Presumptive Tax as an Alternate Income Tax Base: A Case Study of Pakistan

There is a general consensus that an efficient means of mobilising revenues is necessaIy for improved public infrastructure and for preventing disruptions in the economy [Wilfried (1991)]. Inappropriate and unsustainable expenditure and revenue policies, on the contrary, cause disappointing economic performance. Hence, the concern with mobilising adequate resources through improved taxation and better pricing of public services. A review of the existing taxation systems of several developing countries suggests that these are distortionary in nature and contribute to a number of economic problems including production inefficiency, capital flight and fiscal and balance of payments disequilibria [Asher (1990)]. They are generally complex (difficult to administer and comply with), inelastic (nonresponsive to growth and discretionary policy measures), inefficient (raise little revenues but introduce serious economic distortions), inequitable (treat businesses and individuals in similar circumstances differently) and, quite simply, unfair (tax administration and enforcement are selective and skewed in favour of those capable of defeating th~ system) [McLure and Zodarow (1991)]. Further, there is heavy reliance on taxes on international trade (approx. 80 percent for India and Thailand, 84 percent for Sri Lanka, 70 percent for the Philippines, 50 percent for Turkey). User charges and taxes on income, property and capital contribute only a small proportion of the overall revenues (pakistan 20 percent, Thailand 19 percent, India 17 percent, the Philippines 19 percent). Agricultural incomes are not taxed. personal and corporate income taxes are levied on narrow bases at high rates. These tax structures impose varying levels of taxation, depending on the form of income, type of assets, size and legal status of businesses, and the kind of Qusiness activity (i.e. are ‘schedular’ in nature). As a result, the average effective tax rate and the marginal effective tax rate substantially vary across assets and section-thereby distorting individual choices with respect to the form of income, the sector of investment activity, and the time profile of investment [Bulutoglu and Thirsk (1991)].