ISLAMABAD: The Federal Board of Revenue (FBR) has structured sales tax in such a manner that the principle of equity is not compromised. The principle of equity in taxation is an important question widely discussed in public finance and is the first canon of taxation on which Adam Smith laid a good deal of stress.
A fair tax system is not merely an issue in pure economic analysis but also in social philosophy. There are two prominent theories put forward to devise a fair or equitable tax system. They are (1) Benefits Received Theory and (2) Ability to pay Theory.
Under the said structure of sales tax, an official source at the FBR told Customs Today that unprocessed food items, flour and rice and medicines, that constitute the major portion of consumption of poor household, are exempted from sales tax. Hence the burden is proportionately higher on upper strata of society than the poor household.
The FBR collects three major indirect domestic taxes namely sales tax, a tax on sales/ supplies; Federal Excise Duty, a duty on production and sales tax on services in the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 and Customs Duties imposed on the import of goods in the country.
However, the official source said that it had to be realized that due to resource constraints indirect taxes would continue to remain an important source of tax collection. Faced with a tax base far from the ideal, the Finance Ministry cannot resort to outright decrease/elimination of indirect taxes.
However, in order to reduce reliance on indirect taxes incidence of indirect taxes is being reduced on sectoral basis” the source said adding that during the budget 2016-17 rate of sales tax on urea fertilizer was reduced from 17% to 5% while pesticides were fully exempted from sales tax and rate of sales tax on tractors was also reduced to 5%.
Similarly, the source said that computers and laptop were also exempted from sales tax. Traditionally the customs duty constituted a major component of overall revenue collected by the FBR, but the share of customs duty, an indirect tax, had reduced from 19% to 13% from 2005-06 to 2015-16 indicating a shift towards direct taxation.
