Crumbling tax system

Taxes play a vital role for establishing an egalitarian society, the true fruit of social democracy. Under a representative and responsible government, citizens are taxed according to their ability (at progressive rates; the higher they earn the more they pay) so that essential services can be provided to all, especially to the less-privileged segments of society. In Pakistan, on the contrary, the poor are overburdened with taxes and what makes the situation further painful, is the fact that taxes collected are ruthlessly squandered by the rulers on their personal comforts and luxuries.

The common people get nothing in return out of what they pay to the state as taxes. Our governments have miserably failed to discharge their basic duty of protecting the life and property of citizens. The rulers have shown total apathy in providing basic facilities such as education, health, transport and housing. Taxes collected, much below the actual potential as the rich enjoy concessions or exemptions, are totally consumed in debt serving, defence and foreign tours of the rulers – billions were wasted during the last five years on useless foreign visits of President, prime ministers and ministers with large entourages.

While the legislators have been heavily burdening the poor masses with oppressive indirect taxes since 1991, the Center for Investigative Reporting in Pakistan (CIRP) released a report (http://www.cirp.pk/Electronic%20Copy.pdf) on December 12, 2012 alleging that “in both houses of the Parliament, the Senate and National Assembly, there are 446 lawmakers and 300 of them have turned out to be tax-dodgers – among them are those 88 MPs who don’t have National Tax Number (NTN), let alone paying income tax. There are 16 MNAs whose taxes couldn’t be examined due to lack of basic information like NTNs and Computerised National Identity Card (CNIC) numbers and one Senator from the calamity-hit area claimed tax exemption and one National Assembly seat is vacant”. These revelations, if true, are simply shocking – these tax non-compliant legislators have been instrumental in increasing incidence of tax on the poor by 42 percent during the last 20 years and decreasing 29 percent on the rich!

Another example of crumbling of tax system surfaced on February 10, 2013 when the Parliamentary Committee on Appointment of Judges deferred regularisation of two judges of Sindh High Court for alleged non-payment of taxes. Chairman of the committee, Chaudhry Aitzaz Ahsan, told the media that “cases of parliamentarians who did not pay taxes were highlighted but a different standard was being used for the regularisation of judges”. The Registrar of High Court later vehemently contradicted the allegation against judges. In these columns we have been suggesting [Sheer ignorance of law? Business Recorder, December 21, 2012] that asset and tax declarations of judges, public office holders and high-ranking military and civil officials should be made public under a law, but parliament showed no interest as most of its members do not file tax returns and wealth statements required under the law. In India, anybody can see assets of judges on the website of Indian Supreme Court – but in Pakistan, powerful segments are not ready to disclose the same voluntarily. The situation that emerged on February 10, 2013 could have been averted, had the declarations of judges were accessible online.

The federal and provincial assemblies through oppressive taxes have been making the life of the poor more and more miserable with every passing day. None of them is ready to tax the rich and mighty as either they are part of ruling elites or represent them. The existence of a modern democratic state is reflected in its sovereign right of levying taxes through the elected representatives of the people. Taxes are meant for running the state to ensure public welfare, but in Pakistan, taxes are collected only from the poor for the benefit of the rich in utter violation of Article 3 of the Constitution of Islamic Republic of Pakistan. The existing oppressive tax system, based on exploiting the poor and enriching the ruing elites – comprising militro-civil-judicial bureaucracy, landed aristocracy, industrialist-cum-politicians, and oligarchy of religious and spiritual leaders (ulema and pirs) – is bound to lead to civil commotions and economic disaster by creating income inequalities and fiscal collapse.

Tax system is ailing both at policy and operation levels [Allying with tax evaders, Business Recorder, January 25, 2013]. At policy level, taxes and duties are varied by the FBR through use of delegated authority given by the Parliament to issue Statutory Regulatory Orders (SROs). This delegation is against Article 162 of the Constitution as parliament itself cannot vary any tax or duty that affect the distribution of taxes for any province from the divisible pool unless the prior sanction from the President is obtained. Due to bar under Article 162 of the Constitution, the parliament cannot delegate such powers to any executive authority. But the parliamentarians are themselves violators of the supreme law of the land. They use FBR as handmaid to secure extraordinary benefits for themselves or the rich and mighty who support them for winning elections. We have been pointing out this constitutional violation in these columns for the last many years but of no avail [Finance Act 2012: Where is Parliament? Business Recorder, June 29, 2012]. The result is annual losses of billions of rupees to the national exchequer.

What a mockery that in December 2012, the chairman and a member of Public Accounts Committee while snubbing the Chairman FBR for poor performance stressed the need for ending issuance of SROs. They were not even aware of the fact that parliament itself violated Article 162 of the Constitution by giving such delegated powers to FBR. This shows the hollowness in understanding the supreme law of the land by our able legislators.

