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Ramzan Qadir

Published Date: Mar 5, 2015

Indirect Taxes Creating Economic Inequality

Country’s poorest 10pc contribute 16pc of their income to indirect taxes while richest 10 pc contribute only about 10 pc

intentions of Pakistan Muslim league-Nawaz (PML-N) government to
generate an estimated Rs 255 billion for fiscal year 2014-15 through new
taxes is likely to hit the low and middle income classes because of
indirect taxes on necessities of life, said the economists at National
Tax Summit in the federal capital on Thursday.

indirect tax system is aggressive and bias against the poor, putting
greater burden on the low-income households than the upper ones,
according to various reports by rights and development organisations
working in Pakistan.

A report by a social development
organisation stated that the poorest 10 per cent of households
contribute 16 per cent of their income to three indirect taxes – General
Sales Tax (GST), Central Excise Duty (CED) and Customs Duty.

the burden of tax progressively declines as income rises and the
richest 10 per cent of households contribute only about 10 per cent of
their incomes to the indirect taxes.

Pakistan’s tax regime
consists of four main revenue sources: GST, CED, Customs Duty and Income
Tax. Its structure is dominated heavily by indirect taxes, which
combines over two-third (68 per cent) of combined federal and provincial
tax receipts.

Another report stated that if surcharges are
included, the indirect taxes rise to over three-fourth (76 per cent).
Thus all of these indirect taxes badly affect the poor of the country.

hurdles include unwillingness of the affluent to pay their dues, the
token contribution to tax revenue by the country’s parliamentarians,
barring a handful, widespread exemptions and privileges granted to the
rich and powerful, many of which have been coded into law, a rising tax
burden on honest taxpayers and formal businesses and the growing
inability of government to finance the delivery of efficient and
effective public services to a burgeoning population.

Christian College University’s Dr Akmal Hussain said that the current
status of taxation in Pakistan is highly regressive which is bound to
create a wide gap between the have and have-nots. A successful tax
system reduces inequalities through a policy of redistribution of income
and wealth.\

“We must reduce the burden through decreasing
indirect taxes while higher rates of income taxes, capital transfer
taxes and wealth taxes on elite are some means adopted for achieving
equity in society.”

Former FBR chairman Abdullah said that
Pakistan has one of the lowest tax collection rates in the world and the
international organisations are watching its efforts closely. They want
Pakistan to do more to tackle rampant tax evasion, particularly by its
wealthy elite. He said that for sustainable development we must rely on
direct taxation instead of indirect taxation which creates woes to
marginalised classes of the country.

Sustainable Policy Institute
Deputy Executive Director Dr Vaqar Ahmed said that as part of the 7th
National Finance Commission (NFC) Award, all the four provinces were
supposed to improve tax collection, but they fell behind their
commitment to collect tax on farm income and real estate to improve the
country’s falling tax-to-GDP ratio.

It was agreed in the award
that all the provinces will supplement centre’s efforts to increase the
tax-to-GDP ratio to 13.60 per cent by 2012-13, but it actually ended up
at 9.6 per cent for the same year, showing a dismal performance of the
revenue realisation. Thus to rationalise the indirect taxation the
provinces should have to move for direct tax collection on agriculture,
on landlords, and on property owners.

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