It seems that the government through its economic, fiscal and monetary policies is trying to divert the national economy towards black and undocumented economy. The last two budgetary measures have strengthened this perception.
The current budgetary proposals are also being criticised on the same grounds. It seems that it has been prepared in haste and is directionless. The proposals do not represent any clear policy vision.
It seems that the government’s basic objective is just to collect more taxes at whatever source, even it is collected by taxing the already taxed segment.
The current budget proposals mainly rely on taxing heavily on non-filers through increased withholding taxes and thus making a very clear distinction between filers and non-filers. This distinction has in fact legalised the status of non-filers.
Heavy taxation measures imposed upon non-filers have forced this class away from banking system and a parallel black economy is emerging at a faster rate. A substantial amount of capital has moved out of the banking system and have become part of undocumented black economy.
Transfer of funds within the country is being channelled through ‘Hawala’ system. Most of the capital has been diverted towards real estate sector where it is easier to whiten black money due to its lower official valuation compared with its market valuation.
That is why the real estate prices have doubled during this period. These are now out of reach of a common man. The real estate investment is considered as a safe tax haven for non-filers.
The federal and provincial governments, both are aware of the serious consequences of this development, but no steps have been taken to check this activity. If it is allowed unchecked, it may have devastating effects on our economy and may impact the entire banking sector.
As substantial capital has been diverted towards real estate sector, there is serious concern that a lack of investment in other productive sectors would result in serious unemployment issues, as thousands of youth coming out of universities every year are likely to remain jobless.
Not only does this sector fail to generate enough tax revenue for the government, it has also failed to create new job opportunities compared to other productive sectors. The issue of taxing real estate sector always got muddled on the question of jurisdictions of Federal or Provincial governments that we have never been able to resolve. This unresolved issue has benefited the tax evaders.
The present culture of greater reliance on withholding taxes is resulting in higher prices. The withheld taxes are being treated by taxpayers as an additional cost and therefore, this ‘additional’ cost is being recovered from the customers through higher prices.
This leads us to conclude that the taxpayer still gets his tax-free income no matter whatever amount has been deducted as withholding taxes. The government should seriously look into the justification of greater reliance on withholding tax regime; it must consider its gradual withdrawal to ensure that even non-filers do not get away just by paying withheld taxes only.
It is yet to be seen if all withheld taxes from various sources are deposited into the government treasury and nothing is misappropriated as the efficiency of tax collection system and its reconciliation process seems fairly questionable.
We are fully aware that there are filers who do not pay taxes either because their income is below the tax threshold or they may have current or previous years’ losses. Therefore, the greater emphasis of increasing the number of filers has been over-emphasised.
Even if the tax filers’ number doubles, there is no guarantee that collection of taxes would be enhanced if their taxable income as a whole does not increase. Therefore, we need a double digit growth of national economy to ensure enhanced revenue through equitable taxation without any distinction between filers and non-filers.
There is strong evidence that the Federal Board of Revenue in its current structural form may not be capable to handle so many tax filers judiciously.
We are not sure if the Finance Minister is aware of the fact that most of the notices that were sent to the so-called tax evaders were in fact sent to the assesses who were already paying their taxes honestly.
We need to develop and improve tax collection system that is based upon mutual trust between the taxpayer and the tax collecting agencies.
Taxes cannot be collected through harsh measures and threats. This attitude has driven away the taxpayers from paying taxes voluntarily.
I would like to draw the Finance Minister’s attention to the threatening and abusive language of Notices and Correspondences being issued by FBR officials to those assesses that are already paying substantial taxes.
The present budgetary system has been based upon the presumption that it is easier to collect more taxes by taxing more who are already heavily taxed.
This is considered an easy way to meet the taxation targets without realising that we are killing the same goose that lays golden eggs as the taxpaying capacity is being continuously exhausted.
The current Budget proposals are in fact a confirmation of this presumption. We need to change this mindset and tax judiciously and in an equitable manner.
The current budgetary proposals have increased the holding period of securities from four years to five years to avail total exemption from capital gain tax. This is being done for the last three years continuously. This upward revision has tarnished government’s image and the trust level on government policies seems to have disappeared.
Similarly, to fulfil a promised reduction of Corporate Tax rate by 1 percent, the government had to maintain Super Tax that was imposed last year for only one year. This has resulted in eroding the impact of reduced corporate tax. Needless to say that it has also eroded the trust and integrity of the government.
The imposition of Super Tax is harsh and has burdened the businesses. The government should immediately withdraw this tax to restore confidence among taxpayers as it was initially imposed for only one year.
The current budget proposals include taxation measures that are likely to adversely impact revenues of Insurance companies. Income from all sources of these companies would be clubbed together and would be taxed at normal corporate tax rate with Super Tax if applicable.
Basically, it means that income from dividends and capital gains would be taxed at corporate tax rate. It seems unfair as dividend income and capital gains tax have been taxed at reduced rates for all other taxpayers. There seems to be no justification to introduce different rates for different taxpayers. This is another example of taxing the taxed segment irrationally.
Similarly, the tax rate on stock exchange brokers has been doubled on shares trading by increasing it from 0.01 percent to 0.02 percent without any justification.
It has suddenly doubled the cost of providing brokerage services to investors without realising that the new brokerage regime has already increased the cost of doing business for this sector due to which several brokerage houses are in the process of closing down their businesses.
The government should adopt a consistent long-term policy for investors and business community so that they should be able to plan their investment and business strategies accordingly.
The budget should provide a clear direction to the nation regarding the national economy, its growth and how the government intends to resolve the important national economic issues.
(The writer is a fellow member of Chartered Institute of Management Accountant UK, LLB Hons and LLM (Corporate Governance) from University of Northumbria UK)