Reasons behind decrease in effective rate of sales tax identified
The effective rate of sales tax is within the range of 3 to 3.5 percent as compared to the standard rate of 17 percent sales tax due to massive tax evasion and illegal/inadmissible input tax adjustment claimed by the unscrupulous elements. Official sources told Business Recorder here on Saturday that the illegal input tax adjustment was one of the major reasons responsible for decrease in the effective rate of sales tax. In view of the standard rate of 17 percent sales tax, the effective rate of sales tax is very low. At one time in the past, the effective rate of sales tax went upto 7-8 percent. Later, the rate again came down.
They added that the efforts were needed to plug in loopholes in the sales tax system for improving effective rate of sales tax. Official stated that the effective rate of sales tax was around 3 to 3.5 percent as compared to the statutory rate of sales tax. In its final report, the Tax Reform Commission (TRC) has mentioned that the effective rate of sales tax during 2013-14 was 3.9 percent for sales tax (domestic) and 10.7 percent for sales tax (imports).
TRC said the four federal taxes, ie, Income and Corporate Taxes, Sales Tax (Domestic and on Imports), Federal Excise Duties, Customs Duties are levied on different tax bases. The statutory tax rates are applicable as per relevant tax laws of these taxes. However because of variety of reasons, including tax exemptions, concessions, tax fraud, and less-than-satisfactory tax administration (including corruption), the effective tax rates diverge from statutory rates. Hence, there is room for improvement. This note provides a comparative assessment of effective and statutory tax rates for fiscal year 2013-14. The effective tax rates are calculated as collection of tax relative to its base. It may be added that the relevant data has been obtained from official sources of FBR and GOP.
The most serious problem appears to be in the area of sales tax, especially its domestic component where the divergence between effective and statutory rates is much larger compared to other taxes. The sectors which are either tax exempt or lowly taxed are wholesale and retail trade, transportation, hotels and restaurants, and an array of other activities categorised as informal sector activities. Similarly, the effective rate of income and corporate taxes is on the lower side mainly due to tax evasion and avoidance and low compliance of the corporate sector. The weakness of tax administration is far too obvious as the number of business activities that have not been properly taxed is seriously high. This can be readily verified from analyzing the returns. The number of corporations showing nil income and business losses is increasing at a fast pace. The recent reliance on withholding tax structure rather than self-assessment is a clear reflection of poor tax administration, TRC added.