Huzaima Bukhari
“Taxation is a lot like sheep shearing. As long as you shear a sheep, it will continue to produce a new crop of wool but you can skin the animal only once”—Anonymous
In Pakistan there are many governmental departments at both the federal and provincial levels that are merely white elephants on the public exchequer. To name a few, Ministry of Defence Production (can be merged with Ministry of Defence); Ministry of Culture, Social Welfare and Special Education, Special Initiatives (sic!) can all be merged with Ministry of Education; Ministry of Population Welfare, Ministry of Women Development, Ministry of Youth Affairs can all be brought under one, Ministry of Manpower. Ministries like Inter-Provincial Co-ordination and Overseas Pakistanis can easily be disbanded or merged with others as they seem to serve no purpose.
However, federal and all provincial governments are continuously expanding their footprints in the most devious way that is not only increasing administrative expenditure but is also enlarging the scope of unnecessary regulations which are stumbling blocks for rapid economic growth. Taxes are a by-product of economic activity therefore as more and more engage in trade and profession the quantum of taxes is bound to increase. However, if income earners are forced to collect taxes on behalf of monstrous revenue authorities, then expecting large revenue turnovers can be nothing more than seeing through rose-coloured glasses.
At present, Pakistan’s principal revenue collection agency, the Federal Board of Revenue (FBR) is totally dependent upon advance taxes or withheld taxes and that too mostly by taxpayers like companies, individuals and associations of persons. Shifting the weight of their own responsibilities on withholding agents’ shoulders, the federal government has the audacity to remain insensitive towards their woes, and it is observed that day by day, not only is the burden being increased but strong coercive methods are introduced to supervise their activities. Instead of performing the duty of collecting taxes themselves, revenue officers are predominantly busy in overseeing the work of these agents.
The devil was leading a guided tour through the halls of Hades. He led the group through the fire and brimstone exhibit, then they entered a room where billions of clocks hung on the walls. The devil explained that every person on earth is represented by one of the clocks. Every time a person does something nasty, their clock ticks backwards one minute. One of the tour participants raised his hand and said “I know an IRS agent named Johnny Anonymous. Where’s his clock?”
The devil grinned and said “Oh. His is in the back room. We use it for a fan”.
Apparently, training processes of revenue collectors are on the decline since they seem quite ill-equipped to understand how they are supposed to implement law, make assessments of income in accordance with rules of accounting, interact with taxpayers without spectacles of suspicion and for once, doing the job that they get paid for.
Squeezing juice out of compliant taxpayers has become the hallmark of revenue agencies in general and FBR in particular. The massive evasion of taxes occurring in the informal sector seems beyond their vision while their hammer keeps striking those who are already squirming with not only heavy taxation but also the undesirable job of collecting taxes, depositing them, submitting periodical statements and staying prepared for possible repercussions for the slightest of default.
If only sense prevails and the public is freed from duties of the government, chances are that revenue would go up like anything. With entire focus on earning profits and a trouble-free mind, people would be inclined to pay taxes provided laws are made comprehensible and rules less cumbersome. For the purpose of understanding how the government can benefit from a bustling economy an illustration would highlight the fundamentals of taxation and their practical implications.
An example is that of a mediocre family cafe, comprising two floors with the capacity to accommodate 20 families at one time. It remains full for three hours and five hours during lunch and dinner time, respectively. Now say that the average bill per table is Rs. 4,000 and average time spent by the customers is one hour then during the eight hours of operation total receipts in one day would be:
Rs. 4,000 x 20 tables x 8 hours = Rs. 640,000.
This implies that during a financial year i.e. July to June, if business is conducted for 300 days liberally accounting for holidays or occasional closures, the annual receipts, if honestly disclosed, should be:
Rs. 640,000 x 300 = 192,000,000
Rate of sales tax is 16% where cash payment is made and 4% in case payment is made via credit card and say, this ratio is 80:20, the government should get 24,576,000 and 1,536,000 as provincial sales tax.
Moving on ahead, if direct and indirect expenses (assuming that the owners maintain high standards) pertaining to the business are taken generously at 70% of the turnover, the net income arrived at would be 57,600,000.
Under the Income Tax Ordinance, 2001 tax on such income is 25,010,000 since the applicable slab is 45%.
Thus, according to this example, the government should receive:
Indirect tax 26,112,000
Direct tax 25,010,000
Total tax 51,122,000
Please remember that this assessment is based on very low averages and only for 300 working days in a year. If only one business declares its receipts and expenditure honestly it can churn out total revenue of over Rs. 51 million, then just imagine how much tax could be collected from say, only 1000 such eateries from all over Pakistan.
FBR in its bid to relinquish actual duties and forcing the public to evade taxes, we are forgetting that with our paltry savings, we cannot construct a ten-foot paved road in front of our homes what to talk of highways and railroads. We can barely educate our own children let alone educate the entire nation.
We may individually manage to resolve shortage of power in our houses, but we cannot construct dams or establish power plants. The evaded enormous amounts of taxes would probably find their way to off-shore havens for benefit of foreigners but have no use for the child who is forced to work at a tender age; or the widow who scrubs floors of the rich to feed her orphans; or even the educated freshman who, with a degree in his hands fails to secure a decent employment.
How long should we pretend to shut our eyes in the face of these realities and continue to lament the pathetic state of this country when we are collectively responsible for this morbid state of affairs? If we all resolve to honour our obligations as citizens of this country, there is no reason we cannot overcome all our shortfalls in a matter of a few years. We can rid our precious country of her financial afflictions and make it a dreamland—the envy of all nations.
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The writer, lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)