09-06-2010, 02:46 PM
ISLAMABAD (September 06 2010): A latest study of the Federal Board of Revenue (FBR) has strongly proposed restoration of wealth tax on expensive properties owned by the elite class of Pakistan. It is learnt that the FBR analysis supported restoration of wealth tax to discourage concentration of wealth along with generation of huge revenue from the rich people of the society.
The wealth tax restoration would directly collect revenue from the rich people possessing immovable property in posh areas across the country. The restoration of wealth tax has been termed as a key measure to document the elite class of the country.
The study, called 'Broadening of Tax Base', was conducted by FBR's Directorate of Training and Research, headed by Abdul Wadood Khan, under the strategy to conduct in-depth research for raising tax-to-GDP ratio in the country. The directorate submitted the analytical report issued in Sep-2010 to the FBR for further necessary action.
According to the report, the abolition of wealth tax by military regime proved 'fatal' as far as income distribution is concerned. Since the abolition of wealth tax the income distribution in terms 'Gini Coefficient' has worsened. Moreover, the gradual shift towards presumptive tax regime put extra burden on low income group.
As the poor do not have much capacity to consume or having less purchasing power do not contribute to the revenue, while extremely rich, despite having greater purchasing power, pay only limited taxes. Wealth tax used to target only those rich people who own expensive properties and having the capacity to pay taxes on these properties. Besides, it was an effective tool to trickle down the economic benefit through discouraging the concentration of wealth. The restoration of wealth tax would also help in generating handsome amount of revenue.
The 40 page report has shared some interesting trends in enforcement and compliance by the business and trade. It said that since the compliance ratio is greater in the corporate sector, the tax department makes them scapegoat for meeting their audit targets. It is necessary to drastically reduce the corporate income tax rate to facilitate the process of corporatisation.
The research paper has also observed that the concept of group relief and amalgamation is available to companies under the Income Tax Ordinance. However, few companies have availed the facility of group relief and amalgamation during the past years.
The FBR has taken a number of measures to bring changes in the tax laws to broaden the tax base. In this regard, the harmonisation of taxes would bring substantial improvement in bringing the undocumented sectors into the tax net.
The analysis showed that only bringing people into the tax net would not be sufficient to broaden the tax base and some other measures are also required to address the issue. One of the most important issues is the under-reporting of taxes by the registered taxpayers. When more taxpayers are added to tax net under-declaring their income will do nothing positive towards revenue but increase cost of tax administration. Tax authorities have to adopt a logical and reasonable approach for addressing issue of under-reporting of taxes by the registered taxpayers.
The analysis pointed out that over the years Pakistan's tax base has been more or less stable at one percent or less than the total population. In United States, 72 million returns are filed annually with the Inland Revenue Service (IRS) which, given a population of over 300 million, translates into the tax base of over 24 percent. In Malaysia, the tax base is 20 percent. In Turkey and India, the tax base is around 5 and 2 percent respectively. Tax laws in Pakistan are such that individuals with the same income or profit can be treated unequally in terms of final taxation and tax exemptions.
Within the income tax regime, the study has also proposed corrective measures to improve compliance under Income Tax Ordinance. In the Income Tax Ordinance 2001, a special provision exists to facilitate the money launderers to remit their illegal money through banking channel and surrender the foreign currency to the central bank and get Pakistani rupees as encashment. In this way, they can escape not only taxation but any criminal proceedings as well. Though the scheme succeeded in bringing huge foreign revenue in the country but at the same time it facilitated the tax evaders. There are a number of other instruments available to tax evaders like foreign exchange bearer bonds, US dollar bonds and certificates which facilitate the tax evasion.
Rough estimates showed that informal sector, or black economy, appraised variously at 35 to 55 percent of the formal GDP and is employing some 20 million out of total labour force of 47 million. According to figures released by various quarters, it has been estimated that the parallel economy is growing at an alarming pace of 23 percent per annum. It has been estimated that every fifth rupee transacted in Pakistan is black. The volume of black economy generated in 2008 was Rs 800 million, the report said.
