Avoiding reforms & imprudent policies
Huzaima Bukhari & Dr. Ikramul Haq
An unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018-19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy
“Their [provinces] revenue efforts have been unimpressive to say the least, whereas their allocation on social development has been much less than what is required to bridge the existing service delivery gap. Therefore, it requires strong commitment from the provincial governments to support the fiscal consolidation efforts, bring the needed diversification in the revenue base, and gear themselves up to carry out effective public financial management to improve the quality of public spending”—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy
“Higher reliance on withholding taxes and within withholding taxes a high concentration on a few items makes the income tax revenues vulnerable. Moreover, taxing the already taxed, is a regressive approach which creates burden on the compliant taxpayers hence, FBR is focusing on working out a plan to diversify the base of income tax in the country”—FBR Year Book 2018-19
The elite is unwilling, even in its own enlightened self-interest, to contribute on the basis of capacity to bear the resource burden required to build a fairer society. Instead, it has instituted a social order that imbibes the feudal value system and promotes a culture of paternalistic and personal relations (in contrast to impersonal market relationships and a culture of competitiveness in other economies), nepotism and patronage, violation of the rule of law, non-acceptance of the norms of fair play and justice, etc; wrecking institutions meant for checking such excesses. Even a slowly growing middle class from non-elite backgrounds has adapted to these value systems, creating a crisis of legitimacy for the state and its institutions—Shahid Kardar, Overhaul the system, Dawn, September 16, 2014.
The root cause of our economic destruction has been the policy of ‘reckless borrowing and ruthless spending’—Dr. Ashfaque H Khan, The News, August 8, 2012.
A tax gap analysis recently completed by the World Bank indicates that Pakistan’s tax revenue would reach 26 percent of GDP if tax compliance were raised to 75 percent—World Bank $400 million Pakistan Raises Revenue Project
The Pakistan Tehreek-i-Insaf (PTI) on assumption of power in August 2018 with the help of coalition partners, after general elections held on July 25, 2018, contrary to its election promises, failed to undertake much-needed and long-delayed fundamental structural reforms and restructuring of Federal Board of Revenue (FBR) that could have yielded required revenue to overcome monstrous fiscal deficit and make Pakistan self-reliant in the coming years. It also could not reduce wasteful, unproductive expenditure by right-sizing and revamping the loss-bearing Public Sector Enterprises (PSEs). It only resorted to patchwork here and there, thus, 2019 witnessed securing record loans, external and internal, no privatisation or revamping of PSEs, ending of circular debt, meaningful efforts to cut unproductive/wasteful expenditure, introducing further regressive taxes—just to mention a few. The poor fiscal management, wrong economic policies, and adoption of failed strategies pushed the country into stagflation leading to recession, high inflation and unemployment, closing down of industries/businesses leading to job losses, high interest rates and extremely low growth. It also created disappointment and despair in general public. The reasons for sluggishness in business and lack of any further investment, among many other factors, have roots in oppressive taxes and highly anti-business behavior of FBR.
The very first action of ex-Finance Minister, Assad Umar, of presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018 in the National Assembly showed the traditional babu [clerical—typical of bureaucracy] approach to balance the books. He failed to include the key areas of Theme-3—‘Revatilise Economic Growth—part of First 100 Days Plan of PTI after forming Federal Government, unveiled during the election campaign and to give a roadmap to fulfill the promise of collecting Rs. 8 trillion by PTI. On the contrary, the target of FBR was reduced by Rs.169 billion—a reduction of 3.5% over the original budget that ultimately led to historic high fiscal deficit of 8.9 percent of GDP! The PTI had ample time of nine months for reforms and revenue mobilisation—both tax and non-tax—and we gave an actionable plan for the same, Productive tax reforms, Business Recorder, October 27, 2018, and earlier roadmap for restructuring of FBR, PTI and tax reforms, Business Recorder, August 17, 2018. However, the PTI’s economic and tax managers did not bother to study and/or implement the same. For long-term tax reforms, covering all areas, a paper, Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016), was also presented but not considered by the PTI for public debate and adoption after seeking feedback and input from all stakeholders. This paper gives step-wise action plan for restructuring of entire tax system and raising revenues of Rs. 8 trillion at federal level alone.
