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Municipal self-governance

In Pakistan, the poor are subjected to heavy and cruel taxation to finance the luxuries of militro-judicial-civil complex and politicians – who enjoy free or concessional perquisites, benefits, including expensive plots at prime locations. The way they waste and plunder the taxpayers’ money is no secret – shamelessness is the most appropriate word to explain their conduct. No serious effort since independence has been made to reform our indomitable militro-judicial-civil apparatus that has miserably failed to deliver, yet the corrupt politicians and businessmen feel honoured to act as their henchmen.

Due to sheer apathy of the ruling elites, the country is now at the brink of economic collapse. The monstrous fiscal deficit of nearly Rs 2 trillion and fast depleting foreign reserves are forcing the government to borrow more and more money – externally and internally. In just ended fiscal year our tax-to-GDP ratio further dipped to 8.5 percent from 9.2 percent. This is the time that intellectuals and professionals should play their role by suggesting remedial measures to bring the country out of present mess.

Our tragedy is that revenues worth trillions of rupees have been sacrificed by the governments – civil and military alike – since 1977 extending unprecedented exemptions and concessions to the privileged classes.

Some of these are highlighted below:

— Military rulers abolished all the progressive taxes eg Estate Duty, Gift Tax, Capital Gain Tax etc.

— The historic decision of taxing “agricultural income”, passed by Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” as obtaining in section 2(1) of then Income Tax Act, 1922 to tax big absentee landlords. This was a revolutionary step to impose tax on net agricultural income at federal level for the first time in the history of Pakistan, but foiled by a military dictator.

— During Zia’s rule of 11 years and that of General Musharraf for nearly 9 years, absentee land owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax.

— Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have enacted laws to this effect, but total collection in fiscal year 2012-13 was less than Rs 2 billion against actual potential of Rs 200 billion (share of agriculture in GDP was about 22 percent).

— Meagre or non-taxation of capital gains – exemption is meant for the rich and the mighty and not the small investors who lose more money than what they make due to manoeuvrings of big players – has caused annual loss of billions of rupees to the national exchequer.

— Tax losses for exempting (in fact not taxing) speculative transactions in real estate are to the extent of billions of rupees per annum. The definition of ‘business’ given in the Income Tax Ordinance, 2001 covers “adventure in the nature of trade” and yet our tax machinery is sitting idle causing colossal loss to the national exchequer by not bringing adventures in the nature of trade in real estate into tax ambit and giving undue tax exemption on gains arising on speculative transactions in shares and stocks. Our tax-to-GDP ratio can rise to 20 percent if we tax speculative dealings in real estate (this would also help in promoting construction industry as prices of land would come down) and bring black economy into tax net.

— Multinational Companies (MNCs) through abusive transfer pricing mechanism, deprive Pakistan every year of taxes of over Rs 200 billion.

— Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before he took charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his global assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis. The repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite tremendous revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan.

— In 2003 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemptions given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US $60 billion) started pouring in from all over the world remitted by all and sundry without any fear of being investigated, courtesy amnesty given under section 111(4) of the Income Tax Ordinance, 2001. Influx of enormous wealth was directed to the stock exchanges and real estate market where the sharks continued to engulf the small investors through unholy maneuverings; or was used to artificially enhance the prices of property. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.

— From 2003 to date, according to a conservative estimate, we have lost Rs 300 to 500 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life.

— Section 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they are permitted to whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in their accounts after paying a nominal premium of 1 to 2.5 percent of the entire proceeds! The loss caused due to this provision alone for the last five years is nearly Rs 275 billion.

— In the last five years alone, revenue loss on account of taxing income from property at reduced rate is estimated at Rs 180 billion.

The above are just a few areas showing how much tax loss we have been incurring perpetually since 1977. It confirms that Pakistan is ruled and controlled by predatory elites in whose hands power and wealth are concentrated. The ruling elites – comprising indomitable military-civil complex, unscrupulous politicians, mighty religious party leaders, absentee land owners and greedy businessmen – are engaged in loot and plunder, rent-seeking and snatching of public property. Total loss of revenue through Statutory Regulatory Orders (SROs) issued during the last few years alone is estimated at about Rs 1200 billion – unprecedented concessions to the rich made the state poorer and the masses indebted enormously. The State does not need any borrowing at all, if taxes are levied according to the established norms of democratic dispensation.

