Daily Times

Indirect taxes are those that are levied on consumption or spending of the people as they are included in the prices of goods and services. Their burden eventually falls on the consumer when he/she buys those goods. Taxes such as sales tax, tariffs and petroleum development levy, etc, have been blamed for significant price hikes in recent years. The government has its own justifications for their imposition. Since these taxes are very difficult to evade, as they are included in the prices, they are easy money for the treasury. Besides, they can be collected with the minimum use of tax machinery already known to be corrupt and accounting for about 20 to 25 percent tax theft. Such taxes are very economical as their collection does not involve much administrative involvement and paper work. Conversely, direct taxes such as income tax, profits tax and wealth tax are easier to evade in a weak administration where there may be manipulation of records and concealing of income, property and assets.

The choice is very obvious: the government does not bother to make more effort to increase its revenue through direct taxes. Since both rich and poor people end up paying the same absolute amount in indirect taxes, that is why the poor person has to pay a relatively higher percentage of his income when compared to the rich and elite class. Recently, one of the mainstream political parties demanded the government reduce indirect taxes to 15 percent in a bid to control inflation. There appears to be significant substance in this demand as the following data indicates the comparison of our indirect tax rates with those of other Asian countries and close neighbours.

In Pakistan, average indirect taxes were at 16 percent from 2009 to 2012 while in 2013 and 2014 they were further increased to 17 percent. In India they have been at 12.5 percent from 2009 to 2012 while in 2013 and in 2014 they were 13 percent and 14 percent respectively. In Bangladesh and Sri Lanka this rate has been 15 percent and 12 percent respectively for these last five years. Indonesia maintained this rate at 10 percent for the last five years while the Asian average has been 11.7 percent in 2009, 11.64 percent in 2010, 11.84 percent in 2011, 12.24 percent in 2012, 12.39 percent in 2013 and 12.84 percent in 2014.

The above figures clearly indicate that we have the highest indirect tax rates in the whole region, well above the Asian average. Many countries like Sri Lanka, Bangladesh and Indonesia have maintained the same rate throughout, which means that they are relying on other direct taxes to increase their tax incomes rather than resorting to this short cut that enhances revenue at the expense of public welfare. Although the Asian average is going up — like the Indian indirect tax rate — there is no comparison of our rate to others. Keeping in view this whole scenario it seems fair to pay heed to the opposition’s demand to reduce indirect tax at 15 percent that can, in turn, reduce the cost of living or inflation by 15 to 20 percent to present significant relief to the poor person. This is likely to be a visible step to alleviate the sufferings of the common man who is under a huge burden and is desperate to listen to any such refreshing news out of the budget proposals. The resulting shortfall in revenue may be bridged by resorting to direct taxes possibly from large retailers and wholesalers who have not been contributing their due share to the national exchequer. The government may impose fixed income tax on them in order to avoid any high handedness of tax officials in this regard. Besides, there may be many other possibilities of other tax avenues by broadening the tax net, which have not yet been explored despite much hue and cry over the years.

It is high time the government stops relying on petroleum development levy to meet its revenue targets, which has been one of the main sources of its earnings over the years. It is for this same reason that the government has not passed on the full benefit of reduced oil prices to consumers because it still wants some cushion on revenue collection after a possible decline in tax revenue collection in the coming months due to the recent floods. However, this is the need of the hour; we have to shift our policy focus from indirect taxes to direct taxes sooner or later. The first step should be taken to control inflation to give relief to the poor as more than half of our population lives below the poverty line. It is not only likely to win popular support for this government but will also set a precedent for upcoming rulers who have always looked for short cuts to augment their receipts instead of formulating any tax reforms.

The writer is a freelance columnist