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Tax stalemate

Formulators of the national budget appear caught between a rock and a hard place as they scramble to produce a budget that not only curbs the widening gulf between government revenues and expenditures; but also face the unenviable task of improving documentation of the economy, and consequently, the tax net.

Fears that the government will resort to increasing the burden of taxes on those already paying taxes appear well-founded based on the government’s inability to break the tax impasse in recent times. The annual budget for FY10 failed to add any significant number of tax payers to the ledgers of the Federal Board of Revenue as policymakers cut corners in favour of taxing the already taxed.

The ‘FY12 Tax Proposal’ report published by the Overseas Investors Chamber of Commerce and Industry (OICCI) voices the same apprehensions of stakeholders, explicitly calling on the government to expand its resource pool instead of continuing the legacy of burdening the existing tax payers.

Starting from the emphasis on bringing agriculture sector into the tax net, which accounts for 22 percent of the GDP and just contributes 1 percent of the total tax revenue, the report stresses on increasing documentation to bring more business into the tax rate. The report also urges the government to improve coordination and linkages between various government departments.

With regard to industry-specific proposals presented in the report, the OICCI suggests bringing auto dealer network under wholesale/ retail mode. Presently, auto dealers are just acting as agents between auto assemblers and customers.

Under the proposed mechanism, dealers will maintain inventories of automotives, which would reduce delivery times and do away with the ‘own’ money system.

To make alternations in the existing supply chain system, the OICCI has made a pitch for reduction in turnover and withholding taxes since the commission earned by a dealer on a car sale is very nominal compared to the amount of taxes.

The report also mentions that distributors of fast moving consumer goods also face high withholding taxes which limit documentation as currently they earn a nominal margin on the company list price and incur high operating expenditures.

Industry experts believe that the wholesale retail mechanism will encourage documentation, as sub dealers will also become a part of the supply chain and help the government increase tax revenue by taxing distributors’ net profits.

Tax consultants opine that, in addition to the rationalisation of withholding tax, growth in tax revenue depends on how successful is the government in bringing more and more trading business on to the paper and tax their net profits – a move much-needed for effective implementation of RGST.

Ultimately it boils down to the same thing – that without taking tough and stringent measures to improve documentation, it would not be possible for the government to equalise and rationalise the tax burden amongst all profit-making segments of the economy.


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