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Tax proposals for Budget 2015-16 – VII: Need for an NTA

The government of Pakistan Muslim League (Nawaz), under the third-time elected Prime Minister Mian Muhammad Nawaz Sharif, will announce its third annual budget for the fiscal year 2015-16 on June 5, 2015. According to Finance Minister, Senator Ishaq Dar, Economic Survey of Pakistan would be released on June 4, 2015, as per tradition-many proclaim that both the budget and this document is nothing more than a mere ritual which would make no difference in the life of the common people, who are bearing the main brunt of exorbitant indirect taxes in Pakistan while the rich are not paying personal income tax-according to Tax Directory 2014 and Active Taxpayers’ List placed on the website of Federal Board of Revenue (FBR) only a few thousand rich, file income tax returns and the quantum of admitted tax is laughable.

While chairing a meeting of “high finance officers” (sic) in Islamabad on May 16, 2015, Ishaq Dar said that “recommendations of the Tax Reforms Commission will be included in the budget.” He further said that “the budget will be prepared taking into account the public interest. “By now everyone is quite familiar with this rhetoric, rather sick of hearing it. Does a Finance Minister of any country tell his citizens that he works in “public interest”? Obviously what else is he supposed to do? There appears no need to keep on humming the same tune. The question is that why does Ishaq Dar want to reassure us? The answer is simple, “chor ki darhi mein tinka” (guilty conscience needs no accuser).

Ishaq Dar has yet not unveiled his plans and strategy with respect to making Pakistan a self-reliant economy and come out of the debt-trap. He as usual wants to impress us by claiming that foreign donors are “happy” with him and willing to lend more money to Pakistan for paying back “old loans.” This, he claims as his biggest success since holding the office of finance minister.

Calling a meeting of the Cabinet’s Economic Co-ordination Committee (ECC) on May 18, 2015 “to discuss the budget and tax reform recommendations” was yet another routine matter. Praising the Tax Advisory Council-a committee comprising academics, professionals, members of chambers of commerce and industry and former government officials-for giving “positive proposals” for the national budget was yet another lip-service on the part of the worthy Finance Minister. Though budget is very close now, our brilliant Finance Minister has yet not made public any major policy initiatives that would solve pressing issues like rising debts, burgeoning fiscal deficit, persistent energy crisis, slow economic growth and high rate of unemployment.

In these columns since long (present series started on April 10, 2015) we have been presenting concrete suggestions for reconfiguring of tax system to raise revenues of Rs 8 trillion, but no notice has been taken by those who matter in the land to make these a part of debate and discourse on national budget making process. This shows extreme apathy on the part of so-called “experts” who have never produced a single working paper on the issues of fiscal challenges faced by Pakistan and how to meet them by devising a comprehensive policy and implementation plan having short-term, medium-term and long-term goals and objectives.

As promised in the first column of the series, we will complete the task, which otherwise is the duty of the Ministry of Finance. Till the announcement of federal budget 2015-16 on June 5, 2015 we will try to present some more concrete and viable proposals for creating an efficient tax system that can cater for the need of the masses and not enrich the already wealthy classes in whose hands the present socio-political system is captive due to sheer money power.

Enforcement of tax laws without any fear or favour should be the first and top most priority of the federal and provincial governments if they want to rescue the country from the present economic quagmire coupled with expending taxes for the benefit of masses and desisting from wasting funds on white elephants-monstrous public sector enterprises sleazing with inefficiency and corruption-so that the public can see that the elected government is a responsible one and cares for it. This would promote tax culture and restore people’s faith in the tax system. Voluntary tax compliance can be improved through a strong deterrent system where the compliant taxpayers are respected and rewarded, while evaders are exposed and punished under the law. Our tax apparatus is doing exactly the opposite!

At present, both federal and provincial governments are not collecting taxes according to our real tax potential. Our tax potential at federal level alone is Rs 8 trillion. If agricultural income tax and other provincial and local taxes are also collected efficiently, the total figure would be around Rs 12 trillion.

According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, about 5 million individuals have annual income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates will be Rs 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 and Rs 1,000,000 is added, the gross figure would not be less than Rs 4500 billion. FBR collected only Rs 750 billion as income tax in the fiscal year 2013-2014. Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50% of actual potential as admitted by a study jointly conducted by the Andrew Young School of Policy Studies at Georgia State University and the World Bank. In fiscal year 2013-14, FBR collected Rs 1400 billion under the head of sales tax, federal excise and customs duties, which is pathetically low and does not conform to the actual economic activity capable of generating many times more revenue.

For harnessing the full tax potential at federal, provincial and local government levels, National Tax Authority (NTA) is the need of the hour. Through consensus and democratic process, all the parliaments can enact laws for establishing an autonomous NTA that would facilitate people to deal with single Revenue Authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interests [Article 153] and its control can be placed under National Economic Council [Article 156].

The following measures at federal and provincial levels can increase the tax-to-GDP ratio from the present 9.8 percent to 16 percent, over the next two to three years: 

— Progressive income tax on all incomes, irrespective of source, with alternate base that it should not be less that 2.5% of net worth of an individual for the closing date of said tax year.

— Excess profit tax on windfall gains, especially where cartels operate

— Bridging of tax gap through effective enforcement, especially through integrated automated tax intelligence system capturing all inflows and outflows.

— Withdrawal of all exemptions and concessions, except for genuine charities (waqf, trusts, non-profit organisations) and new industries raising 90% capital through public offers and creating jobs.

— Substantial property tax on the rich having palatial houses, farm houses etc.

— Special taxes and duties on expensive vehicles, wasteful expenditure and luxury items.

— Presumptive agricultural income tax of Rs 5000 per acre on irrigated agricultural holdings above 25 acres and Rs 2000 per acre on un-irrigated holdings above 50 acres provided that it should not be less than 10% of produce.

— Single-stage, low-rate sales tax on all kinds of goods and services with no adjustments/refunds. Exporters of goods and services should get the entire tax back once export proceeds are received through banking channels.

(The writers, authors of many books and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty Members at Lahore University of Management Sciences)

Huzaima Bukhari and Ikramul Haq, "Tax proposals for Budget 2015-16 – VII: Need for an NTA," Business recorder. 2015-05-22.
Keywords: Economics , Economics policy , Tax laws , tax system , Economic survey , Annual budget , Public interest , Tax reform , Socio-Political system , GDP , FBR