There is a need to rigorously peruse the documentation of informal sector to incorporate big slice of tax in revenue collection. The government should give special attention to large illegal segment of this sector where smuggling, hoarding/profiteering and large-scale underground manufacture and sale of spurious and counterfeit goods with serious violations of copyright laws generate huge profit on which no tax is being paid. In this regard, deterrence is required within the tax code by enactment of appropriate punitive laws.
On the issue of tax on agriculture, the research paper highlighted that provincial governments are not collecting tax on agriculture income but on fixed per acre basis. They charge Rs 150 per acre from the irrigated area and Rs 100 per acre from non-irrigated land. This is a gross violation of the Constitution that requires tax on agricultural income. It is not logical to make a distinction between the agricultural and non-agricultural incomes for the purpose of taxation. A distinction so made arbitrarily amounts to creating a preference for one class of income over the other. The availability of statutory exemption for agricultural income has resulted in the systematic exploitation of this exemption by those enjoying non-agricultural income. Though the simple expedient of attributing part of their income to agricultural activity they are able secure substantial tax benefits. However, since they have purchased agricultural land, which may be marginal land or even wasteland (banjer), it is not too difficult to hoodwink the federal tax authorities on the bonafides of the investments made by them and attributed to the earnings of their agricultural holdings.
The progressive rates of income tax, if applied to the incomes of this rural elite, could improve the politico economic well being of the country, it added.
The report also referred to various insertions and amendments in sections of the applicable tax laws which created confusion among the taxpayers as well as tax officials during audit proceedings. The FBR data showed that the average tax paid by the taxpayer is far less than their level of earning. It can be improved through strong audit for which information collected through survey for documentation of national economy could be effectively utilised.
It is important to mention that the team of the tax officials, who compiled the syndicate report on 'broadening the tax-base', included Mashkoor Ali (chairperson), Sabah Sajid, Sohail Ahmad, Soban Ahmad, Sumera Kanwal and Nafeesa Bano. The Deputy Director of Directorate of Training and Research Ms Asma Hoori was the advisor of the project to assist the team of tax officials in compilation of the syndicate report.
The wealth tax restoration would directly collect revenue from the rich people possessing immovable property in posh areas across the country. The restoration of wealth tax has been termed as a key measure to document the elite class of the country.
The study, called 'Broadening of Tax Base', was conducted by FBR's Directorate of Training and Research, headed by Abdul Wadood Khan, under the strategy to conduct in-depth research for raising tax-to-GDP ratio in the country. The directorate submitted the analytical report issued in Sep-2010 to the FBR for further necessary action.
According to the report, the abolition of wealth tax by military regime proved 'fatal' as far as income distribution is concerned. Since the abolition of wealth tax the income distribution in terms 'Gini Coefficient' has worsened. Moreover, the gradual shift towards presumptive tax regime put extra burden on low income group.
As the poor do not have much capacity to consume or having less purchasing power do not contribute to the revenue, while extremely rich, despite having greater purchasing power, pay only limited taxes. Wealth tax used to target only those rich people who own expensive properties and having the capacity to pay taxes on these properties. Besides, it was an effective tool to trickle down the economic benefit through discouraging the concentration of wealth. The restoration of wealth tax would also help in generating handsome amount of revenue.
The 40 page report has shared some interesting trends in enforcement and compliance by the business and trade. It said that since the compliance ratio is greater in the corporate sector, the tax department makes them scapegoat for meeting their audit targets. It is necessary to drastically reduce the corporate income tax rate to facilitate the process of corporatisation.
The research paper has also observed that the concept of group relief and amalgamation is available to companies under the Income Tax Ordinance. However, few companies have availed the facility of group relief and amalgamation during the past years.
The FBR has taken a number of measures to bring changes in the tax laws to broaden the tax base. In this regard, the harmonisation of taxes would bring substantial improvement in bringing the undocumented sectors into the tax net.
