Incentives for Widening Tax Base

By Bukhari, Huzaima; Ikram-ul-Hap | Economic Review, November 2006 | Go to article overview

Incentives for Widening Tax Base


Bukhari, Huzaima, Ikram-ul-Hap, Economic Review


Tax reforms initiated in 2000 have started yielding more revenues but have failed in improving the tax-to-GDP ratio. The collection by the Central Board of Revenue (CBR) last fiscal exceeded the revised target of Rs. 690 billion by over Rs 10 billion. It is an all-time record.

However, the higher collection was largely due to import-based taxes, which accounted for 48 percent of the share in the overall tax revenue.

Analysts have been expressing serious concern about narrow tax-base, lower tax-to-GDP ratio and increasing tax burden on the poor. Pakistan needs to strive very hard to be at par with many developing countries in achieving a desirable tax-to-GDP ratio of over 15 percent. Now the ratio is dismally low at 9.5 percent.

Some radical changes--like broadening of tax base and reduction of exorbitant sales tax rate, simpler and fairer tax codes- are required to encourage savings and investments.

Pakistan needs to re-priorities its tax goals for fiscal year 2006-07 to improve tax-to-GDP ratio, attain better compliance and collections that move up with the rapid industrial and business growth.

While billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low. The government is least bothered about taxing the informal economy and 'benami transactions.

The CBR should be given full autonomy to tax the privileged class, the absentee landlords, military rulers and their hand picked members of the Parliament. They should also be divested of all the exemptions enjoyed under various tax codes.

There is massive sales tax evasion coupled with non-reporting of income. CBR needs to enhance sales tax collection and broaden income tax base. The people should be given tax benefit/incentive, which will help expand tax base, improve documentation and ensure better collection.

A well-thought-out scheme is required that should not only check leakages in sales tax collection but also encourage the people to file their income tax returns. The dual aim of expanding tax base and combating tax evasion should be achieved.

At present every person, making taxable supplies, is required to charge sales tax at the rate of 15 percent on the value of goods and is required to deposit the same into government treasury after adjusting input tax paid by him. But registered persons are not depositing full amount of sales tax recovered from the end users.

By not depositing sales tax into government treasury, they deprived the national exchequer of: (a) sales tax which the end users are paying to registered persons and (b) income tax which a registered person should pay on his income since that portion of sales is not recorded in their income tax affairs.

As the CBR has now developed an online mechanism of checking registration of persons, government can announce the following scheme:

Anybody who pays sales tax in a financial year should be entitled to claim refund of 20 percent of the amount paid. The procedure for claiming refund should be simple. He should send invoices to sales tax department, which will authorize refund from a nearest branch of National Bank, after verification of genuineness of the invoice (by checking sellers' registration number).

In this way, the CBR can develop data base about sales of all registered persons and then cross verify the same with the particulars declared by them in their sales/income tax returns; or

Any person who pays sales tax can claim credit of part of sales tax paid say, 20 percent against his income tax liability by producing all sales tax invoices obtained by him throughout the year. Detailed mechanism can be devised to cater the situation where income tax liability is less than amount of credit of sales tax.

In this scheme, the people may choose not to claim full credit of sales tax paid by them since they could not justify sources of their full expenses. …

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