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The Tax Regime May Not Change But Chairman FBR Might

Shajeej Zaidi argues that the advantages of direct taxation as opposed to indirect taxation are obvious but it’s so much easier for the government to again increase GST. Because implementing a direct tax system would entail broadening the existing tax net which would require structural reforms and a political will to entangle every citizen in the tax net. The new FBR Chairman wants to do it but it would be an uphill task.

Shabbar Zaidi seems to be on the right track so far. Every new government which comes to power has a bias towards clamping down hard on existing taxpayers because it is a sureshot and easy way of meeting the FBR’s revenue collection targets. Zaidi, on the other hand, issued a directive on his first day after taking charge that bank accounts of companies which are tax defaulters will not be frozen without his express permission.

Even though attaching a company’s bank account ought to be a last resort, field agents of the FBR  generally do so just as a show of power because all they need at present is the approval of the tax commissioner of the region.

In a recent TV interview, Zaidi said that whether or not he is able to stick with his role and regardless of his ability to achieve anything else or not, he has one key aim: to improve the trust deficit between the tax collector and the general public. I think he hit the proverbial nail on the head.

Other than the salaried class who are automatically taxed at the source, no one wants to be included in the tax bracket. This is because they know that once they are identified as taxpayers, and I’m talking about small businesses here mostly, they will be crucified in lieu of FBR’s wanting to meet its yearly targets. Thus, we have a very neat system of give and take where the small trader scratches the tax collector’s back and the tax collector scratches the small trader’s back.

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To counter this, Shabbar proposes digitizing the tax collection so that there is as little contact between the taxpayer and tax-collector as possible. It is a good initiative, albeit one fraught with challenges. First off, we lack the requisite infrastructure.

Pakistan Revenue Automation Limited (PRAL), a subsidiary of the FBR started a project named NEXUS way back in 2005. Its aim was to create a fully automated system for creating and updating the profile of every citizen/taxpayer. To date, no such software has been created. Moreover, it’s nearly impossible to get small traders to first co-opt a software like this in their business.

I specifically write about small traders, small businessmen, shopkeepers, barbers even, because they are the ones currently exempt from the tax regime in Pakistan. The salaried class and government employees automatically pay taxes. Industries and large corporations are taxed too, at over 25%.

In Pakistan, small firms are defined as having a turnover of less than PKR 250 million and and fewer than 250 employees. They are subject to a reduced tax rate of 25%. Independent laborers, non -documented workers or even salaried professionals earning less than PKR 4 lac are exempt from paying taxes, but they do actually pay taxes and at a very high rate.

This is because Pakistan has one of the highest GSTs in the World at more than 17%, which is split between the federal and provincial governments. After adjusting for regulatory duty, customs duty, compulsory value added tax and income tax at source, it adds up to anywhere from 35% to 65%. Like other developing countries, Pakistan unfortunately relies heavily on indirect taxation. While it is a good attempt at establishing a paper trail between businesses and documenting the economy, it places the burden of taxes on the poor and underprivileged.

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Because, think about it, a peon and Mian Mansha pay the same amount in taxes on a packet of biscuit. While this system is beneficial to Mr. Mansha, it’s unfair for the peon because a way, way higher percentage of his earning is going towards taxes compared to Mansha’s.

To meet their revenue demands, governments use a combination of direct and indirect taxation. In most western and civilized countries, direct taxes are preferred to indirect taxes because they are a more equitable form of taxation, as opposed to the Mansha-peon example. In the UK for example, 60% of all revenues are direct taxes, while in Pakistan, direct taxes constitute only 12% of the country’s total revenues.

Even Bangladesh collects 47% of its revenues through direct taxation, while one third of India’s tax revenues come through direct taxation. Indirect taxes lead to cost-push inflation, because the higher the taxes levied on consumers goods, the higher their price and thus, consumers’ disposable income falls.

On the contrary, direct taxes are economic stabilizers, because as people’s income rises during good times, taxes proportionately go up too thus curbing inflation and when incomes fall during an economic downturn, taxes go down too thus increasing people’s discretionary income and thereby forestalling deflation.

The advantages of direct taxation as opposed to indirect taxation are obvious but it’s so much easier for the government to again increase GST, because implementing a direct tax system would entail broadening the existing tax net which would require structural reforms and a political will to entangle every citizen in the tax net. While this is something that Shabbar Zaidi proposes to do, it will not be easy because there are vested interests both within the FBR and outside who will consider his success in his declared objectives an anathema.

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There have been two other private sector appointees to the post of Chairman FBR. Moinuddin Khan, the ex-Standard Chartered banker, was appointed by Nawaz Sharif in 1998, but was forced to resign because he went after Sharif’s fat cat trader friends, particularly a cloth shop in Liberty Market.

Ali Arshad Hakeem, the second appointee from the private sector, was forced to step down by the Islamabad High Court in April 2013, after a mere 9 months – because FBR officers lodged a case against him. May Shabbar Zaidi succeed in all his endeavours as Chairman FBR. I wish him luck because he certainly needs it.

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Shajeel Zaidi

The author works in alternative financing on Wall Street, and has a fascination with modern history and politics.

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