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Political economy of tax reforms

The debates and discourse concerning political economy of tax reforms in Pakistan lack objective analyses and rational approach as evident from the latest book, published by Oxford University Press, The Role of Taxation in Pakistan’s Revival, edited by Jorge Martinez-Vazquez and Musharraf Rasool Cyan. The book contains nine chapters, which are in fact, studies conducted for 7-year-long [December 7, 2004 to December 31, 2011] Pakistan Tax Administration Reform Programme (TARP), carried out with total cost of US $149 million, out of which US $102.90 million came as loan from the World Bank. The book confirms why TARP was a great failure-on its conclusion not only did tax-to-GDP ratio fall substantially, there was a tremendous decrease in the number of return filers. After reading the book, an irresistible conclusion which can be drawn is that prescription of the World Bank (WB) and International Monetary Fund (IMF) suggesting “more taxes” without growth, equity and delivery of social services to the citizens is a lethal pill, based on a diagnosis by a quack rather than by a qualified physician. Imposition of regressive, high rate taxes, especially sales tax on essential items, in an underdeveloped, informal and struggling economy has been the tax policy of Pakistan, on the dictates of the IMF and the WB and the disastrous results are before us-see a detailed analysis in Illogical Taxes, Business Recorder, September 18, 2015.

None of the studies in the book has highlighted the most painful aspect of Pakistan’s cruel tax system. On the one hand, the State is least pushed to provide free education and health facilities and on the other, individual income taxation is insensitive to family circumstances to determine ability to pay, in utter violation of Article 3 of the Constitution of Pakistan. In civilised, democratic countries income tax laws recognise the cost of living alone or with family-expenses to nurture children are always taken into account. The laws, thus, allow deductions/allowances according to size of family. In Pakistan, Federal Board of Revenue (FBR) not only denies any such allowance or deduction, but extorts advance income tax even from the lower-income earners and their family members having no income on facilities like mobiles. Adding insult to injury, FBR expects them to file tax returns to get the money withheld as refund, whereas the cost to get it is much more than the amount due and chances of harassment after filing return are obnoxiously high.

The so-called “experts” on Pakistan’s taxation system, at home and abroad, do not try to comprehend the basic elements of a repressive system, let alone suggesting ways to reform it. Their popular slogan is more taxes to improve tax-to-GDP ratio, but no concern for utilisation of money collected as taxes and its ruthless abuse for providing extraordinary perks and perquisites to the ruling elites. They want what is prevalent in the West without studying and considering the mundane realities of Pakistan where the State is not providing even security of life and property, what to speak of taking care of fundamental needs of all citizens-the denial of fundamental right of free education to children under Article 25A is the most glaring example of State’s apathy.

The real issue of taxation in Pakistan is lack of a judicious balance between direct and indirect taxes. Appeasing the rich and mighty and lavish spending on comforts of elites is the main cause of the huge budgetary gap. Such wrong policies are continuously increasing the miseries of people, 12.7 percent of Pakistan’s population now lives below $1.25 per day, which is categorised as extreme poverty-the World Development Indicators (WDI) 2015. Non-collection of taxes from the rich and generously extending exemptions/concessions is the root cause of our unjust tax system. In the book, edited by Jorge Martinez-Vazquez & Musharraf Rasool Cyan, even the internationally-acclaimed writers have failed to dislodge the claim of FBR that the share of direct taxes is about 40% in total tax collection. They have blindly adopted the figures of FBR without examining their authenticity. They could not discern that under Pakistan’s Income Tax Law, overwhelming collection is through indirect taxes that are camouflaged as direct taxes. These presumptive and transactional taxes have nothing to do with the income of a person-the incidence of these is passed on to the clients/customers.

In these columns, it has been established time and again with facts and figures that the share of direct taxes in GDP is continuously shrinking-during the last 20 years, it was never more than 4% of GDP. If the experts engaged by the IMF/WB to suggest tax reforms could not analyse the data properly, what can one expect from the commentators talking about taxation system in different TV talk shows or writing columns/articles in the vernacular Press. No expert hired by the WB or the IMF as the book shows is aware of the reality, or has not intentionally highlighted it, that the main incidence of the taxes in Pakistan is on the middle-low-income groups, while the beneficiaries of taxpayers’ money are rich members of the militro-judicial-civil complex and public office holders who get enormous tax-free perquisites and benefits. The State, captive in the hands of a few, is facing enormous challenges on fiscal front as parasitic elites have failed to deliver.

