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
Will it not be wonderful to live in a society where there is an overall atmosphere of well-being? Where everyone has easy access to all the basic needs of education, health, employment and old-age benefits. Where one does not feel guilty living in posh bungalows and driving luxury cars because the poorest of the poor also has a decent house and can conveniently travel around in properly managed rapid public transport. Where the self-respect of the nation is visible by the absence of beggars on the roads. Where the general environment is friendly and secure. Are these ideas the product of a utopian mind or are they actually workable? Well, any positive-minded person would whole-heartedly agree that these dreams can be transformed into reality but to do so, we as one nation would have to not only make a lot of sacrifices but also raise ourselves above the level of selfishness and self-interest.
On a very minuscule scale (in the form of individuals and welfare associations), we may be very charitable and do good deeds, at times even beyond our capacity. However, have we ever considered why all these benevolent acts do not seem to be creating the ripples that we would like them to? It is because we are trying to build a tunnel through huge mountains with small hammers. Not that I approve of it but for the sake of argument, even if all the inhabitants of Islamabad got together, they would not succeed in hammering their way through the Margalla Hills right up to Haripur. Such a feat would involve heavy machines and of course tremendous finances. The main idea is that if we want to see ‘good’ in a visible form, enjoy its fragrance and feel its impact around us, we would have to play our role as responsible citizens of this country. We need to empower the government financially so that the little we do in charity can be replicated on a gigantic scale with its effects positively trickling down to each one of us.
In this write-up, I intend to convey my point to the readers with the help of a couple of fictional examples from real life. One is that of a popular restaurant and the other is a modest private clinic of a general medical practitioner, both assumed to be frequently visited by the people. These may prove to be useful in understanding the fundamentals of taxation and its practical implementation especially for those of us who may not be aware of how different levies contribute towards documentation and eventually at increasing revenue for the government.
ABC Family Restaurant
A popular outlet, comprising two floors with the capacity to seat 30 families at one time. It remains full for two hours and five hours during lunch and dinner time, respectively. Now say that the average bill per table is Rs. 2,000 and average time spent by the customers is one hour then during the seven hours of operation total receipts in one day would be:
Rs. 2,000 x 30 tables x 7 hours = Rs. 420,000.
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. 420,000 x 300 = 126,000,000
With rate of sales tax now again at 16%, the government should get 20,160,000 as general sales tax.
Moving on ahead, if 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 37,800,000.
Under the Income Tax Ordinance, 2001 the rate of tax on such income is 25% of this amount which comes to Rs. 9,450,000.
Thus according to this example, the government should receive:
Indirect tax 20,160,000
Direct tax 9,450,000
Total tax 29,610,000
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. 29 million, then just imagine how much tax could be collected from say, only 1000 such eateries from all over Pakistan.
Dr. X’s private clinic
Dr X works as assistant professor in the Punjab Government and runs a modest clinic in a lower middle class locality in Lahore. Since the patients are not that affluent, the doctor charges only Rs. 300 per patient. Now if the clinic opens for four hours in the evening and the average number of patients is only twenty out of which two are examined free of charge, then total receipt in a day would be:
Rs. 300 x 18 patients = Rs. 5,400
Now, if the clinic remained open for 300 days in a year, annual receipts should be around:
Rs. 5,400 x 300 days = 1,620,000.
If related expenses of the clinic are 50% of this receipt then the average income of this doctor from private practice should be around 800,000 in a year—again keeping a very low quantum. Together with salary from the government, X’s income for the year should be more than Rs. 1 million.
Rate of tax for salaried individuals earning income of Rs. 1 million is 9%. This implies that the doctor should be paying Rs. 90,000 as income tax. One wonders what would be the situation of the most sought-after specialists who charge whopping amounts of fees to examine patients. Gauging from this humble example, their receipts should be in millions.
The same holds true for other professionals as lawyers, architects, chartered accountants and IT experts. If the revenue authorities release information about the amount of taxes paid by some of our leading professionals, a wealth of interesting data would crop up. Unless and until, we pay our dues, honestly, how can we expect the government to do anything in return for us? In our enthusiasm 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 be able to overcome shortage of power in our house by installing generators or invertors 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 so that her orphans could be fed; 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 all equally responsible for this morbid state of affairs. If we all resolve to pay our taxes honestly, there is no reason we can overcome all our shortfalls in a matter of a few years. We can rid our precious country of her financial woes and make it a dreamland, the envy of all nations.