By P.K.Balachandran/Daily Express
In advanced countries, taxation is rational, compliance is high, and the tax collection machinery is well-oiled and efficient. But in South Asian countries, taxation is politicized and the tax collection process is stymied by various inhibitory factors including poor facilities, inadequate manpower, inefficiency and, of course, corruption.
The net result is that tax collection is low, leaving governments with no option to borrow money to meet its recurring and developmental expenditure.
And when attempts are made to collect taxes forcefully, tax payers, especially traders and businessmen, both big and small, resist them with all their might. This is precisely what is happening in Pakistan this week.
Pakistan is facing a country-wide traders’ strike even as there is a “Freedom March” staged by the opposition parties led by the Jamiat Ulema-e-Islam leader, Maulana Fazl-ur-Rahman, converging on capital Islamabad in a massive effort to coerce Prime Minister Imran Khan to step down for alleged failure to run the country on proper lines.
The traders’ strike call was given after the failure of a round of negotiations between them and the authorities, with the latter being led by the Prime Minister’s Adviser on Finance, Dr Abdul Hafeez Shaikh, and Federal Board of Revenue chairman Shabbar Zaidi.
After the failed talks, Dr Shaikh criticized the traders for not paying their taxes, pointing out that out of the 3.5 million traders in Pakistan only 392,000 were in the tax net.
But Ashraf Bhatti, a top leader of the traders justified the strike saying: “We straightaway reject the IMF’s agenda in the country. Since the government is playing ‘meeting-meeting’ with us, we warn it to either accept our demands or face more shutter-down strikes in the near future.”
Anis Majeed, patron-in-chief of the Karachi Wholesale Grocers Association, said traders are being “forced to shut down due to the cumbersome method of tax collection through a documentation process which cannot be done overnight.”
In India too, tax collection is poor. According to the government’s Economic Survey for 2017-18, the number of income tax payers in the country of 1.2 billion people is only 59 million or 4.5% of the total population. It is a very small. It looks as if 95% of Indians are not paying income tax.
But a realistic calculation, taking all factors into consideration, the actual figure of tax payers is 90 million, according to Suraj Jaiswal’s article in cbgaindia.com.
In Sri Lanka too tax compliance is very poor. People, who are within the tax bracket, exploit the low penalty rates and the weak enforcement machinery. People see others of their kind evade taxes and emulate them. When the wealthy evader goes scot free, why can’t we? the middle class man asks.
Tehmina S.Khan, in an article written for World Economic Forum, says that given low tax ratios and debt levels of over 60% of GDP in India, Pakistan and Sri Lanka, long-term fiscal sustainability hinges on better revenue mobilization.
“Even more importantly, a larger tax revenue envelope would help fund critical spending on infrastructure and social needs. South Asia is home to just under 40% of the world’s population living under the US $1.25 per day (PPP) poverty line.”
“And, poor infrastructure is a constraint on growth. Infrastructure spending needs are estimated at US$ 1.7 to 2.5 trillion (at current prices, cumulative up till 2020). Part of the funding for this will have to come from governments through higher tax revenue mobilization,” she points out.
But all governments in South Asia collect less in taxes as a share of GDP than the median middle-income country, she observes. In India, according to Khan, only 3% of the population pays personal income tax, with the figure is even lower at about 1% in Bangladesh, Nepal, and Pakistan.
Reasons For Poor Collection
Tax collection has been held back for several inter-related reasons Khan says. Firstly the tax base is typically very narrow. In India over 50% of the working population is in agriculture accounting for 17 to 18% of the GDP. But agricultural income is not taxed.
Then, in every annual budget, there are concessions to the politically active and vocal middle class. The political need to give “tax reliefs” to various sections of society (the voters), has created vested interests in seeing that no concessions that are given once are withdrawn. So governments are unable to increase taxes.
And even if one wants to pay taxes in South Asia, it is not easy. The procedure is cumbersome, corrupt and time-consuming. According to Khan: For a typical firm in South Asia, it takes more than 300 hours to pay its taxes, compared to 200 hours in East Asia and 175 hours in advanced countries.”
Tax collection is problematic in South Asia also because the service sector is large. And a large part of the economy is non-formal or unorganized. An under-developed financial sector and governmental inefficiency are other inhibiting factors. Where financial transactions are in cash, tax evasion is easy. Countries like the Maldives, Bhutan and Nepal, which have strengthened their financial sectors, have improved tax compliance and collection, Khan points out.
She recommends, widening of the tax base. There should be no holy cows like the agricultural sector, which cannot be taxed. But how far governments in South Asia, which are democratic and have to face periodic elections, can do this, is open to serious question.
There is another suggestion of Khan’s which is difficult to implement, and that is caution in giving tax concessions to attract industries and entrepreneurs to backward areas or designated areas.
“Policy makers need to review extensive tax exemptions and widely employed tax holidays. More generally, tax policy should refrain from attempting to achieve multiple objectives such as the development of regions or industries, infrastructure creation or choice of technology as it complicates the tax system, increases compliance cost (and potentially the degree of informality), and distorts economic choices,” Khan says.
In another typical World Bank suggestion, she says: “ The institutional arrangements and organizations for tax administration should be granted more political independence, insulated from political influences, and provided adequate resources to enhance data collection and assessment capacity.”
But it is widely acknowledged that the above suggestion is virtually impossible to implemented because of the high degree of politicization of decision making in South Asia, where there are pulls and pressures from various political quarters and also ideological considerations.
Then there are practical difficulties in assessing the income of independent professionals like doctors, lawyers, architects.
Tax collection systems are highly complicated as in the case of the Goods and Services Tax (GST) in India. The GST has unified the tax regime in India but paying it is too complicated. In the Maldives, tax collection relies heavily on one sector – tourism. For sustainable tax collection, revenue sources must be diversified, Khan recommends. The Abdullah Yameen regime was on this job by encouraging international investments in other sectors. But it was defeated in the elections.
Two Basic Issues
Tax reform is faced with two basic problems: One is the level of efficiency of the system, and the other is the degree of politicization of the system. While the level of efficiency can be upgraded with better training, adequate manpower, improving technology and motivation, the political aspect will be harder to tackle.
South Asian countries are democracies of one form or the other, where electoral constituencies have to be nursed and even pampered for being in power or capturing power. Competing demands of the various sections of society have to be managed in a deft political manner which could involve sacrifice of rationality.
Being former colonies of the Western powers, South Asian countries have an intrinsic fear of being dominated by the prosperous West and its ideologies. They view prescriptions from Western institutions like the World Bank and IMF with suspicion and disapproval. These prescriptions are also considered to be unsuited to the objective conditions in their countries. These make de-politicization of tax regimes virtually impossible in South Asia.