More growth, more taxes

Every year before the announcement of annual federal budget-which has become an official ritual-plethora of tax proposals are received by the Federal Board of Revenue (FBR) from trade and professional bodies, tax bars and industry’s representatives. For the last many years, FBR itself has been soliciting budget proposals by placing detailed guidelines on its website. However, each year the Finance Bill proves to be a hopeless document-containing meaningless changes in tax codes, imposing more and more burden on the existing taxpayers-especially through cumbersome withholding of taxes-with no policy shift to bring the untaxed sectors and non-filers in the tax net.

Taxation in Pakistan is oppressive, lopsided and counterproductive-there is only 2% of corporatisation of total business. By heavily taxing corporate sector vis-à-vis firms and association of persons, FBR has been encouraging undocumented sector. We have not more than 65,000 companies and annual addition is just 3000 or even less, whereas in countries like Malaysia and Turkey having much less population than Pakistan, the number is in millions with impressive annual growth. If we want to move from undocumented economy to transparent corporatized sector to achieve rapid growth, the government must reduce corporate rates to 20% and tax firms and other non-corporate business entities at a higher rate of 30%.

Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry during the last few years, especially since we have started submitting completely before the dictates of the foreign donors. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today. It is impossible to enhance revenues with stagnation in economy; and over-taxing such economy, as has been done in Pakistan, can destroy the revenue system as well.

The priority of our tax managers is achieving revenue targets, fixed ambitiously every year in utter disregard of how economy is actually behaving. This is the main problem of tax system. By fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, Pakistan has been forced into a quandary, where it can neither afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle which has ensnared our policymakers. They will have to find ways and means to come out of this tangle to make Pakistan an economically viable and secure place which can attract investors. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, investors would never come forward.

FBR, apex administrative revenue authority, has been single-handedly destroying Pakistan’s trade and industry by resorting to discretionary powers [Statutory Regulator Orders (SROs)], withholding undisputed refunds payable to the taxpayers, making excessive tax demands and resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets. Such actions of the tax machinery are detrimental for business and industry and resultantly, FBR not only has failed to tap the real revenue potential but has remained unsuccessful in meeting revised targets for the last many years. Besides, there is perpetual increase in our fiscal deficit and debt burden.

There cannot be two opinions about the complete shifting of our economic priorities. We, as a nation must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is existence of inefficient, corrupt, repressive and criminal governments/institutions, which do not give a damn for the welfare of the common people. Successive governments’ onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan’s undeniable geostrategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest.

This article, therefore, is not proposing cosmetic changes in the Income Tax Ordinance 2001, Sales Tax Act 1990, Federal Excise Act, 2005 or the Customs Act, 1969. It is concentrating on some key areas where paradigm shifts are needed in structural and operation level to ensure not only more tax revenue for the State but also business growth, social equity and fairness so that honest taxpayers are not disillusioned-presently FBR is extending concessions, immunities and amnesties to dishonest non-compliant people engaged in trade, business and industry.

COUNTERING TAX EVASION It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains. What is more tragic is that this social evil inherent in the tax system gets doubly compounded as it necessitates greater and greater tax burden on those who are law-abiding. The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life. Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that mighty tax evaders are not paying anything with the connivance of their friends and mentors in the tax machinery. The unholy alliance between tax evaders and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system.

Pakistan must have ‘Compulsory Public Disclosure of Assets Law’ requiring the following to make their assets and liabilities public:

— High ranking civil and military officials

— All Senators, MNAs and MPAs

— Judges of the superior courts

— Any person who has availed loans exceeding Rs 50 million from any financial institution

— Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc

The above privileged classes of society shall act as an example for others. Their declarations would inspire common people to pay their taxes honestly. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes as suggested above. The people of Pakistan have a right to know how these mighty sections of society amassed immense wealth without paying taxes.

