Finance Act 2013: Apathy of Parliament

The adoption of Finance Bill 2013 on 27 June 2013, with a number of amendments proposed on 24 June 2013, was a disgrace for the National Assembly. There was no meaningful debate on tax measures and the proceedings were concluded with indifference. This shows apathy of the elected representatives towards important constitutional obligations under Article 73 and 82 of the Constitution of Islamic Republic of Pakistan. The new parliamentarians like their predecessors were only interested in safeguarding their privileges, untaxed/undeclared assets, besides obtaining more and more perquisites and benefits.

The militro-judicial-civil complex – real rulers of Pakistan – gets what they want from members of parliament – look at the figure billions allocated for defence, pay raise for civil servants and money given to judiciary. But, for the poor voters more hardships in the form of indirect taxes and inflation. Both the Treasury and Opposition benches showed no interest in proposing taxes for the rich and reduction of wasteful expenses – showing open disrespect of the mandate of the voters who brought them to power with the hope that they would do something for their socio-economic conditions or at least provide them basic services – housing, transport, education and health, to say the least. On the contrary, parliamentarians made amendment to the Chairman and Speaker (Salaries, Allowances and Privileges) Act 1975 (LXXXII of 1975) providing that “the Federal Government may grant to the Chairman and the Speaker such additional privileges as it may deem fit”. As was in the past, the worthy members of the National Assembly (MNAs) did not even bother to ponder about the impact of regressive taxation-increase in sales tax rate etc – on the ailing economy and its devastating burden on the poor – out of total revenue collection, 78% comes from indirect taxes and tax-to-GDP ratio dipped to 8.5% for fiscal year 2012-13 from 9.2% in 2011-12.

Time and again, we have been emphasising in these columns that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation. This is only possible if the Parliament performs its Constitutional role of providing the people of their fundamental rights, implements flawless process of accountability and ensures good governance. Constitutionally speaking, the Cabinet is answerable to the Parliament, but the truth is that MNAs run after ministers for personal favours and gains.

Parliament is subservient to the vested interest primarily, for the reason that the head of the ruling party is also Prime Minister and his close relative is Finance Minister. This fatal combination of powers distorts the concept of democracy – absolute power, undoubtedly, corrupts absolutely. The model near home – India – proves the point. Sonia Gandhi as head of the party does not hold any post in the government. She is thus in a position to enforce accountability of those in the government – party policies are her domain and not that of Manmohan Singh. In Pakistan, the real controlling authority is just one man having absolute say in all governmental and party matters. This is the real malaise of non-functioning of democracy in its true sense.

The Government was adamant to pass the Finance Bill 2013 without any evocative debate and rejected all the proposals of Opposition. Even amendments suggested by Senate were ignored without any debate. The Parliament once again proved that it is a mere rubber stamp. The Finance Bill as usual was the handiwork of the tax bureaucrats sitting in the Federal Board of Revenue (FBR). Because of these incompetent people FBR could only collect Rs 1.92 trillion in taxes, falling short of the original collection target by Rs 461 billion. The previous parliament approved target of Rs 2.381 trillion for 2012-13, but the figure was revised to Rs 2.007 trillion by the new government after it foresaw a massive shortfall. The shocking shortfall enhanced budget deficit to around Rs 2.1 trillion – over 9% of GDP. It is the highest ever in the country’s history. The collection results even fell below the expectations of the visiting IMF team – they placed it around Rs 1.97 trillion.

The new government had no idea what to present as budget once in power. Since political parties do not have any studies and do not believe in participation of experts in budget-making, financial managers and tax collectors – incompetent bureaucrats – have persistently failed to meet revenue targets and overcome fiscal deficit. Their tax policies are based narrowly on collecting taxes at source, without bringing the mighty sections of society within the tax net or collecting what is actually due from them. They are interested only in number games and are bent upon collecting taxes where they are not due: there is a direct link between growing poverty in Pakistan and distortion in the tax base since 1991 when Nawaz Sharif government shifted burden of tax on the end consumers by introduction of massive presumptive taxes in income tax law. Lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax has pushed an overwhelming majority of Pakistanis either towards or below the poverty line – the number is now over 60 million.

