Numerous organizations have been set up to reform tax systems worldwide, often with the intent to reform income taxes or value added taxes into something considered more economically liberal. Other reforms propose tax systems that attempt to deal with externalities. various forms of land tax can both deal with externalities and improve productivity.
The SBP issued this stunning disclosure in its second quarterly report for 2010-11.The report said that although fiscal indicators showed some improvement in the second quarter of FY11 with substantial growth in non tax revenues, the overall fiscal position during -FY11 deteriorated. Consequently, the fiscal deficit increased to 2.9 percent of GDP from 2.7 percent in the same period last year. Persistent growth in expenditures driven primarily by flood relief activities and failure to implement tax reforms, have rendered the fiscal imbalance unsustainable, report observed.
Financing the deficit has become all the more challenging in the absence of external financing due to non-observance of IMF conditions on fiscal consolidation.The government, as a result has resorted to heavy borrowing from the banking system, which in turn has not only exerted pressure on short-term interest rates, but also has adverse implications for inflationary expectations, private sector credit and overall macroeconomic stability. The only way out for the government is to show political will to prioritise its expenditure heads and implement tax reforms aimed at removing tax exemptions e.g., taxing agriculture and services. Even if this does not deliver immediate tax revenues, it would close the door on tax avoidance.
Expenses under the running of the government head increased 23.4 percent annually, mainly reflecting the impact of higher salaries and allowances for federal government employees in the FY11 budget. Additionally, flood relief measures claimed an unbudgeted 2.7 percent of consolidated public expenditures during -FY11.
According to the report, within overall revenues, FBR tax collections registered a growth of 13.7 percent annually during H1-FY11, as compared to 5.1 percent in the corresponding period of the previous year.
Unable to sustain solid growth, Pakistan’s economy is teetering on the brink of collapse, with one-third of the population living below the poverty line. Pakistan’s economic instability stems in large part from low government revenue due to the elite’s use of tax evasions, loopholes, and exemptions.Without tax reform, Pakistan will continue to run an unsustainable debt and be forced to rely on Western donors for bailouts.
Is the process of changing the way taxes are collected or managed by the government. Tax reformers have different goals. Some seek to reduce the level of taxation of all people by the government. Some seek to make the tax system more progressive. Others seek to simplify the tax system and make the system more understandable or more accountable.
1. For the welfare of individuals with low income earnings, the basic exemption limit is proposed to be enhanced from Rs.300,000/- to Rs.350,000/-. However individual taxpayers whose normal income is between Rs.300,000/- to Rs.350,000/- shall be required to file return of income and statement, for the purposes of documentation. 2. In order to encourage enhanced equity financing, and to provide relief to new corporate industrial undertakings established on or after 1st July 2011, with 100% equity financing, a tax credit equal to 100% of tax payable is proposed. The existing companies may also take benefit under this arrangement if investment in BMR is financed through their 100% equity, on or after by 1st July 2011. 3. The rate of tax deductible on Cash Withdrawals from Banks is proposed to be reduced to 0.2% from existing 0.3%, for bringing in improvement in the liquidity position of eligible taxpayers.
4. In order to harmonize the existing tax credits available to individuals for investment in shares and for premium paid to Insurance Company, the maximum cumulative limit for both the investments is fixed @ 15% of the taxable income, with maximum upper limit for investment upto five hundred thousand. 5. Tax relief is proposed to be provided to withdrawals exceeding Rs.500,000/- from a Voluntary Pension Fund. 6. For encouraging companies’ enlistment on stock exchange, the existing tax credit equal to 5% is proposed to be enhanced to 15%. 2
7. For the national cause of Broadening of Tax Base and utilization of third party databases, NTN and CNIC of eligible taxpayers are proposed to be provided expressly alongwith other particulars, in the withholding tax statements filed by withholding agents. 8. For the purpose of identification of eligible taxpayers, the requirement of mandatory filing of return of income by the commercial and Industrial consumers of electricity with annual billing above one million rupees, is proposed. This measure will also help in Broadening of Tax Base in the country. 9. In order to discourage the practice of arbitrage by banks for receiving ‘dividends’ from Asset Management Companies, the rate of tax on such return is proposed to be enhanced from 10% to 20%.
