Indirect Tax Policy Considerations
Editor's note: The author read this paper at ACCA's 2007 pre-budget seminar.
When I use the word indirect taxation, I would mean to include sales tax (Federal and Provincial), excise tax and custom duty broadly speaking and in one sense can be effectively categorized as consumption taxes.
Consumption taxes have grown to be a major source of tax revenue for governments around the globe. Tax authorities worldwide are gradually migrating the overall tax burden from direct tax to the less visible indirect taxes and are the sole big reason of increasing inflation. In a recent survey, consumption taxes constituted approximately 30 percent of total taxation in OECD countries while in some countries these constituted more than 50 percent of the total tax revenue.
As the honorable chairman of proposed FBR has said that excise and customs are dying levies, hence, I will concentrate my efforts over sales tax act, 1990 which is about to be replaced with value added tax in near future and a committee is working in CBR over this law.
As now that consumption taxes are taking more prominent role, currently our government is also more focused on deriving maximum benefit from these taxes like consumption tax policies, legislation and auditing are all under increased scrutiny by government and tax officials.
Currently, we are moving ahead in the right direction recommended by the World Bank which covers four broad measures to progressively reform taxation in general.
- Consolidation of the number of taxes
- Cutting back on special exemptions and privileges
- Simplifying filing requirement
- Broadening the tax base by keeping rates moderate in the developing countries
However, I would recommend something more in the light of directions given by working party No. 9 of OECD – double taxation treaties of indirect taxes. We must prepare such treaties with an aim to avoid double taxation, promote harmonization of rules, mutual co-operation, simplification of administration and above all certainty for business.
CONSUMPTION TAX POLICIES
At the moment a consistent indirect policy keeping an eye over literacy rate and geographical segregation of urban and rural population is not reflective from any document. I think that CBR is not the only institution which is responsible for reduced tax to GDP ratio. Other institutions are also responsible for this reduced tax to GDP ration owing to the low literacy rate. There is a dire need to increase the literacy rate not only to increase the tax to GDP ratio but also the civic sense.
Efforts must not only be concentrated towards illiterates, I am not forgetting the literate portion of society – CBR must work with ministry of education to include the concept of tax, need for imposing tax, types of taxes in Pakistan, basic tax calculation of direct and indirect taxes etc in the appropriate portion of syllabus at various classes or stages at school and college level and do not limit it like a 30 marks portion in B. Com.
From the administrative front, I would recommend replacing the use of designation of collectors, assistant collectors, Inspectors, commissioner, taxation officers with assistant manager, manager, senior manager like tax facilitation manager, tax audit manager and taxpayer care manager. This will have a deep impact over the mind set of tax machinery.
The training at DOT must not concentrate only on law but the difference between wrong decisions, that is, an order of an economic manager and finance manager also need to be crystal clear in their mindset by experience sharing. Moreover, there must be a process of consultation within tax machinery for complex issues and not just throwing the ball for appeal forums.
The three dimensional strategy of Excise Tax and five dimensional strategy of Sales tax needs to be principally based instead rule based facilitation to bring certainty in Business Planning and removal of unnecessary doubts about the discrimination and transparency issues. Such conflicting rule based facilitation with dimensional tax legislation makes the excise and sales tax law the most difficult piece of legislation to comprehend.
You will appreciate the fact that strategies are hard to apply and hard to manage, however, principle based strategy is much easier to apply then a rule based strategy.
TAX ON TAX and RATES OF TAX
Tax on tax issue is not limited to section 148 of Income Tax Ordinance, 2001 but has its roots in Sales Tax and Excise tax also.
On the excise front, excise tax machinery now days taking a view that according to section 12(4), excise tax needs to be inclusive for the purpose of determination of value for the purpose of duty under section 12. Although various precedence in field at the moment, however, things need to be cleared with efficient advice mechanism for machinery by the CBR as it deteriorates the image.
Section 2 (46) – value of supply, clause (a) and (d) clearly enunciates the fact that sales tax needs to be levied on value inclusive of all taxes specially federal excise.
Such tax on tax needs to be removed and have a considerable effect over consumer price and sensitive price index issued by state bank of Pakistan. A levy needs to be independent in order to calculate its impact tax on tax is clearly an impediment for the tax administration owing to the variability in tax rates.
It is worthwhile here to note that rates of tax coupled with tax on tax varies the prices considerably when the items covered in sensitive price index are now manufactured and becomes the indispensable part of life of urban population. Removal of tax on tax and reduction in tax rates of indirect taxes, especially 15% rate of sales tax will greatly relieve the SPI which is continuously moving upward.
