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Taxation for welfare

In Pakistan ironically, the less-privileged are subjected to heavy and cruel taxation to finance the luxuries of militro-judicial-civil complex and politicians-who enjoy free perquisites, benefits, including expensive plots at prime locations. The way they waste and plunder the taxpayers’ money is not a secret. Since independence, no serious effort has ever been made to reform our mighty militro-judicial-civil apparatus that has miserably failed to deliver.

Pakistan has failed to become economically viable due to perpetual failure of the ruling elite. Our monstrous fiscal deficit is now over Rs 2 trillion; debt burden is over 500 percent of tax collection and nothing on the plate for uplifting the rural areas to a respectable status. The government has to borrow more and more money-externally and internally-just to meet day to day expenses. 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 progressive taxes eg Estate Duty, Gift Tax, Capital Gain Tax etc. Now these are with provincial governments after the Eighteenth Constitutional Amendment, but they are also least interested in taxing the rich and mighty.

— 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 General Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” as obtaining in section 2(1) of the then Income Tax Act, 1922 to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan, but this attempt was successfully foiled by a military dictator.

— During Zia’s 11-year rule 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 during the last five years was less than Rs 2 billion against actual potential of Rs 200 billion (share of agriculture in GDP on average was about 20% for this period).

— Meagre 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 maneuverings 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 sits idle causing a colossal loss to the national exchequer by not bringing adventures in the nature of trade in real estate into tax ambit and give undue tax exemption on gains arising on speculative transactions in shares and stocks. Our tax-to-GDP ratio can rise to 20% in one year 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 of taxes of over Rs 200 billion every year.

— 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 a 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 substantial 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 a 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. The influx of enormous wealth was directed to the stock exchanges and real estate market where the sharks continued to devour 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 increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.

— According to a conservative estimate, from 2003 to this date 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. The wealthy should now be taxed at grass root level through local governments according to the size of houses they own. Tax on immovable property after the Eighteenth Constitutional Amendment is the sole prerogative of the provinces. By levying capital gain tax on disposal of urban immovable property, the provinces can generate sufficient resources rather than look towards the federal government for money all the time.

— 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 2 to 4 percent of the entire proceeds! The loss caused due to this provision alone for the last five years is estimated at nearly Rs 200 billion.

The above are just a few areas showing how much tax loss we have been incurring perpetually since 1977. Total loss of revenue through Statutory Regulatory Orders (SROs) issued during the last 10 years alone is estimated at about Rs 2000 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 dire need in today’s Pakistan is to tap the real tax potential and make the country a self-reliant economy, stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, make government-owned corporations profitable, accelerate industrialisation and increase productivity, improve agriculture sector, reduce inequalities through a policy of redistribution of income and wealth. It is high time that professionals and civil society must campaign against oppressive, anti-people policies and work relentlessly for establishment of an egalitarian state. We can make Pakistan a self-reliant and prosperous country through fiscal decentralisation and grass root taxation at local government level.

Take the example of Finland that is divided into municipalities, administration of which 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. The municipalities enjoy the right to levy municipal tax. Municipalities in Finland have wide-ranging powers. Extensive functions that fall within the specific sphere of authority include education, healthcare 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 self-governance in Finland. 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 those for which they are responsible for under the law. The most important is municipal tax, which amounted to almost 15 billion Euros in 2015. Corporate income tax amounted to a little over 3 billion Euros, and real estate tax also raises almost 2 billion Euros-Pakistan collects less than 30 billion Euros as taxes both at federal and provincial level!

If a country of 5.3 million people (Finland) can achieve this level of taxation at municipal level alone, then we a nation of over 190 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 in a short span of time.

We have the resources but system for self-governance as in vogue in Finland and elsewhere in the world is non-existent despite the clear command vide Article 140A of constitution. Resultantly, power is not with the people but in the hands of a privileged few.

Economic equality and prosperity, peace and social tranquility can never be achieved unless taxation system is reformed completely. It needs partial decentralisation where taxes are collected for education, healthcare and social welfare services through municipalities working on the principle of self-governance ensuring that revenues are spent for the benefits of public and not the powerful segments of society alone.

Huzaima Bukhari and Dr. Ikramul Haq, "Taxation for welfare," Business Recorder. 2016-07-22.
Keywords: Economics , Fiscal deficit , Wealth tax , Taxation system , Tax revenues , Pakistan , SROs , MNCs , GDP , Income Tax