In our fiscal woes, there is also culpability of IMF “bosses”, who dictate our economic managers to follow their ill-prescriptions. They plead for more regressive taxes and do not care even if the federal government raises sales tax rate to the extent of 50% on high speed diesel oil, 30% on kerosene, 29.5% on light diesel oil, 26% on motor spirit excluding HOBC and 24% on HOBC through statutory regulatory orders (SROs)-see detailed comments in Constitutional violations in taxation, Business Recorder, October 9, 2015. They know that such actions not only burden the poor but also constitute open violation of Articles 77 and 162 of the Constitution of Pakistan. In their countries, they talk about “rule of law” and in Pakistan they ignore our rulers’ blatant violations of the supreme law of land with impunity.

The Supreme Court in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v. Federation of Pakistan and Others (2013) 108 TAX 1 (S.C.Pak.) held that “Parliament/Legislature alone and not the Government/Executive is empowered to levy tax. As far as delegation of such powers to the Government/Executive is concerned, the same is for the purpose of implementation of such laws, which is to be done by framing rules, or issuing notifications or guidelines, depending upon case to case, as we have come across some of the cases noted hereinabove. But in no case, authority to levy tax for the Federation is to be delegated to the Government/Executive. Therefore, arguments so raised by learned counsel have no force and the same are repelled hereby.”

The IMF in its coming parleys with the Pakistani team in Dubai will certainly not raise the issue of violation of constitutional provisions and burdening the poor with unprecedented taxes on petroleum products. Why should they? They are mainly concerned with getting their own money back, no matter if it means sucking blood of the poor. The fault of course, mainly lies with our shameless ruling elites, who beg before them, thrive on borrowed funds and taxes paid by the masses.

We should set our house in order and stop blaming lenders. An undeniable reality is that the Pakistani nation is the most heavily taxed in the entire region and the citizens get neither education nor health facilities from the State, what to speak of social protections like pension for all, out of taxes paid over the period of time. There is overwhelming reliance on indirect taxation [even under the garb of direct income taxation through presumptive tax regime on a number of transactions] without evaluating its impact on the economy and life of the less privileged sections of society. In the face of declining income tax contribution (after excluding indirect ones levied under Income Tax Ordinance, 2001) to GDP, our Finance Minister and FBR officials have been making tall claims about an “impressive” (sic) increase in taxes. The reality of this “impressive” performance was exposed in our various columns, but the IMF and the WB remained mum as they were party to portraying all-good “projection saga”-FBR reforms-II, Business Recorder, August 3, 2015.

The existing tax system is not taxing the rich 15 million and main collection is from indirect taxes. Resultantly, income and wealth distribution disparities are rapidly widening in the country leading to social and political unrest. In 2014, the number of tax returns filed was less than 900,000. Track record of FBR shows remote possibility of collecting even Rs 6 trillion-though the actual potential s not less than Rs 8.5 trillion-in the next three years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the given scenario, efforts are needed both at federal and provincial levels to enlarge the size of the pie by shifting to flat rate growth-oriented taxation-see details in Chapter 14 of Return to Prosperity by Arthur B. Laffer & Stephen Moore.

In these columns, a roadmap for reforming the existing tax system and raising taxes to the level of Rs 12 trillion at federal and provincial levels has already been given-New Tax Model, Business Recorder, August 28, 2015. But our more-loyal-than-the-King stalwarts sitting in Ministry of Finance & FBR want “advice” and “assistance” from the IMF and the World Bank that miserably failed in the past-Mir kya sada hein beemar howe jis key sabab; usi attar key londey sey dawa letey hein (What a simple soul is Mir; he seeks medication from the healer’s boy who is the cause of his ailment).

The present tax system and policies are detrimental for 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 principle 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, in fact, is a constitutional obligation of the government. Political economy of tax reforms must be studied from this fundamental perspective, if some meaningful change in nation’s life is desired.

Huzaima Bukhari and Ikramul Haq, "Political economy of tax reforms," Business recorder. 2015-10-16.
Keywords: Economics , Income Tax , Social service , Economic development , Commercial law , Fiscal policy , Social policy , Retail trade , Pakistan , Dubai , TARP , HOBC , GDP , IMF , FBR , WDI , WB , TV