Regressive taxes take a bigger percentage of income from those who earn less. For instance, a person earning Rs25,000 a month pays the same amount of tax when loading credit on their mobile as someone earning Rs2.5 million, highlighting the disproportionate burden on lower-income individuals.
One of the proposals being floated to increase the Federal Board of Revenue (FBR)‘s collection, in line with the International Monetary Fund’s conditions, is to raise the General Sales Tax (GST) from the current 18pc to 19pc.
Research by the Pakistan Institute of Development Economics (Pide) indicated that about half of the household income for roughly 30pc of the poorest households is spent on food. This was based on the Household Integrated Economic Survey of FY19, when the GST was at 17pc.
One proposal being floated to increase FBR revenue is to raise GST from 18pc to 19pc
While it is true that when a homemaker shops for vegetables, the vendor pushing the hand cart doesn’t charge GST while selling eggplants. However, from the field to the table, the process adds GST all along the way at various stages of inputs and processes.
Besides GST, customs duties and the federal excise duty are the other major indirect taxes imposed on the economy. In the run-up to the budget, rumours abound of tariff hikes on imports of used cars and increased FED proposals for tobacco. While the petroleum levy is classified under non-tax revenue in the budget, it is similar to regressive in nature. Proposals to reintroduce a carbon tax or significantly raise the petroleum levy to Rs100 per litre are spine-chillingly alarming.
An increase in indirect taxes burdens those already crushed under the weight of inflation. An increase in direct taxes has a similar effect of taxing those who are already taxed — already roughly 3pc of filers pay 90pc of income tax collected.
Various stakeholders, including institutions such as the Asian Development Bank and the International Monetary Fund, have repeatedly called for widening the tax net through real estate, agriculture and retailers. However, these sectors have stubbornly and successfully resisted all efforts to be taxed in proportion to their revenue.
Fighting a ‘mafia’
Last month, the Regional Tax Office in Rawalpindi awarded certificates to honour the first four traders who have officially registered themselves under the Tajir Dost Scheme. The scheme is the latest attempt to integrate traders and wholesalers into the formal tax net. Introduced at the start of 2024, the voluntary registration period concluded on April 30. In the first month of its voluntary registration, fewer than 100 traders signed up, indicating the absolute lack of interest in joining the formal net.
Retailers and wholesalers contribute 18pc to GDP but their tax contributions stand at a mere 4pc, probably because only 300,000 of about 3.5m retailers are actively filing tax returns. Taxing retailers may net an increase in revenue of Rs400 billion to Rs500bn, according to some estimates.
Since 2019, three distinct schemes have been proposed to bring the retail sector into the net. However, insufficient political will and strong opposition from the trading community have brought the efforts to nought.
Comparing the retailers to the ‘mafia’, former chief of the FBR Shabbar Zaidi lamented the ‘failed’ system of the state that has been unable to tax the retailers. “They bring down the shutters and block the entrance to the markets,” he says, explaining why the government has repeatedly failed to impose taxes.
The agri anomaly
Similar to the retail sector, the agricultural sector’s tax revenue is insignificant compared to its contribution to GDP. Agriculture accounts for roughly a quarter of Pakistan’s GDP, but agricultural income tax (AIT) is only about Rs2.5 billion, far below its potential of around Rs800 billion, suggests a study by Pide.
Farmers must file two income tax returns: one to the FBR and the other to the provincial authorities. Tax return filing to the FBR is mere paperwork to ensure that the farmer remains on the filers list — the provincial authorities collect the actual tax, explains Khalid Wattoo, a farmer and development professional.
However, there is an anomaly. AIT is taxed at a much lower rate than other industries. For example, up until Rs4.8m, agriculture income is taxed at 10pc, whereas income from other sources is taxed at over 30pc, says Mr Wattoo.
A farmer, who is also an industrialist — a definition that may apply to many feudal landlords who are incidentally in politics as well — can declare his income as agricultural and pay a lower tax rate, effectively turning his income “white.”
