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Decline in direct tax collections
September, 22nd 2016

Chairman of the Federal Board of Revenue (FBR) conceded to the Senate Standing Committee on Finance that there was a decline of 2 percent in direct tax collections as a percentage of total taxes collected in 2015-16 in comparison to the previous year - from 40 percent to 38 percent. In this context, two observations are in order. Firstly, one must extend appreciation to the committee members in general and to the chairman of the committee Saleem Mandviwalla in particular for calculating the percentages from the budget documents. Fortunately, the committee members took note of the federal government's misplacement of collections under the Gas Infrastructure Development Cess (GIDC) and natural Gas Development Surcharge (GDS) amounting to a total of 175 billion rupees under other taxes - items which, as per the Supreme Court ruling, is a dedicated fund and therefore must be placed under non-tax revenue as was the case during the tenure of the PPP-led coalition government. Thus if these two items are subtracted from the 2014-15 total tax collections then direct taxes account for 40.5 percent of all collections. Secondly, in 2015-16 budget data, if the GIDC and GDS are subtracted, direct taxes account for 40.8 percent of total collections. In other words, the committee members did their homework and extracted the correct information to put the FBR on the mat for a 2 percent decline in direct tax collections as a percentage of total taxes.

This of course is a source of serious concern for the obvious and much touted reason: direct taxes are based on the ability to pay principal and are not passed on while indirect taxes are passed on to the end consumers and their impact on the relatively poorer households is naturally higher in percentage terms than on the richer households. Be that as it may, the government has begun relying on withholding taxes as a major component of direct tax collections and in the current year's budget has earmarked nearly 70 to 75 percent of all direct tax collections from withholding taxes.

While withholding taxes are globally defined as direct taxes as they are imposed on sources of income, for example, dividend income and/or rent income, etc, yet in recent years withholding taxes in Pakistan have been imposed on consumer items/services which implies that they are in the sales tax mode and hence they are not direct but indirect taxes. This should not be taken to imply criticism of the imposition of withholding taxes as they are currently imposed on consumer items/services which are procured by the relatively wealthy as well as those who are non-filers to boot, which can be supported as a means to bring them into the tax net; but to simply highlight the fact that these taxes are being mis-defined as direct taxes instead of as sales tax. This mis-definition is taking the FBR's focus away from expanding the number of income taxpayers in this country who remain unfortunately very limited and largely consist of the salaried class.

The FBR chairman stated during the committee meeting that "we have taken a total of 127 million rupees budgetary measures in the current fiscal year and out of these 105 billion rupees are related to direct taxes." One must urge the FBR chairman to be more forthright in defining new taxation measures appropriately - notably direct or indirect taxes - because that alone would allow the Board to acknowledge where the tax system's weaknesses lie and where the thrust of any new taxes must be in future.

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