CHANGE IN TAX POLICY There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment-oriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from the implementation perspective. Efforts of the government in the past to reform the tax system through special task forces, recruitment of new members on market wages and relying on the reports of so-called foreign experts had not yielded any positive results or acceptability from the taxpayers. It remained a closed door, bureaucratic exercise with no meaningful dialogue with the people and experts who matter in the subject. In the absence of a well-designed tax policy, the agenda of tax reforms would always remain lopsided. The government should not make any legislative and administrative changes until a transparent tax policy is announced and support of those who are affected by it, is secured.

Over the period of time our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy that is above mere achieving of targets set out unreasonably by foreign donors. Our potential is much higher than these targets, which we can never attain with the present tax laws and incompetent, inefficient and corrupt tax machinery.

EQUITY PRINCIPLE If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to public exchequer and vice versa. The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability-to-pay principle views tax policy issues in isolation to incidence of public expenditure. Many regard this principle as the most equitable and just method of taxation-emphasised primarily for its redistributive role. We in Pakistan have completely deviated from this principle, which is a constitutional obligation of the government. We have to follow Quranic injunctions in this regard which unambiguously and unequivocally commands us to spend in Allah’s way whatever is surplus after the fulfilment of one’s legitimate needs [2:219]. There is no room for concentration of wealth in a true Islamic society.

The existing tax system is highly exploitative and unjust. It protects the rich and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. The common man is paying an exorbitant sales tax of 17% (on many finished imported items the impact is as high as 35% after adding all other duties, taxes etc) on essential commodities like eatables, but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes.

The determination of a tax base capable of measuring an individual’s ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax world-wide. In Pakistan we have moved from this policy to unequal sacrifice rule where the mighty civil and military bureaucrats (now they are part of the landed aristocracy by getting State lands as awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled to pay sales tax of 17% and subjected to hardships due to ever rising costs of public utilities and POL products. This is in direct violation of Quranic Article 3 of the Constitution of Islamic Republic. It is the duty of the government to immediately remove these dichotomies and distortions. Taxes should be for the welfare and benefit of public at large along with making the State invincible, but definitely not for the luxuries of the rulers and State functionaries.

BENEFIT PRINCIPLE According to this principle, an equitable tax system is one under which tax payments are based on the amount of benefits received from government services. In other words, the cost of government services should be apportioned among individuals according to the relative benefits they enjoy. Clearly, implementation of the benefit principle presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. Thus it encompasses issues of both tax and expenditure policies.

Our successive governments have failed to convince the people that payment of taxes is their collective responsibility. All civil and military governments alike had been engaged in wasteful expenditure, never caring to live within their means and failing to even protect the life and property of the people, not to talk of providing them basic needs of health, education and civic amenities. Are these rulers justified to ask people to tighten their belts while their own lifestyle is Shahana (like royalty)?

Tax policy must be used as a tool of distributive justice. The Government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include subsidised/free medical and educational facilities, low-cost housing, and drinking water facilities in rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of the taxes paid, there will be better response to tax compliance. Taxes cannot be collected through harsh measures and irrational policies. The rulers and tax bureaucrats would have to demonstrate a clear inspirational model by their actions, so that the taxpayers can place their trust in them and pay taxes honestly and diligently.

TAXPAYERS’ BILL OF RIGHTS The Government, before imposing any new obligations on the taxpayers, must restore the confidence of taxpayers by immediately promulgating a Taxpayers’ Bill of Rights, as was done by a number of countries including USA and UK in the 1980s.

— The provisions of the Bill must:

(a) Safeguard and strengthen the rights of taxpayers.

(b) Ensure equality of treatment

(c) Guarantee the privacy and confidentiality of their declarations

(d) Provide right to assistance by State in tax matters

(e) Guarantee unfettered right of appeal through an independent appellate system and alternate fast-track administrative dispute resolution system.

