In Pakistan, the share of income tax in overall tax collection has been declining, highlighting the imbalance of direct and indirect taxes. This has pushed millions of Pakistanis below the poverty line, created budgetary gaps, and resulted in a dismal GDP-to-tax ratio. The purpose of taxes is to ensure redistribution of wealth, but when 75% of tax collections come from indirect taxes, it defeats the purpose of redistribution.
The Federal Board of Revenue (FBR) relies heavily on indirect taxes without considering their impact on the masses who are already suffering from poverty and inflation. This is a serious concern if the government is actually willing to take any steps towards poverty alleviation. The actual share of direct tax collection is only up to 25% unlike the FBR claim of 37.5% or more for TY 2021-22. Food inflation is also on the rise, which affects basic commodities, and it is a detrimental factor for a developing nation with 60 million people living under the poverty line.
In fiscal year (FY) 2021-22, FBR collected Rs. 2532 billion under the head of sales tax, Rs. 320 billion under federal excise duty, and Rs. 1,009 billion under customs duties. The total indirect collection of Rs. 3851 billion was pathetically low. It should have been at least Rs. 6,000 billion.
The existing gap between tax potential and tax collection can be bridged by efficient implementation of tax reforms and reducing corruption. If done correctly, tax collection targets can reach up to Rs. 13 trillion, which will suffice for budget deficits and balance of payments. Third party information can also be vital for increasing the tax base.
Direct Taxes vs. Indirect Taxes
Direct taxes are levied directly on individuals and businesses, while indirect taxes are imposed on goods and services. Direct taxes include income tax, wealth tax, and property tax, while indirect taxes include sales tax, value-added tax, excise duty, and customs duty.
In Pakistan, the share of direct taxes in total tax collection has been decreasing over the years, while the share of indirect taxes has been increasing. This means that the burden of taxes is shifting from the rich to the poor, as indirect taxes are regressive in nature. This is because everyone, regardless of their income, has to pay the same amount of tax on a particular item.
Impact on Poverty
The increasing reliance on indirect taxes has had a negative impact on poverty in Pakistan. The poor spend a higher percentage of their income on basic commodities, which are subject to sales tax and other indirect taxes. This means that they have to bear a disproportionate burden of the tax system.
Moreover, the indirect tax system is prone to corruption, which further exacerbates poverty. The poor are often unable to pay bribes to avoid taxes, while the rich can easily evade taxes through loopholes and corruption.
Impact on GDP-to-Tax Ratio
The declining share of direct taxes in total tax collection has also had a negative impact on the GDP-to-tax ratio. This ratio is a measure of the efficiency of the tax system in generating revenue for the government. The lower the ratio, the less efficient the tax system.
In Pakistan, the GDP-to-tax ratio is one of the lowest in the world, which means that the tax system is inefficient in generating revenue for the government. This has resulted in budgetary gaps and a heavy reliance on foreign aid and loans.
Efficient Tax Reforms
In order to bridge the gap between tax potential and tax collection, efficient tax reforms need to be implemented in Pakistan. These reforms should focus on increasing the share of direct taxes in total tax collection and reducing the burden of indirect taxes on the poor.
In conclusion, there is an urgent need to shift the focus towards direct taxation in Pakistan to ensure the redistribution of wealth and provide relief to millions of people who are struggling with poverty and inflation. The government should take steps to implement efficient tax reforms and reduce corruption to bridge the gap between tax potential and tax collection. By doing so, Pakistan can achieve a more balanced taxation system and better economic outcomes for all.