Indirect taxes creating economic inequality

Country’s poorest 10pc contribute 16pc of their income to indirect taxes while richest 10 pc contribute only about 10 pc

The intentions of Pakistan Muslim league-Nawaz (PML-N) government to generate an estimated Rs 255 billion for fiscal year 2014-15 through new taxes is likely to hit the low and middle income classes because of indirect taxes on necessities of life, said the economists at National Tax Summit in the federal capital on Thursday.

Pakistan’s indirect tax system is aggressive and bias against the poor, putting greater burden on the low-income households than the upper ones, according to various reports by rights and development organisations working in Pakistan.

A report by a social development organisation stated that the poorest 10 per cent of households contribute 16 per cent of their income to three indirect taxes – General Sales Tax (GST), Central Excise Duty (CED) and Customs Duty.

However, the burden of tax progressively declines as income rises and the richest 10 per cent of households contribute only about 10 per cent of their incomes to the indirect taxes.

Pakistan’s tax regime consists of four main revenue sources: GST, CED, Customs Duty and Income Tax. Its structure is dominated heavily by indirect taxes, which combines over two-third (68 per cent) of combined federal and provincial tax receipts.

Another report stated that if surcharges are included, the indirect taxes rise to over three-fourth (76 per cent). Thus all of these indirect taxes badly affect the poor of the country.

Other hurdles include unwillingness of the affluent to pay their dues, the token contribution to tax revenue by the country’s parliamentarians, barring a handful, widespread exemptions and privileges granted to the rich and powerful, many of which have been coded into law, a rising tax burden on honest taxpayers and formal businesses and the growing inability of government to finance the delivery of efficient and effective public services to a burgeoning population.

Forman Christian College University’s Dr Akmal Hussain said that the current status of taxation in Pakistan is highly regressive which is bound to create a wide gap between the have and have-nots. A successful tax system reduces inequalities through a policy of redistribution of income and wealth.\

“We must reduce the burden through decreasing indirect taxes while higher rates of income taxes, capital transfer taxes and wealth taxes on elite are some means adopted for achieving equity in society.”

Former FBR chairman Abdullah said that Pakistan has one of the lowest tax collection rates in the world and the international organisations are watching its efforts closely. They want Pakistan to do more to tackle rampant tax evasion, particularly by its wealthy elite. He said that for sustainable development we must rely on direct taxation instead of indirect taxation which creates woes to marginalised classes of the country.

Sustainable Policy Institute Deputy Executive Director Dr Vaqar Ahmed said that as part of the 7th National Finance Commission (NFC) Award, all the four provinces were supposed to improve tax collection, but they fell behind their commitment to collect tax on farm income and real estate to improve the country’s falling tax-to-GDP ratio.

It was agreed in the award that all the provinces will supplement centre’s efforts to increase the tax-to-GDP ratio to 13.60 per cent by 2012-13, but it actually ended up at 9.6 per cent for the same year, showing a dismal performance of the revenue realisation. Thus to rationalise the indirect taxation the provinces should have to move for direct tax collection on agriculture, on landlords, and on property owners.