10. For encouraging investments made by non-residents in Government Securities, the withholding tax on profit on debt deductible @ 10% is proposed to be a final tax. This measure will relieve the non-residents from the statutory requirement of filing of return of income, and will boost national economy. 11. The withholding tax on profit on debt deductible @ 10% arising from investment in Government securities by individual is also proposed to be a final tax. This measure will relieve such taxpayers from the statutory requirement of filing of return of income, and will also encourage domestic investments in the Government Securities. 12. After imposition of capital gain tax on Modarba certificates and instruments of redeemable capital traded at stock exchange through Finance Act 2010, the 0.01% CVT on such instruments is proposed to be withdrawn in order to encourage their trade.
The State Bank of Pakistan (SBP) has said that the failure of tax reforms programe and the flood relief expenditures have rendered the fiscal imbalance of Pakistan unsustainable.
Achieving the deficit target of 4.7 percent set for FY11 seems highly unlikely in the absence of a clear strategy to increase the tax base by bringing untaxed sectors into the tax net; there is also a need to rationalize electricity tariffs and subsidies on POL product.
The ratio of total expenditures to GDP rose to 8.6 percent in the first half of FY11, which was relatively lower than the level observed in the same period last year. The report also underlined that at the federal level; about 69.5 percent of the increase in spending was driven by defense, running of the government and net lending activities.
As the government moves forward with its agenda to transfer key ministries to provinces under the 18th Amendment, the fiscal balance could deteriorate further in the absence of strict discipline on spending.
Receipts under the head of defense, however, increased appreciably in -FY11compared to the same period in the last five year as US$743 million were received on account of logistics support.
Although this increase appears to be significant, FBR will have to collect Rs 942.7 billion in -FY11 to meet its end-year target. This amounts to a growth of 26.3 percent over collections in H2-FY10. Although tax collection tends to improve significantly during the second half of a fiscal year, this target may be difficult to achieve.
Our tax-to-GDP ratio can rise to 20 per cent in one year if we tax speculative dealings in real estate. This would also help in promoting construction industry as price of land would come down and bring the black economy into tax net. The multinational companies, through abusive transfer pricing mechanism, evade taxes of over Rs200 billion per annum. The Wealth Tax Act, 1963 was abolished through the Finance Act 2003 although it was especially suitable because enormous assets were created without disclosing income.
Before its abolition in 2003, the wealth tax was the only progressive tax available with tremendous potential for growth, if exemptions given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at $60 billion) started pouring in from all over the world, remitted by all and sundry, without any fear of being investigated, courtesy amnesty given under Sec 111(4) of the Income Tax Ordinance, 2001.
Influx of enormous wealth was directed to stock exchanges and real estate market where the sharks continued to fleece small investors through market manipulations, or was used to artificially enhance the prices of property. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to enjoy economic prosperity. From 2003 to date, according to a conservative estimate, Rs200–350 billion worth of wealth tax have been lost.
Sec 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they are permitted to whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in their accounts after paying a nominal premium of one to two per cent of the entire proceeds. The loss caused due to this provision alone for the last five years is estimated at nearly Rs275 billion.
In the last two years alone, revenue loss on account of taxing income from property at reduced rate is estimated at Rs280 billion. The state does not need any borrowing at all, if the rich and the mighty are taxed according to the established democratic norms of equity. The dire need is to tap the real tax potential and make the economy self- reliant, stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, make government- owned corporations profitable, accelerate industrialization and increase productivity, improve agriculture sector, bring inflation to single digit and reduce inequalities through a policy of redistribution of income and wealth.
Policy Recommendations: Eliminate exemptions. Fewer than three million of Pakistan’s 175 million citizens pay any income tax, and the country’s tax-to-GDP ratio is just 9 percent. By eliminating tax exemptions for the rich, politicians can fund essential social services. Increase tax revenue. Pakistani legislators must build a consensus to tax the rich and elite if they want to match growth rates in nearby developing countries. Spend more on development. Pakistan has spent twice as much on defense during peacetime as it has on education and health combined— this needs to change. Stop the bailouts. Donor countries must put conditions on funding and should emphasize tax and economic reform to help Pakistan develop long- term economic plans for sustainable growth.