The Federal Government in its Budget Strategy Paper 2011-14 has noted with profound regret that under the 7th National Finance Commission (NFC) Award, the provinces had agreed to help the Federal Government in raising tax revenues to the tune of 15 percent of GDP by the end of NFC Award period.To achieve this goal, provinces were required to take necessary legal and administrative measures to effectively tax agriculture and property sectors. Since little or no progress has been made in this regard the transfer to provinces from the divisible pool – originally envisaged at Rs 1,034 billion in the budget – would now stand reduced to Rs 993 billion.Federal Ministry of Finance has, therefore, urged the Prime Minister to hold a meeting of the Council of Common Interests on an urgent basis to start the taxation process from the next financial year budget with a view to achieving a 15 percent tax-to-GDP ratio by 2015-16.
A law on tax collection in relation to agriculture income does exist. However, rules and procedures are still needed to be framed under the law by the provincial governments. Also, the basic mechanism and appropriate policies to collect this tax are still not in place. In the absence of these fundamental prerequisites, provinces, particularly Balochistan, continue to remain precariously dependent on the Federal Government on account of meagre collection.The provincial governments are not levying or collecting tax on agriculture income but charging a fixed rate per-acre – on the basis of area and produce index unit for irrigated and non-irrigated regions. The charge is usually Rs 150 per-acre from the irrigated areas and Rs 100 per-acre from non-irrigated lands. Even the penalty for non-filing of tax returns on agri income is a pittance, ie, Rs 1,000. This acreage-based charge is in gross violation of the Constitution that stipulates tax on agriculture income as defined in Article 260(1).
Political parties with a larger urban base are not prepared to support a value-added Sales Tax (RGST) regime; nor are the existing urban taxpayers willing to accept any additional load of taxation unless tax collection from agriculture income and real estate is subjected to same treatment, as in the case of businesses and salaried class. As a consequence, the Federal Government is now caught between a rock and a hard place. Taxes that have buoyancy such as: Capital Value Tax (CVT) on immovable properties and sales tax on services are now with the provinces. Other than Sindh, no province has made attempts, however feeble, towards creating a desired capacity to collect sales tax even from stand alone services. They are asking for help from the Federation to collect sales tax on services on their behalf (now firmly with them after the 18th Amendment) against a collection fee.The revenue collection system for the farm sector in place is only in the form of an indirect tax. The crop tax has no co-relation to the crop price and the law allows the ‘abiana payment’ to be adjustable against income from agriculture, unlike Sales Tax on goods and Federal Excise Duty which is not adjustable against income tax on businesses. This just goes to prove that both horizontal and vertical taxation between farm activity and non-agri business is based on an iniquitous or wicked practice.
The declared value on which real estate transactions take place is less than 60 to 70 percent of the real sale value. Unless the stamp duty plus other provincial levies are lowered to one percent – real estate transactions will continue to remain woefully understated.Provinces must understand that their share in the Federal Divisible Pool greatly depends on FBR’s success in effectively bridging the tax gap by improving its monitoring system and taking some other required measures that are accompanied by stricter enforcement. But they too need to start making an effort in the same direction. Tax broadening has to be a collective effort – a national effort indeed.Potential taxpayers in Pakistani society can only be identified through collection of transaction data and then cross-matching with the returns filed at all the three tiers of the government. This requires creation of a common data bank backed by laws which make it obligatory for those outside the tax net to supply asset and transaction information with regularity. This requires a handshake between the registrars’ office and various other sales points. We have created an Inland Revenue Service in the FBR through integration and harmonisation of the income tax and sales tax administration and laws.
The present state of confusion or confused mass of information owes its existence to our failure to train the field formation and create a cohesive force. Income tax officers are often found clueless about sales tax laws and vice-versa. Customs service officers who have opted to the Inland Revenue Service stick out like a sore thumb. Without continuous training and an effective audit mechanism, the self-assessment system remains moribund. This is precisely the reason that despite a sharp focus on revenue collection, over the last few years, the tax-to-GDP ratio instead of going up, has been going down. This explains how economic interests of the landed aristocracy that includes politicians, bureaucrats (both khaki, white-collar) have primacy over constitutional rule whereas it should have been the other way around. – Brecorder
