The administration of a tax system is highly complex. No doubt, a proper bureaucratic input is vital for making the system successful, but it is equally necessary to take all the stakeholders on board and laws are made and implemented through consultation and consensus rather than by means of irrational policies and illogical measures. Unfortunately, this aspect of the problem, which deserves utmost priority, has been neglected for no ostensible reasons. All the tax reform committees and commissions have failed to consider this matter important enough to merit full-scale attention. Even if they recognised it as a problem they decided to leave it for the relevant quarters. The undeniable reality is that no agenda for rationalisation or simplification of tax system can significantly improve tax compliance, unless there is a substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to relentlessly pursue and punish tax evaders without any political and other interference.
There is always talk of giving “market” wages to officers, but nobody has even thought of improving the overall working conditions of tax departments and refining professional skills of tax collectors. If one goes to a tax office as a taxpayer only then one would feel the taste of inhuman and insulting treatment an ordinary citizen receives daily. Does it really need enormous money from lenders/donors to extend respect and courtesy to taxpayers, which they deserve? Does this issue relate to market wages or foreign funding or advice?
Tax reform is a continuing exercise
The exercise relating to tax reforms cannot be a time-bound affair and does not mean merely making changes in law. Reforms can be successful only if simultaneous analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers’ attitude, revenue needs of the country and so many other allied aspects. Measures that are necessary to make a tax system successful relate to:
1. devising and running an efficient and truly independent justice system;
2. provision of expert legal advice for drafting of laws;
3. designing of tax forms and procedures;
4. improvements in the management of tax department;
5. a broad-based personnel policy;
6. training of tax administrators, especially for under-cover operations;
7. educating taxpayers and making them realise that it is their moral duty to pay tax;
8. development of work ethics;
9. provision of healthy working conditions; and
10. efficient appellate system for deciding tax cases within a year of their filing, and dispute resolution apparatus for settlement of the problems faced by taxpayers.
Relatively successful reforms in Indonesia, Jamaica, Malawi, etc., were carried out in three to four years’ time and these involved substantial preparation and transition arrangements including extensive consultations with all parties affected by tax reform.
In Pakistan, the five-year (2006-2011) foreign-funded Tax Administration Reform Programme (TARP) extended for one more year (2012) failed to achieve anything, rather it multiplied the problems of tax machinery as well as taxpayers. Tax reform programmes and strategy involve continuity in key decision-makings and major educational campaigns concurrent with the introduction of tax reform proposals to familiarise taxpayers with new requirements. In Pakistan, we merely made it a bureaucratic exercise that is always bound to fail. Now a new tax reform programme under the name of ‘Pakistan Raises Revenue (PRR)’ Project is accepted by the present government with the total cost of about US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is $400 million. In the past as well, the World Bank and others gave a lot of money to Pakistan for reforms, yet things have changed only for the worse on fiscal/tax front. Pakistan Raises Revenue (PRR) Project is designed to “sustainably increase domestic revenue by broadening the tax base and making it easier for citizens and businesses to pay their taxes. This will make it possible for Pakistan to finance the investments in infrastructure, education and health needed for the country to accelerate and sustain growth”. But no serious study is unveiled for this!
For initiating a public debate, we have prepared a draft ‘Income Tax Act, 2020’ [text is long and can be obtained through email at firstname.lastname@example.org]. It can serve as a starting point of debate in the Parliament. All concerned — members of House Standing Committees, tax administrators, trade and professional bodies, taxpayers, tax professionals and public at large — can examine this draft and suggest improvements as well as highlight its shortcomings and deficiencies. A meaningful public debate on this draft can pave the way for better income tax legislation in the country. However, it all depends on the attitude of the elected members, who hardly take any interest in enacting such laws that can make a difference in the lives of ordinary people.
We hope that some elected member may get inspired and opt to present it as a private member’s bill in the house before the next budget is announced if Government is not interest. It can generate meaningful debate in the Parliament as fair taxation is at the heart of establishing a true social democracy. FBR will certainly not like this draft as tax bureaucrats want complex laws and cumbersome procedures that give them unbridled powers and discretion—their strength and capacity to extort money (not tax but bribes) depends on complex and complicated laws. They resist any such change. It is now the duty of elected members of all parties and not of the ruling government alone to take initiative and enact the income tax law through a consultative process.
Salient features of the proposed Income Tax Act, 2020
I. Integration of all components
There are four authorities responsible for enactment and implementation of taxes on income, Parliament, Federal Government, Federal Board of Revenue and the Inland Revenue Service. The role of each one of them should be clearly defined.
II. No delegated powers
There should be no delegation of power to any administrative authority in fiscal law, except to make rules. The notorious SRO system should be disbanded completely as it is against Article 77 read with Article 162 of the Constitution.
III. Tax rates should not be subject to annual Finance Bill
Income tax rates should be at least for 10 years so that people can make long-term planning of their affairs. The base of income and the range of tax rates should be made adequately wider so that there is no need to change it every year. The progressivity of tax rates is essential to meet the constitutional requirement of ensuring economic justice and social disparities. Tax rates should also be rationalized in order to make them equitable for all classes of persons.
IV. Tax on undisclosed income
The tax on undisclosed income must not be charged by clubbing it with the declared income. It should be taxed separately at a fixed rate after debate in Parliament. However, it is proposed to have a National Deposit Account in which any amount can be deposited without giving explanation for its source. No money should be allowed to be withdrawn from it for 3 years and it would not carry any interest either. Thereafter, on maturity date the whole amount minus tax payable would be returned. It will generate extra revenues for the government.
V. Distribution of income within a family
In respect of deductions, a minimum 20% of the income, if transferred to members of taxpayer’s family, must be exempted. It can be made taxable in the hands of the members of the family. This will provide for faster and equitable distribution of wealth amongst the members of the family and greater family stability in the society. All recipients would be bound to file returns, show receipt through banking channel and utilization for own benefit. If it is found that the payer in any way took an advantage of this provision he would be penalised by double the amount of tax he intended to avoid.
VI. Penalty and prosecution
Penalty and prosecution provisions must continue and the income-tax authorities should be given wider powers to enforce these provisions of law. No degree of liberalization or reduction in the rates of tax can take away the lure of not paying taxes. Tax is like any other expenditure and every one would like to save as much as possible.
VII. Payment of tax
The entire amount of tax should be made payable by the taxpayer either by deduction at source or by advance payment of tax before the end of the year. The base for deduction of tax at source may be made very wide but option must be given to the taxpayer to declare that his income is below taxable level to receive income without any deduction of tax. Penalty and prosecution provisions can be strengthened against giving a false declaration.
VIII. National Tax Tribunal
There may be a National Tax Tribunal subordinate only to the Supreme Court. It should be the final authority as regards the interpretation of all federal tax laws. It should only refer important questions of law to the Supreme Court. This would relieve the high courts of very heavy burden of tax cases.
IX. Rules of interpretation
The Act should contain the rules for interpretation of the statutes. Much of tax litigation has arisen because of different rules of interpretation being applied by different authorities and by the same authorities at different times. The rules of interpretation of tax laws should be applied uniformly and decisively.
Huzaima Bukhari and Dr Ikramul Haq, "Need for new income tax law — II," Business Recorder. 2020-03-18.
Keywords: Economics , Income Tax Act , Economic issues , Administrative reforms , tax system , Irrational policies , Tax evaders , Tax Authorities , Tax structure , Tax administration , FBR , SRO