Reliance on indirect taxes that constitute 78% of total collection proves beyond any doubt that the tax system is directly contributing to poverty as people who possess enormous income and wealth are not being subjected to personal taxation in Pakistan. Thus, the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified. The present tax policies are detrimental to economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The ability-to-pay is regarded as the most equitable and just method of taxation and emphasised upon primarily for its redistributive role. In Pakistan, our rulers have completely deviated from this principle, which is in fact, a constitutional obligation of the government.

The common man is presently subjected to exorbitant sales tax and Federal Excise Duty [FED] of 17% to 19.5% (tax incidence is 35% on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities [even salt sold under brand names is subjected to 17% sales tax] but the mighty sections of society such as politicians-cum-businessmen, landed classes, as big industrialists, generals and bureaucrats are shamelessly amassing more and more wealth without paying any income tax. It is tragic that in a country where billions of rupees are concentrated in a few hands, tax-to-GDP ratio is pathetically low [just over 8% in just ended fiscal year 2012-13] and the Government is least bothered to tax undocumented economy and benami (name-lender) transactions. The mighty sections of society are engaged in these transactions while the corrupt FBR officials getting due share from them, have no inclination to tax them.

Unfair taxation resulting into inequitable distribution of resources is the root cause of our multiple socio-economic ills. State policies induce massive tax evasion (section 111(4) of the Income Tax Ordinance, 2001 is a permanent tool for whitening of untaxed money). FBR as it exists today is incapable of exploiting real tax potential of nearly Rs 8.5 trillion. By collecting just Rs 1950 billon at the end this fiscal year, they are claiming to have achieved wonders and created record! They are getting rewards, bonuses and double salaries for poor performance – it is shameful to say the least.

According to a report published in Business Recorder, “The break-up of revenue collection during July-June 27, (2012-13) revealed that direct tax collection stood at Rs 696 billion against Rs 681 billion in the corresponding period of last fiscal year. Sales tax collection amounted to Rs 823 billion against Rs 800 billion. The collection of customs duty was Rs 228 billion against Rs 206 billion and Federal Excise Duty (FED) collection amounted to Rs 116 billion during July-June 27 (2012-13) against Rs 120 billion in the same period of last fiscal year. As compared to the budgetary target of Rs 2381 billion, the tax machinery would be able to reach the figure of Rs 1,952 billion, reflecting a massive shortfall of Rs 429 billion. Finance Minister Ishaq Dar had admitted shortfall in revenue collection in 2013-14. He reportedly informed the National Assembly that in the current year, there is a revenue shortfall of Rs 374 billion in the FBR collections”. FBR proved the minister wrong by posting the shortfall of Rs 426 billion increasing the fiscal deficit to over 9% of GDP.

We can easily collect Rs 8 trillion as revenues. There are 10 million individuals having annual taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection from them at the prevalent tax rates comes to Rs 3750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000, the gross figure would not be less than Rs 5000 billion. FBR collected only Rs 716 billion as income tax in 2011-12 – the position for just ended fiscal year is equally bad. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2011-12, FBR collected Rs 804.8 billion under the head sales tax, Rs 122.5 billion under federal excise duty and only Rs 216.9 billion under custom duties. The total indirect collection of just Rs 1148.2 billion was pathetically low. It should have been at least Rs 3500 billion. If prevalent tax gap is bridged, the total revenue collection would be around Rs 8500 billion without imposing any new taxes or raising existing tax rates as has been done by Ishaq Dar.

Collection of Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes) would change the entire fiscal scenario. We would have enough money for development and public welfare-government would retire debts in a few years and we can easily become a self-reliant nation free from subjugation of donors. However, this dream for Pakistan can only be realised the ruling classes start paying taxes due from them, tax collected are used for welfare and development. Tax policy encourages industrialisation by taxing the unproductive sector to divert money to productive sectors. At the same time redistribution of wealth through progressive taxes is ensured – taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich. This trend must be reversed before it is too late.

(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences)