Unconventional budget proposals

Like every year, an attempt is made in this article to suggest comprehensive tax reforms agenda for Budget-2018-198, to be announced on April 27, 2018. The conventional proposals/changes in the existing tax system, made every year before the annual budget, have proved totally futile, even counterproductive. Unfortunately, however, the policymakers in the past have been ignoring or sidetracking fundamental reforms to make the tax system fair and efficient. In the election year, the government of PML-N can implement fundamental structural reforms to win the support of voters. Since 2013, it has failed to tackle the most essential issue of documentation of economy and decreasing number of return filers. The existing so-called functional system that replaced the circle-based system has not only failed miserably, it has rendered the Federal Board of Revenue (FBR) ineffective. The other very important issue is lack of political will to impose direct taxes. The present Income Tax Ordinance, 2001 relies overwhelmingly on presumptive taxes and/or minimum taxes, which in substance are indirect taxes. These are regressive and widening rich-poor divide. Such taxes favour the rich and mighty and make the poor poorer.

The policy of appeasement towards tax evaders, despite vehement opposition from many quarters, is prevailing and perpetuating. Giving a free hand to tax evaders to whiten money through section 111(4) of the Income Tax Ordinance, 2001, section 9 of the Protection of Economic Reforms Act, 1992, tax amnesties, increasing exemption limits, raising deductions, and serving the rich and mighty has eroded income tax base substantially over the period of time.

Every year, meaningful budget proposals are ignored, more precisely thrown in the dustbin, without even reading by wizards sitting in FBR and Ministry of Finance [MoF]. Three years back, when many constructive changes were suggested in these columns for improvement in tax administration and creating a growth-conducive taxation, Shahid Kardar, ex-Governor State Bank, conveyed candid remarks: “We three [Shahid, Huzaima and Ikram] write just to get things off our chest not because we believe even for a moment that they [people sitting in MoF and FBR] will ever change”. Neither disappointed nor disheartened even after Shahid Kardar’s words of wisdom, we continue to make attempts on regular basis to convince the wizards in MoF and FBR to go for structural reforms in the tax system to achieve the cherished goal of self-reliance and prosperity for all.

No agenda for rationalisation of tax codes or simplification of tax system can improve tax compliance unless there is 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. The present functional structure in Inland Revenue Service (IRS) has failed to achieve these objectives. While there is always talk of giving “market” wages to tax officials, nobody has ever emphasised improving the overall working conditions of FBR and honing professional skills of officers and staff. 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 on daily basis. Does it really need enormous money to extend the well-deserved respect and courtesy to taxpayers? Does this issue relate to market wages or foreign funding or advice?

The fundamental element of tax reforms is providing an efficient and competent administration, which is nowhere visible in Pakistan. Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely altering tax laws or suggesting cosmetic changes here and there. Reforms can be successful only if a comprehensive analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers’ attitude, revenue needs of the country and many other allied aspects.

We desire tax reforms without first establishing an efficient, workable structure. The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverket, that maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish ‘National Tax Authority’ – see details in ‘Need for National Tax Authority’, Business Recorder, October 20, 2017. This kind of innovation alone can counter massive pilferages in collections that are estimated at Rs 3 trillion by IMF in its country report, Unlocking Pakistan’s Revenue Potential.

Successive governments, military and civilian alike, have failed to tackle the twin menaces of hidden economy and tax evasion. The study, What is hidden, in the hidden economy of Pakistan? Size, causes, issues and implications, by Ahmed Gulzar, Novaira Junaid and Adnan Haider, shows that corruption and tax evasion are not only causing an expansion in the size of the informal economy but also hampering the growth rate, thereby adding more to economic uncertainty, income inequality and poverty.

The existing tax system is not taxing the rich 15 million. Resultantly, income and wealth distribution disparities are rapidly widening. Under the given scenario, efforts are needed both at federal and provincial levels to enhance the size of the pie by shifting to growth-oriented taxation – see details in ‘New Tax Model’, Business Recorder, August 28, 2015.

The PML-N in last budget must provide fair and transparent tax system for which complete model is available in a study, ‘Towards Flat, Low-rate, Broad and Predictable Taxes’, published by PRIME Institute. This model provides for revenue collection of Rs 8 trillion along with maximising economic growth. Politicians must have the courage to achieve a sensible balance between income, capital and consumption taxes. And they must also have the courage to spend, not on ill-designed social programmes introduced more to collect votes than social returns, but on important investments in creating human capital (eg education, training and health), and necessary public infrastructure to increase productivity of the economy.