ASSIGNMENT OF TAX Assignment of a tax means transfer of taxation power from a higher level to a lower level government. Taxation power includes the following: right to levy tax, collect tax, and appropriate proceeds from the tax. Thus, there can be three interpretations of assignment of a tax. Firstly, higher-level government may levy and collect a tax but hand over the entire proceeds to lower level governments. Secondly, the higher-level government may levy a tax but allow the lower-level governments to collect it and retain fully the proceeds therefrom. Finally, the higher-level government may transfer a tax to lower-level governments, a situation which defines assignment of a tax in its strictest sense. All provincial governments are violating the command of Article 140A and not devolving political, administrative and fiscal powers to elected local governments.

In the Pakistani scenario the exactly opposite has happened. The levy of presumptive taxation by the federal government and non-existence of local bodies to raise funds for providing education and health at grass root level have denied the fundamental rights of the people. The provinces enjoy exclusive right under the Constitution to levy taxes on services within their respective physical boundaries. The federation blatantly encroaches upon their undisputed right by levying tax on services on presumptive basis-this is in substance indirect tax-under various sections of the Income Tax Ordinance, 2001. Such taxes are not taxes on income, which the federal government is empowered to levy under item 47 of the Federal List. Generally, the purpose of tax assignment is to augment the resources of lower level governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower-level government to levy the tax assigned to it. Not only this, the lower-level government may not have power to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing the tax rates within a minimum and maximum range prescribed by the higher-level government.

There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal and taxing powers among federation, provinces and local governments. True provincial autonomy can only be guaranteed if assignment of tax principle is followed in letter and spirit. Establishment of local governments is a Constitutional obligation [Article 140A] elections and asking them to dislodge the District Management, provincial autonomy but all the four provinces and federal government have failed to fulfil this command. Let the provinces have exclusive right over their resources and finances and they must transfer taxes to local governments so that grass root democracy and funds for public services can be utilised and guaranteed.

BUOYANCY AND ELASTICITY Tax revenue may change through automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of the existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying tax parameters (bases, rates etc) are called discretionary changes. Variations in the tax yield flowing from the combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax. It is computed by dividing percentage change in tax yield by percentage change in national income.

The Pakistani experience in this regard has been very disappointed as admitted by the government in almost every Economic Survey in the following manner: “Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan tax system is still characterised by a narrow and punctured tax base, over reliance on distortionary import-related taxes, high taxes on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effect of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilisation efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure”.

Buoyancy estimates assess the overall success of government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income. In the absence or weakness of elasticity attribute of the tax system, a government will have to revise tax rates and tax bases every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws, reduce administrative efficiency and are also politically inexpedient. This is what happened in Pakistan since 1977. It is high time that we must go for a paradigm shift in our tax policy to avoid these kinds of negative effects. Therefore, the tax structure should be redesigned so as to impart a reasonable degree of elasticity to the tax system.

Taxation is a potent instrument to shape and influence the socio-economic polices of a country. It is therefore imperative for us to formulate a nationally acceptable tax policy keeping in view our own peculiar conditions. Our Tax policy must take into account:

— Present stage of our economic development.

— Objectives of economic policy.

— Priorities of economic policy continually change with the changing economic, social, and political milieu.

It is necessary for us to use the forthcoming budget as a tool for CHANGE and not as guardian of status quo. In taxes, we need to bring some fundamental structural and operational changes. Mere amendments here and there will serve no useful purpose. New tax strategy should entail the following three components:

RESOURCE MOBILISATION The first and foremost objective must be to raise resources for public authorities for administration and development. Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idly or squandering them on luxury consumption. According to Roy Gobin, “the revenue criterion is usually the dominant consideration, since governments in developing countries have become increasingly aware of the active role which budgetary measures can play not only in initiating and promoting growth but also in maintaining political power. Not only are higher revenue levels needed, but also tax yields should be increased at a faster rate than income, if infrastructural investments and social welfare expenditures are to be financed without generating unacceptable inflationary pressures and/or increasing reliance on foreign assistance.”

The revenue performance is in fact the best and optimal use of resources. Since the composition of investment is an important determinant of growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing high tax rates on luxuries and other low priority items (such as motor cars, air conditioners, and jewellery), the government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors.