Back to tax basics

No matter how simple taxation laws are enacted in the beginning but they tend to turn into a cobweb of complexities over a period of time leading to legal, procedural complications and distortions. There is no denying the fact that amendments and adjustments have to be made to accommodate emerging business realities and interpretations made and precedents set by the constitutional courts.

But many legal distortions were arisen when tax amnesty schemes were introduced and space was created to accommodate various tax exemption/rate reduction schemes and tax credit initiatives on investments in sectors of real estate, new industrial undertakings, educational and welfare activities and Non-Profit Organizations.

Moreover, separate frameworks have also been created for specialized industries such as banking, petroleum, and green industrial undertakings.

The high-end industries relating to digital transactions, e-commerce and startups also required a separate taxation framework catering to the needs and nature of their specific business activities. Ideally, a taxation architecture should be built on the fundamental principles of equity, consistency, convenience and economy. However, the impact of all different shades of business enterprises pushed the doctrine of simplification and convenience to the back seat.

The prevalent tax structure is so complex that the same is beyond comprehension of an average taxpayer. Income Tax assessments have been classified as Normal tax regime (NTR), Final tax regime (FTR), Minimum tax framework (MTR).

The first tax assessment classification is fair enough as the same is a standard taxation framework, which is aligned with the fundamental principles of taxation as well as fits well with economics principles to the effect that all income from whatever source earned must be taxed at rates applicable to all taxpayers similarly situated in terms of income thresholds. The classification also fits well with equity both horizontal and vertical and certainty of tax liability and convenience for subsequent payments.

However, the next two classifications adversely reflect on the capacity and competence of the organization legally mandated to administer tax laws. It is tantamount to admission that the tax agency cannot collect due taxes in the normal course of business and as per standard rules of taxation.

The final tax assessment is not based on the net income concept but tax liability is based primarily on presumptive income worked out on the gross revenue or is based on tonnage capacity at a fixed rate.

The same way the minimum tax assessment implies that although the tax has been paid more than what was due but the government will retain the excess tax without bothering to amend the income and create the proportionate tax liability. This obvious tax distortion reflects that the citizens are being subjected to excessive and undue taxes to cover systemic inefficiencies of tax administration.

In addition, there is as much a complexity about computation of tax liability as is found about classifications mentioned earlier. Various computation bases have been prescribed in the tax statute such as separate block of income, imputable income, work back income, special tax regimes and special industries schedules to name a few.

Imputable income, which relates to cases falling under final tax, is the income which would have resulted in the same tax, had this amount not been subject to final tax. However, for getting credit of the agricultural tax paid in relation to the agricultural income declared with the respective provincial authorities, a separate formula has been prescribed under the name of work back.

Moreover, supertax is charged on a separate computation base of income at the prescribed rate. In all such computations not only, the tax is levied at a separate rate but also the basis of computation of income chargeable to tax has been changed.

The one who is liable to both income tax and supertax will work out two separate incomes for calculating his tax liabilities for income tax and super tax for the same year. That equally applies to commutation of advance tax, turnover tax. These multiple bases of computation of income and tax liabilities for the same year go to erode the principle of simplification of tax processes and procedures. The existing distortions if not addressed soon may lead to further layering of distortions overtime and may destroy the intention and purpose for which the new law was enacted.

The similar complexity is found in provisions relating to the unexplained income. Though it is proved that income earned, investment made and money owned is unexplained chargeable to tax at the normal rate yet it is treated tax exempt if foreign exchange is remitted from abroad equal to the otherwise unexplained amount. Tax stands abated and penalty and prosecution also go away.

Thus, tax distortion has been created in tax policy to earn foreign exchange and waive tax instead of earning the same the right way through enhancing exports and raising foreign investments.

Exorbitant tax rates on the same bases constitute another area of concern which defies the taxation principles and works against the spirit of tax norms. The most pinching part relates to raising the tax rates on gross value of revenue/amounts.

The increasing trend of raising tax rates on passive income earned by the pensioners and others on account of bank interests and dividend are hitting hard those whose livelihood entirely depends on such passive sources of income. The complex part is that stark variations are also found within one tax rate bracket insomuch as the profit on debt and dividends have varied tax rates applicable to such sources of income.

So much so that profit received by the pensioners or senior citizens through welfare accounts aka Behbood Accounts is also included in the total income for rate purposes as imbedded in the system-based calculator.

At the time when the government is all set to reform the tax laws, and simplify the processes and wishes to broaden the tax basis, it is all the more essential that the existing laws and procedures and the processes should be thoroughly reviewed to remove internal systemic distortions and complexities.

The basis for computations of income for income tax and supertax should be the same and classification of total income should be limited to as few a category as feasible. In addition, tendency to raise tax rates every year and to create variation in tax rate for income falling under one head be arrested.

Running away from the basics of equity, consistency, certainty and simplicity is surely going to land us closer to a stunted revenue system with restricted capacity to generate the desired amount of revenue and will fail to win trust of the potential and existing taxpayers.

Therefore “Back to Basics” should be the flagship slogan for the reformed tax system and the steps taken to that direction would not only enhance tax efficiency and capacity of the concerned machinery to collect revenue closer to the actual potential of the economy but will also win trust of the stakeholders.

Copyright Business Recorder, 2025