The main source of institutionalised corruption in FBR is vested power of issuance of SROs, their abuse and misinterpretation. In Customs alone, out of effectively traded 5,000 tariff lines as much as 85 percent are covered under various SROs, amended from time to time to mint more and more money or to create unfair trading conditions for those who cannot grease the palms or to help “friends” in the trade and industry. Having a Customs tariff with different and multiple rates, numerous exemptions and many ifs and buts for availing beneficial rates – all SROs aimed at providing leverage for executive discretion and giving bargaining power to officials. Corruption at policy and operational levels in FBR increases cost of doing business and the end consumers, on whom the burden is passed on, are the ultimate sufferers. While the corrupt and unscrupulous join hands for mutual beneficial relations and are thriving, the national exchequer is being deprived of taxes worth billions of rupees on daily basis – the mega scandal of missing containers still unresolved despite the intervention of the apex court testifies to it.

According to a report, ‘Study on cost of tax exemptions: access to relevant data: expert faces problems’, Business Recorder on February 7, 2013, “the tax expert/analyst got engaged by the FBR is facing difficulty in seeking data from the tax officials to complete the study on tax expenditures and to work out cost of tax exemptions, concessions in 2012-13”. It is revealed that actual cost of tax exemptions is much higher than revenue loss of Rs 185.496 billion reported in Economic Survey 2011-12.

FBR has commissioned a study on tax expenditures to ascertain the cost of tax exemptions and concessions in each sector. Analysis done so far shows that the cost of tax exemptions reported in Economic Survey 22011-12 is grossly understated.

The expert hired by the FBR is to determine taxes forgone due to exemptions available in income tax law, zero-rating regime in sales tax and concessionary rates of customs duty under SROs for each sector of economy. According to report, the study on tax expenditure would be “one of its kinds to exactly know about the revenue loss to the national kitty.

As per Economic Survey 2011-12, tax exemptions and concessions to various sectors and investors cost revenue loss of Rs 185.496 billion during 2011-12 against Rs 175.211 billion in 2010-11 – an increase of Rs 10.285 billion. Sales tax loss was Rs 24.300 billion in 2011-12 against Rs 33.762 billion in 2010-11; income tax, Rs 69.608 billion against Rs 46.508 billion and customs duty was Rs 91.588 billion against Rs 94.941. Now FBR says that these figures are understated.

Total revenue loss during the last five years was estimated at about Rs 900 billion. This confirms how FBR takes summersaults with change of its chairman every time. This institution has lost its credibility and figures relating to tax exemptions conveyed to Ministry of Finance for including in important document like Economic Survey are just a guess work.

For example, Economic Survey 2011-12 has not specified any revenue loss under federal excise regime, whereas importers, investors and local manufacturers have availed concessions and exemptions of Rs 91.588 billion under different notifications of customs duty and free trade agreements during 2011-12 against Rs 94.941 billion in 2010-11.

The above figures speak for themselves. It was connivance between FBR and legislators that resulted in colossal revenue loss – more than what we borrowed during the last five years from the International Monetary Fund. While FBR has failed to meet targets for the four consecutive years, fiscal deficit continued to grow and crossed 7 percent of GDP during the last fiscal year. The government kept on borrowing to meet the gap and debt-to-GDP ratio jumped to 68 percent.

The remedy lies in generating taxes of at least Rs 8 trillion and reducing wasteful expenditure on the monstrous and useless government machinery to make it cost-effective. Tax policy should be a tool for boosting economic growth, investment and productivity that would generate more employment and revenues. Unless the government spends taxes prudently and responsibly, people will not pay voluntarily. The dire need in today’s Pakistan is rapid economic growth coupled with reduction in inequalities through a policy of redistribution of income and wealth.

For achieving the cherished goal of establishing a welfare state, a leadership is needed that can tax the privileged classes and vested interests (mafias is a more appropriate word). They are the culprits who, by amassing immense wealth, control the organs of the state and exploit the masses. Not only that they do not pay personal taxes but are beneficiaries of taxpayers’ money and huge loan write-offs. They are guilty of plundering and wasting national wealth generated by common people. All of them should be debarred from contesting the election.

The rulers have become so callous that people living below the poverty line have been subjected to sales tax on the purchase of salt, sold under brand names. On the contrary, the rich possessing billions are paying no or negligible income tax. Enormous wealth possessed by the ruling elites is outside the ambit of taxation. People are dying of starvation, abandoning and selling their children but the President, Prime Minister, governors, chief ministers, army of ministers, state ministers and their lackeys in bureaucracy are wasting millions on personal comfort and “security”, lunches, dinners and foreign tours.

The FBR, instead of punishing tax delinquents, is busy in extending amnesties to them (schemes approved by the Senate Committee on Finance are lying with National Assembly). These schemes are meant to safeguard the ill-gotten wealth of ruling elites but camouflaged as good measures to broaden the tax base and increase tax-to-GDP ratio. Unless all untaxed assets are seized by state nothing will change. This should be the main election agenda, otherwise in the coming elections, money power will again steal the show.

(The writers, tax lawyers and authors of many books, are Members Adjunct Faculty at the Lahore University of Management Sciences)