Myth and facts about direct tax collection
15 August, 2007
ARTICLE: The Chairman of Federal Board of Revenue (FBR), during the 14th National Tax Conference held in Islamabad on July 18, 2007, claimed that "direct tax collection has recorded a growth of 47 percent to Rs 330 billion during the fiscal year 2006-07 as against Rs 224.988 billion over the same period last year".
Official figures released on July 16, 2007 by the FBR showed direct tax collections at Rs 329.7 billion as against a revised revenue target of Rs 318 billion. However, the FBR has not revealed the actual quantum of income tax out of total collection of direct taxes (sic) at Rs 330 billion.
The FBR has not made public, the share of certain withholding taxes that constitute full and final liability in this "record collection" of direct taxes (sic). Obviously, the withholding collections that in pith and substance are indirect taxes should not be accounted towards direct taxes, even if collected under the garb of income tax.
It is shocking to note that out of total "income tax collection" for the fiscal year 2006-07; presumptive taxes are to the tune of nearly 32%. In other words the total collection of income tax as reduced by these taxes is not more than Rs 207 billion. Out of total collection of Rs 841.4 billion by FBR in FY2006-07, regressive taxes are to the tune of Rs 631 billion (after making adjustment of indirect taxes collected under the name of income tax!). The revenue deficit, despite record collection of Rs 841.4 billion, is monstrously high at Rs 200.5 billion and fiscal deficit, at Rs 373.5 billion.
In the face of this undeniable fact, the FBR in its advertisements in various newspapers is claiming that "taxpayers are partners in progress". One wonders what kind of progress the FBR is talking about. The real potential of tax collection for FY2006-07 was not less than Rs 1 .5 trillion.
The government failed to reach even the Rs one trillion mark by granting generous exemptions and concessions to the wealthy segments of society (exemption one head alone ie capital gains on stock markets was Rs 112.45 billion according to government's own admission at page 262 of Economic Survey 2006-07.
The FBR only extorts money from the weaker sections of society through exorbitant taxes [a poor man buying branded salt is paying 15% sales tax!]. It is now adding insult to injury by calling these victims of "fiscal highhandedness" as "partners in progress".
During the fiscal year 2006-07, the FBR taxed a poor widow who had placed funds received on the death of her husband, a government servant, at the rate of 10% (though her income of Rs 90,000 was below taxable limit). On the contrary, a mighty landowner who rented out his property in Islamabad at Rs 400,000 per month and had taxable net income of Rs 3,800,000 (after deducting allowable allowances and expenses) paid meagre tax of 5% on gross rent ie Rs 240,000, whereas his normal tax would have been Rs 950,000 (net annual saving in tax comes to Rs 710,000). This shows who the real "partners in progress" with FBR are.
Tax collected at source on goods and services/con-tracts/supplies/rent/interest income/stock market transactions etc, which being full and final discharge of liability is in substance indirect levies. If this collection is subtracted from income tax collection, the actual figure comes to around Rs 207 billion. Thus the share of income tax as percentage of total revenue is not more than 25%, whereas the same is claimed to be 31.7% at page 68 of Economic Survey of Pakistan 2006-2007 and according to Chairman FBR it is 39%. This exposes the so-called authenticity and reliability of official figures. Even the two wings of the government are claiming different figures.
If presumptive taxes on goods and services and many other transactions camouflaged as income tax are excluded from the collection of direct taxes, the share of indirect taxes touches 75 percent. It is pertinent to mention that the average share of direct taxes for high income countries is 46 percent while in the low income countries it is 28 percent. In 2006, Iran and India posted direct tax shares at 40 percent and 29 percent respectively as compared to 25% by Pakistan [Official claim of 31.7% by the Finance Divisions in Economic Survey 2006-07 and 39% by Secretary General Revenue Divisions is based on manoeuvring and manipulation of data].
The petite share of direct taxes in overall collection of taxes should be an immediate cause of concern for our policymakers. It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax). The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line.
The pathetic state of affairs in respect of tax-to-GDP ratio in Pakistan from 1990-2000 to 2006-07 is highlighted in Table A. The tax-to-GDP ratio of direct taxes is appallingly low. It may be noted that in these official figures huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for FY 2006-07 after excluding presumptive taxes will be around 2.4%, whereas officially it is projected at 3.02%.
The net amount of income tax collected for financial year 2006-07, according to FBR, is Rs 3 09,653 million. If we subtract tax collected at source on goods and services/contracts/supplies at Rs 55,862 million, on imports at Rs 26,l 02 million, exports at Rs 10,827 million, on rent at Rs 647 million, interest at Rs 3717 million, petroleum products at Rs 758 million, commission income of advertising agent and others including stock exchange brokers at Rs 4472 million, on goods transport vehicles at Rs 536 million, which being full and final discharge is in substance indirect levy, the actual income tax collection comes to Rs 207 billion.
In fact the collection of direct taxes as percentage of total revenue is only 24.6% and not 39% as claimed by Chief of FBR. What makes the situation more painful is the fact that Income Tax Department collected only Rs 1100 million out of current and arrears demand during FY2006-07. In other words the tax collected with own efforts is just 0.35 % of total collection! In the face of this reality what is the justification to have a large income tax establishment, when this kind of collection is possible with a small number of staff, not more than 10 to 15. It is really a scandalous state of affairs.
After adjustment narrated above, direct tax-to-GDP ratio for 2006-07 is dismally low at 2.4% and not 3.02% as claimed by the FBR. It proves beyond any doubt that the tax system is directly contributing to growing poverty as people who possess enormous income and wealth are not being subjected to income taxation in Pakistan and poor people are subjected to heavy taxation eg 15% sales tax. Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated.
It is pertinent to mention that in 2006 the government of Sweden collected taxes at 50% of GDP, almost twice as high as the total tax revenue of America and Japan, with both collecting around 25% of GDP. In the European Union, tax revenue, on average, reaches 40% of GDP. We have a dismally low tax-to-GDP ratio and according to FBR will have to wait for 20 years more to come up to the level of many developing countries [see Table B]. This is indeed a sorry state of affairs.