The Supreme Court on April 17, 2013 suspended the March 14, 2013 notification issued by Interior Ministry granting former Interior Minister Rehman Malik and his predecessors lifetime perks and privileges. Hearing the suo motu notice case regarding the unlimited perks and privileges granted to two former prime ministers, all former interior ministers, Sindh chief minister and other senior officials by the outgoing government, the five-judge bench headed by Chief Justice sought a response from relevant authorities in this regard.

The FBR registered shortfall of nearly Rs 450 billion for fiscal year 2012-13 and a few people know that while there was a serious crunch for resources, the government withdrew the biggest new revenue spinner – one percent withholding tax on manufacturing – resulting in a revenue loss of Rs 18 billion. Drastic cut of federal excise duty on sugar to 0.5 percent aimed at benefiting the influential sugar industry owners caused a loss of Rs 8 billion to the national exchequer. Fifty percent cut of sales tax for steel melters, causing revenue loss of nearly Rs 4 billion.

The dire need in today’s Pakistan is to dismantle the culture of plots and perquisites to the ruling classes, boost the growth, improve the governance, crack down on the corrupt, stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, make government-owned corporations profitable, accelerate industrialisation, increase productivity, improve agriculture sector, bring inflation down, reduce inequalities through a policy of redistribution of income and wealth and make the country a self-reliant economy.

It is high time that civil society, social media, intellectuals and professionals begin a nation-wide campaign against oppressive, anti-people policies and work relentlessly for establishment of an egalitarian state. We can make Pakistan a prosperous and progressive society by following the model of Finland.

Finland is divided into municipalities, whose administration is based on the self-government of their residents. The decision-making power of local authorities is exercised by a council elected by the residents. Provisions on the general principles governing municipal administration and the municipalities’ duties are set out in an Act. Additionally, the municipalities have the right to levy municipal tax. Municipalities in Finland have wide-ranging powers. In accordance with the Local Government Act, local authorities perform the functions that they are responsible for by virtue of their autonomy and those that they are required to do by law. Extensive functions that fall within the specific sphere of authority include education, health care and social welfare services. Furthermore, the municipalities are responsible for matters related to the residents’ free-time, recreation, housing, and the management and maintenance of their living environment (ie roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures.

Tax revenues have a critical role in municipal finances. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or that they are responsible for by law. The most important is municipal tax, which amounts to almost 13 billion euros. Corporate income tax amounts to a little over 1 billion Euros, and real estate tax also raises almost 1 billion euros – Pakistan collects less than 20 billion Euros as taxes both at federal and provincial levels.

If a country of 5.3 million people (Finland) can achieve this level of taxation at municipal level alone, we the nation of over 180 million can do much more, but if there is a will. One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. Finland has a well-functioning relationship between the State and the local authorities, as well as a state-subsidy system which ensures municipal resources and residents’ equal access to services. We can learn from this great innovation of Finland. It can change the fate of the nation overnight. We have resources but system for self-governance as in vogue in Finland and elsewhere in the world is non-existent. Resultantly, power is not with people but in the hands of the privileged ones.

Economic equality, prosperity, peace and social tranquillity can never be achieved unless we dismantle the elitist structures completely. We need fiscal and administrative decentralisation where taxes are collected for education, health care and social welfare services through municipalities working on the principle of self-governance – and revenues are collected and utilised for the benefits of public.

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

Huzaima Bukhari and Dr. Ikramul Haq, "Municipal self-governance," Business recorder. 2013-07-19.
Keywords: Economics , Economic system , Economic policy , Economic issues , Economic growth , Economic activities , Tax-GDP , Tax reforms , Taxation , Taxes , Political issues , Corruption , Politicians , Military rulers , Pakistan