The analysis showed that only bringing people into the tax net would not be sufficient to broaden the tax base and some other measures are also required to address the issue. One of the most important issues is the under-reporting of taxes by the registered taxpayers. When more taxpayers are added to tax net under-declaring their income will do nothing positive towards revenue but increase cost of tax administration. Tax authorities have to adopt a logical and reasonable approach for addressing issue of under-reporting of taxes by the registered taxpayers.
The analysis pointed out that over the years Pakistan's tax base has been more or less stable at one percent or less than the total population. In United States, 72 million returns are filed annually with the Inland Revenue Service (IRS) which, given a population of over 300 million, translates into the tax base of over 24 percent. In Malaysia, the tax base is 20 percent. In Turkey and India, the tax base is around 5 and 2 percent respectively. Tax laws in Pakistan are such that individuals with the same income or profit can be treated unequally in terms of final taxation and tax exemptions.
Within the income tax regime, the study has also proposed corrective measures to improve compliance under Income Tax Ordinance. In the Income Tax Ordinance 2001, a special provision exists to facilitate the money launderers to remit their illegal money through banking channel and surrender the foreign currency to the central bank and get Pakistani rupees as encashment. In this way, they can escape not only taxation but any criminal proceedings as well. Though the scheme succeeded in bringing huge foreign revenue in the country but at the same time it facilitated the tax evaders. There are a number of other instruments available to tax evaders like foreign exchange bearer bonds, US dollar bonds and certificates which facilitate the tax evasion.
Rough estimates showed that informal sector, or black economy, appraised variously at 35 to 55 percent of the formal GDP and is employing some 20 million out of total labour force of 47 million. According to figures released by various quarters, it has been estimated that the parallel economy is growing at an alarming pace of 23 percent per annum. It has been estimated that every fifth rupee transacted in Pakistan is black. The volume of black economy generated in 2008 was Rs 800 million, the report said.
There is a need to rigorously peruse the documentation of informal sector to incorporate big slice of tax in revenue collection. The government should give special attention to large illegal segment of this sector where smuggling, hoarding/profiteering and large-scale underground manufacture and sale of spurious and counterfeit goods with serious violations of copyright laws generate huge profit on which no tax is being paid. In this regard, deterrence is required within the tax code by enactment of appropriate punitive laws.
On the issue of tax on agriculture, the research paper highlighted that provincial governments are not collecting tax on agriculture income but on fixed per acre basis. They charge Rs 150 per acre from the irrigated area and Rs 100 per acre from non-irrigated land. This is a gross violation of the Constitution that requires tax on agricultural income. It is not logical to make a distinction between the agricultural and non-agricultural incomes for the purpose of taxation. A distinction so made arbitrarily amounts to creating a preference for one class of income over the other. The availability of statutory exemption for agricultural income has resulted in the systematic exploitation of this exemption by those enjoying non-agricultural income. Though the simple expedient of attributing part of their income to agricultural activity they are able secure substantial tax benefits. However, since they have purchased agricultural land, which may be marginal land or even wasteland (banjer), it is not too difficult to hoodwink the federal tax authorities on the bonafides of the investments made by them and attributed to the earnings of their agricultural holdings.
The progressive rates of income tax, if applied to the incomes of this rural elite, could improve the politico economic well being of the country, it added.
The report also referred to various insertions and amendments in sections of the applicable tax laws which created confusion among the taxpayers as well as tax officials during audit proceedings. The FBR data showed that the average tax paid by the taxpayer is far less than their level of earning. It can be improved through strong audit for which information collected through survey for documentation of national economy could be effectively utilised.
It is important to mention that the team of the tax officials, who compiled the syndicate report on 'broadening the tax-base', included Mashkoor Ali (chairperson), Sabah Sajid, Sohail Ahmad, Soban Ahmad, Sumera Kanwal and Nafeesa Bano. The Deputy Director of Directorate of Training and Research Ms Asma Hoori was the advisor of the project to assist the team of tax officials in compilation of the syndicate report.