Revenue generation for any government works as getting oxygen for living beings. For this generation of revenue government relies on tax system and collections it gets from the revenue collection body. For this purpose, improvements are made in the system through set of reforms.
While looking at Pakistan’s system of taxation, government is dependent on tax collections through revenue bodies. With the passage of time reforms were also proposed and till date 22 different reform commissions came up with their set of recommendations. After coming into the power, current government also came up with their proposed interventions in their first budget. First measure taken in budget 2019-20, was pre-populated income tax return which will be introduced and be based on the tax withheld from and deposited in the name of taxpayer against Computerized National Identity Card Number or National Tax Number. Assessment of performance of the tax administrators and governance framework of tax system.
Government further proposed reduction of withholding taxes to promote industrialization and promote investment and also reduce burden on tax payers. These measures may be encouraging and may improve the revenue generation framework and also help in documenting the economy but still number of limitations are there which may hamper the purchasing power.
First and foremost, definition of filer and non-filer is not yet clear. As per the definition of the laws if a person is seasonally employed and providing services to any organization is also liable to higher tax rates. This example can be best explained by taking into the account a person hired in any institute A and against any activity he has to provide services for 10-12 days. Earnings from this service may suffice a month or 2 for him but here he is also liable to pay tax irrespective of his earnings for rest of the year.
Second, limitation is the increase of indirect tax for those even whose income is not coming in the tax slab. For example, person earning PKR 600,000 annually and has not enough property and income to record tax filing has been facilitated through direct taxation but that facilitation gets nullified as he is suppressed by the help of indirect tax. One fine example is the complex filing system which is yet to be simplified.
Similarly, on utilities such as internet which is now necessity for many jobs and education has been made expensive. Alongside 17 percent excise duty which is being imposed by administration in Islamabad, now there is increase in tax on internet under the head of additional advance income tax on internet and phone respectively. The increase of 100 percent (25 percent and 20 percent) mean that there will be additional decline in disposable income with this increase.
With this 62 percent of the overall taxation on internet, there is also inflationary tax applicable on people irrespective of their income and cost of living.
It should be the only point kept in mind current system is not sufficient enough to have a grip on the stronger ones in this system, thus expansion of direct tax base is not going to significantly happen. This will hurt the weaker ones included in the system both socially and economically
Third major challenge is the perception built around tax collection and machinery. Perception around which government is revolving is that reforming tax is a one-time step and government in the long run can collect and meet revenue targets with ease. Within this perception, government has primarily focused on amnesty and indirect mode of taxation which in the long run will not be fruitful.
The above-mentioned challenges in the tax system have thus suppressed the weaker ones including seasonally employed as they are burdened with the taxes which they are not liable to pay in principle.
In order to deal with the situation, what needs to be done in the short run and on priority is to clear the uncertainty around definition of filer and non-filer along with uniform formula for all while collecting taxes.
Second, while defining luxury and necessity government should focus on demand and supply mechanism of any commodity before imposing a tax or increasing tax rates. Commodity can be necessity today, if it was luxury before. For example, use of technology (internet) which in the past was luxury and it may be for some today is necessity for many now. Therefore, taxing and increasing rates will have negative influence on the users.
While concluding, it should be the only point kept in mind current system is not sufficient enough to have a grip on the stronger ones in this system, thus expansion of direct tax base is not going to significantly happen. This will hurt the weaker ones included in the system both socially and economically. Therefore, government need to start working from definition of filer and non-filer as base need to be looked at. After having strong base, government should focus on rest of the structure and framework for revenue collection which will facilitate the weaker ones and they will no more be under the tax pressure.
The writer is author is working as Research Associate at Sustainable Development Policy Institute