Fair and equitable taxation By MUHAMMAD ASHRAF

ARTICLE (May 02 2010): Although, the Federal Board of Revenue (FBR) has launched a campaign to arrest tax defaulters, it has not made any arrest owing to a variety of factors, including fear of litigation. In old days, taxes were not collected in accordance with the ability and capacity of taxpayers as powerful people were exempted from tax whereas the people from middle income group were burdened with tax.

The latter category of people used to face quite harsh punitive measures, including confiscation of their assets and imprisonment. Computerisation does not mean introduction of a modern tax system. Arbitrary arrests of citizens without giving them fair opportunity to explain their position show as if we are still living in old days.

When Pakistan came into existence, some patriotic businessmen gave blank cheques to Quaid-e-Azam Muhammad Ali Jinnah as a support to the emply treasury of the newborn state. The question is why citizens are not paying taxes now? It has to be examined whether the tax administration is collecting tax without considering the capacity of the taxpayers who have no confidence in the tax administration.

They think that once they are "trapped" by the tax authorities, they would have to bear the tax burden of powerful non-taxpayers, face harassment and notices. Therefore, it is necessary to minimise contacts between taxpayers and tax collectors. Let the computers issue self-generated tax notices to defaulters, reducing significantly the role of the tax collector and allowing a taxpayer to pay tax according to his capacity and income.

Some taxpayers do tax planning with a view to deceiving the tax collector and avoiding payment of tax. There are two types:

-- Such taxpayers claim legitimate benefits, including all deductions, exemptions, allowances and rebates so that tax liability is reduced to minimum. But when the tax planning is in the form of colourable devices to deceit the legal sprit behind the law to avoid payment of tax by resorting to dubious methods it becomes, clearly and unambiguously, a case of tax avoidance. Tax avoidance is defeating the genuine spirit of law by misrepresentation of facts, it is also suppressing the legal intention.

Income tax ordinance 2002 covers anti-avoidance tax as under

Section 108: Transaction between associates.

Section 109: Recharacterisation of income and deductions entered into as part of tax avoidance schemes without economic affect and substance for the main purpose for avoidance and reduction of tax reliability.

Section 110: Salary paid by private companies.

Section 111: Unexplained instance or assets in person book of account, investment expenditure. Excludes foreign exchange remitted from outside Pakistan through normal banking channels that is cashed into rupees by schedule banks.

Section 112: Liability in respect of certain security transactions (bonds, certificates, debentures, stocks and shares) More and more tax avoidance means more and more tax legislation. Over 50 percent of legislations in the UK are about tax.

There are various reasons behind tax avoidance. If the tax is collected according to one's ability to pay, the taxpayer will work hard to earn more, resulting in an increase in tax collection. However, imposition of heavy taxes contrary to one's ability to pay tax would pave the way for tax avoidance.

Powerful and rich believe that they are beyond the grip of the tax net. Due to their influence, their ugly and anti-state activity is largely ignored. There are some entities or persons who are in the habit of tax avoidance.

In spite of the fact that Income Tax Ordinance 2001 is well defined, even then there is tax avoidance in real estate transactions. Recently, the government has unearthed the flight of foreign exchange through hundi when dollar appreciated to Rs 84 from Rs 60.

Anti-Avoidance Act: If tax is not paid now, then someone in his next generation will have to pay with a mark-up. The Income Tax Ordinance should be rationalised and shifted from the presumptive tax regime to real tax regime. Information through newspaper shows that the FBR is dissatisfied with the progress and performance of certain tax managers, but it rarely provides training opportunities to its officials abroad so that they can improve their performance.

There is already a survey department in the FBR and people there have knowledge about those who avoid tax. If they do not know, the FBR must hire the services of a private survey company for this task. More and more data collection, more and more surveys, and more and more efficiency is the key to a quantum leap in revenue.

This news has been read with pleasure that one Khawaja Sohail Mansoor from Sindh has been declared as highest taxpayer, who has been conferred Sitara-e-Imtiaz by the President of Pakistan on Pakistan Day at the Aiwan-e-Sadr on 23-03-2010. This revenue reward is a good step towards efforts aimed at increasing revenue collection.

The FBR should broaden the tax net and hunt down those avoiding tax net. We must revolutionise the revenue administration through automation and introduction of plastic currency.

Relaxation for mandatory return filing under Section 114(a)(b) for subscriber of telephone, car owner, member of club and person undertaking foreign travel should be rescinded and every person except dead, bankrupt, liquidated, and person of unsound mind or person permanently leaving Pakistan should be required to furnish return each year irrespective of income.

Computerisation and introduction of plastic currency can be an effective and meaningful strategy against tax avoidance. Heavy and inequitable taxation, besides tax avoidance may result in unemployment, inflation, less investment, poverty and a brain drain.

(The writer is former Deputy Collector of Customs)

Source: http://www.brecorder.com/index.php?id=1051846&currPageNo=1&query=&search=&term=&supDate=