Monday, 7 November 2016

Karachi contributing 70% of federal tax revenue - a myth. By M ASHRAF JANJUA

The need to write on this topic has arisen as a response to some politicians' repeated statements that Karachi contributes 70% of federal tax revenue. This statement or words to this effect have been repeated so frequently that for some people this has become something sacred and disagreement with this view is regarded as wrong, misleading and belittling Karachi's importance. Some people have gone to the extent of saying that Karachi is the earner which is supporting the rest of Pakistan. Such statements are made and repeated with a degree of confidence as if this is a bargaining counter.

In what follows we attempt to give a factual position based on the data given in the Annual Reports of Federal Bureau of Revenue (FBR), Government of Pakistan for the past ten years. These reports contain zone-wise collection of both direct and indirect taxes as well as other relevant data. It needs to be mentioned at the outset that those people who quote the exaggerated figures have never mentioned the source of their information. Not only that, neither any politician nor any economist (the frequent users of this data) nor the FBR - The original source of these data - ever felt the need to question this sacred percentage of 70. As a result, the oft repeated 70% figure has attained the status of sanctity. This attitude of people and the institutions mentioned above show that some people may get away with using/quoting any data that suits their purpose.

The fact is that minor difference in data used and quoted by different persons or institutions are possible, and at times inevitable, but in the case being talked about the difference between actual data and those quoted by politicians is large enough to create all sorts of misunderstandings.

Before presenting and analysing data on taxes we should know two terms, namely impact and incidence. Those persons or institutions that pay a tax but pass on the final burden to others are bearing the impact of a tax, but those who bear the final burden are bearing the "incidence". Thus if an imported vehicle or a piece of machinery is unloaded at
Karachi (and taxes are paid in Karachi) but it is being used in Punjab or KPK, the burden of taxes paid on such items is on users in Punjab or KPK as the case may be. Those talking of Karachi contributing 70% of Federal tax revenue refer to collection (which actually is about 54%) conveying the impression that collection is identical with incidence. This is the source of misunderstanding.

Given below are data for the year 2012-13, as well as a five-year average (2009-10 - 2012-13) on the collection of Federal taxes. Although province-wise details are available data given below pertain to
Pakistan and Karachi as the objective of the article is somewhat limited.

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Amount of Tax Collection in
Pakistan

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Tax Rs Billion

Category 2012-2013 2008-09-2012-13 (Average

Total
Karachi Total Karachi

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Direct Taxes 743.409 348.253 610.762 275.30

Sales Tax 872.214 5.3.127 884.690 392.90

Customs 239.459 184.94 189.98 149.753

Federal Excise Duty 113.964 38.785 112.00 42.00

Excise Duty (Imports) 7.153 6.369 12.85 11.69

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Total 1976.199 1081.474 1610.282 871.952

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(100%) (54.72% (100%) (54.15%)

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Thus the 70% myth stands exposed even on collection basis. But a more important aspect is who bears the final burden of a tax. The need to examine this aspect has arisen because a sizable part of customs duties and some sales tax are collected at the sea ports but final burden is borne by the consumers throughout the country.

A careful examination of the above data has shown that during 2012 - 2013:

(i) Sales tax in the amount of Rs 346.268 billion was collected at the Karachi/Bin Qasim sea ports.

(ii) Customs duties in the amount Rs 184.94 billion were collected from
Karachi and Bin Qasim sea ports. These add up to Rs 531.008 billion. For the purpose of calculating the incidence (the final burden of the taxes) the amount of Rs 531.008 billion should be distributed among all the provinces. The basis of distribution could be:

(i) Share of a province 's income (and hence also consumption) in the country's total income

(ii) Share in the industrial Production in the country's total and;

(iii) Share in urban population

Although Karachi's population is only 10% of the country's population its urban character, level of income and concentration of industry give the city a considerable edge over other areas. Thus, keeping in view the above-mentioned factors our estimate, somewhat on liberal side, is that
Karachi's share should be 35%. Thus, 65% of the amount of Rs 531.008 billion is estimated to be paid by people in the rest of Pakistan.

With this adjustment the share of
Karachi and rest of Pakistan in the total taxes comes out as follows:

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Pakistan Karachi

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Before adjustment 1976.199 1081.474 (54.72%)

After adjustment 1976.199 736.32 (37.26%)

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The above calculations are the outcome of one adjustment to work out as to who bears the burden or incidence of the taxes.

Some other adjustments can also be made. For instance,
Karachi being an economic and financial hub of the country a large number of firms and institutions has their head offices in Karachi, where these entities deposit their income/corporate tax although their products are used throughout the country. Let us take the example of banks and other financial institutions. Almost all banks, insurance companies and mutual funds have their head offices in Karachi where they pay their income/corporate tax but they earn their income from the entire country. Punjab Province uses 48% of total bank credit. 48% of bank's profits, otherwise deposited in Karachi should be included in a tax burden on Punjab. Thus, if a number of similar adjustments are made Karachi is hardly bearing more than 30 to 35% of tax burden.

To conclude, this scribe is of the view that issues that are prone to creating or aggravating inter-provincial mistrust should be commented upon with extra care. Because talking about only one issue can open the can of worms and hence using up our energy, which should be used to building up and improving inter- provincial trust and co-operation.

If controversial issues like 70% episode are repeated without supporting evidence one could ask questions about inter provincial movement of capital and labour. Also, during the past one decade or so increasing amount of home remittances have provided crucial support to the economy of Pakistan, particularly for Balance of Payments, and building up foreign exchange reserves. Who is earning these home remittances? Contribution of Sindh is only 11%; 89% of these remittances are being contributed by other provinces:
Punjab, KPK and Azad Jammu and Kashmir.

These data should remain information for the entire country to be used and analysed for policy purposes. Efforts to add any political dimension to these pieces of information should be discouraged for the benefit of the country as a whole.

(The writer is former Deputy Governor of State Bank of
Pakistan. The views expressed in this article are not necessarily those of the newspaper.)


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