for tax potential on the basis of alternate model suggested.

Income Tax:

Income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum taxes have been added to distort the entire concept of personal income taxation. The paper suggests simple and flat rate taxation of 10 per cent for all entities other than companies, for which a flat rate of 20 per cent is proposed.

According to official and non-official figures, present tax base is around Rs40 trillion (after taking into account informal economy). Flat-rate taxation of just 10 per cent with strong enforcement system suggested in the study has a potential to yield Rs4 trillion under income tax from individuals and around Rs1 trillion from corporate entities.

Sales Tax:

Presently, collection of sales tax is related to a few commodities. This is confirmed by the fact that petroleum products alone contribute around 44 per cent of the total sales tax domestic collection. Just 10 items including POL and natural gas yielded 73 per cent of the total net sales tax (domestic) in 2015 and 2016. Against the prescribed rate of 17 per cent, the effective sales tax rate for total domestic sales is 4.55 per cent. This rate is 6.81 per cent, 7.96 per cent, 8.36 per cent and 13.56 per cent for top 40, 30, 20 and 10 sales tax paying entities respectively.

This shows that domestic sales made by more than 99 per cent of taxpayers contribute sales tax at effective rate less than 4.55 per cent. The study recommends simplified sales tax of 5 per cent by federal government and ultimately the introduction of Harmonised Sales Tax (HST). Sales tax collection and compliance can be improved by introducing simplified regime and enforcement through one single tax collection agency -- National Tax Agency (NTA).

An integrated Tax Intelligence System can capture all inflows and outflows and correlate sales tax collections on goods and services with income tax returns and monitor all transactions at all levels. This alone can ensure proper tax compliance as mere reduction in tax rates may not induce many to discharge their tax obligations diligently. These measures will yield Rs2 trillion.

Customs:

Customs collection in Pakistan faces serious issues of smuggling, under-invoicing, over-invoicing, misdeclarations and valuation rulings etc -- these are not only causing a loss to national exchequer but also hurting open markets. The collection in 2015-16 of Rs401.2 billion was after raising regulatory duty on over 300 items. The rationalisation of customs revenue is not possible through narrow bases (10 items contribute more than 80 per cent receipts) in the presence of hundreds of statutory regulatory orders (SROs) and numerous valuation rulings -- all leading to complexity and leakages.

There are, presently, four tariff slabs with the peak of 20 per cent and floor of 2 per cent. The study suggests single rate (5 per cent) customs duty for all items that will eliminate the menace of smuggling, arbitrary and/or favourable valuations, complicated registration processes as well as the SRO-ridden system. Since there will be no sales tax on import stage or any withholding income tax, the industry and trade will flourish. Collection of Rs500 billion will be possible.

Federal Excise Duty (FED):

The study recommends abolishing of this tax because the cost of collection is more than what is collected. After abolishing FED, we can introduce sin taxes on harmful items like cigarettes and generate sufficient money for improving health services and providing other social services.