Tax base broadening: more of the same old

On multiple occasions during the budget speech, Finance Minister Ishaq Dar reminded that the tax to GDP ratio was much higher during his previous stint in office than it is at present. The references were apt considering what followed.
When he reached the income tax section of his speech, Dar began by stating that "this year, a paradigm change has been made in proposing tax measures, as the overwhelming revenue proposals relate to direct taxes." But the measures that were subsequently announced are simply a rehash of the strategy implemented in the 1990s: reliance on presumptive taxation with heavy dependence on withholding agents.
Adjustable withholding tax is the key to broadening the tax base, according to the budget which has proposed that the same be charged on marriage halls, hotels, clubs, restaurants, etc. The argument put forth is that "people shall be encouraged to file income tax returns, which shall serve the purpose of broadening of tax base."
Adjustable WHT has also been imposed on traders, albeit at a reduced rate. It will be collected by manufacturers, importers and wholesalers. The government intends to chase after tax dodgers by charging higher sales tax on utility bills of unregistered businesses. Explaining his plan, Dar said that "unregistered persons should be made to pay more than registered persons."
But this intent may not be completely served by the proposed approach. The burden of higher withholding taxes can and will be passed on to consumers in the form of higher prices. Tax dodgers also have the option of paying marginally higher electricity bills while remaining unregistered with tax authorities.
The reliance on withholding agents is also inflationary in nature as the role of withholding agent will add to the cost of doing business for firms, which will in turn drive up prices. Coupled with the increase in sales tax which has now been raised to 17 percent, general price levels are all set to rise in coming months.
Meanwhile, the government may hit snags in implementing other measures for broadening the tax base. "The law for obtaining information from bank regarding its customers is being aligned with international practices," declares the document. But this is easier said than done as the banks will most likely contest any attempts against customer confidentiality.
By the time the dust settles, it will be amply clear that the only real tools for reaching the rather ambitious tax collection target for FY14 will be the higher turnover tax rate and higher sales tax; hardly a break from the past.