Even in the Finance Supplementary (Second Amendment) Bill of 2019, on January 23, 2019, once again no steps were announced for making FBR efficient and business-friendly and simplify taxes, making them fair, low-rate and broad-based to harness the real potential as well as accelerate growth and drastically reduce wasteful expenditure. What made the situation more painful was the fact that in its first budget for fiscal year 2019-20 presented on June 11, 2019, greater burden was imposed on the common man through enhanced indirect taxes, while appeasing the mighty, extending benefits to the rich and toeing the line of the lenders/donors.
Dr. Abdul Hafeez Shaikh, Advisor to Prime Minister on Finance, Revenue and Economic Affairs, heading the economic team of Premier Imran, in post-budget press conference on June 12, 2019, openly admitted that the heaviest taxes in the history of Pakistan were imposed “to qualify for new programme of IMF”. While citing that the tax target for this year was set at Rs. 5550 billion, he went on to say: “If we have to offend some people for this (increasing tax rate), then we are ready to do it” [the tax target, however, on December 23, 2019 was reduced to Rs. 5238 billion]. This confirmed that he had and till today no concern whatsoever about the disastrous impact of oppressive, high-rate and narrow-based taxes with numerous exemptions and concessions for the privileged classes—militro-judicial-civil complex and political elites, especially rich absentee landowners—on our ailing economy. While he announced many unjust indirect taxes to make life of the less-privileged and downtrodden further miserable, a generous money whitening scheme was given to the rich and mighty tax evaders and plunderers of national wealth.
Before coming to power, top leadership of PTI was calling tax amnesties as “immoral”, “undesirable”, “unlawful” and a “slap on the face of honest taxpayers”. After coming into power, they took many U-turns and one was offering asset whitening scheme, drafted proudly by Chairman FBR, Shabbar Zaidi, resulting into tax losses of billions of rupees. PTI’s first asset/income/expenditure whitening scheme notified through a Presidential Ordinance on May 14, 2019 gave generous incentives to those who had not been paying their taxes honestly and cheating the State. About 56 people, whose data was shared by the OECD, availed the PTI’s tax asset whitening scheme and they declared Rs. 31.8 billion worth of assets by paying only Rs. 1.7 billion—for further details read Amnesties & tax losses at Surkhiyan is a bilingual news website and web TV.
The Prime Minister, Imran Khan, while addressing top officials of FBR on November 13, 2019, sought their input/recommendations in respect of a three-year-long tax reform agenda, approved by him through a letter dated October 3, 2019. The plan included among others: (i) a nationwide survey for tax assessment (ii) evaluating wealth parked in real estate (iii) implementing a new value added tax system (iv) setting up the Pakistan Revenue Authority by June next year and (v) restructuring FBR in the interim period. It was shocking that he approved the same without consulting the stakeholders and seeking opinions from experts. In his address, the Premier admitted that “masses get little in return for taxes, and that there exists huge trust deficit between the citizens and taxpayers”.
The important question for remaining six months of the current fiscal year and beyond is: Will the above and other actions desired by World Bank under its US$ 400 million ‘Pakistan Raises Revenue Project’ or as conditions imposed by the International Monetary Fund [IMF] and accepted as such by PTI achieve the fiscal consolidation that is one of the daunting challenges faced by Pakistan, especially debt servicing and bridge the trust deficit?
In fiscal year 2018-19, total payment, as per budget documents, on account of debt servicing, was Rs. 1987 billion against the budgeted figure of Rs. 1620 billion. Allocation for the current fiscal year is 2891 billion, 78 % higher than last year! If FBR collects even the revised target of Rs. 5238 billion (many say it will be highly improbable and total collection after holding back all payable refunds and seeking advances as per past practice will be even less than Rs. 5000 billion). Even if FBR collects Rs. 5 trillion, after transfer to provinces under 7thNational Finance Commission (NFC) Award, net tax collection available to the federal government will be short by around Rs. 500 billion for debt servicing of Rs. 2891 billion allocated in the budget. It may also exceed due to short-term funds [hot money of $1.2 billion] raised on heavy interest rate through T-Bills etc recently from foreign investors! This shows the gravity of the fiscal crisis faced by Pakistan and rightly highlighted by Prime Minister time and again in his speeches and meetings with experts. Successive governments have failed to end imprudent, destructive and damaging tax policies and reduce wasteful expenses. No serious effort has been made by any government, military and civilian alike, since July 5, 1977 to broaden the tax base through lowering of rates and effective enforcement—PTI has also proved so fat that it is no exception.
According to a Press report, after meeting of Prime Minister with top officials of FBR on November 13, 2019, the Chairman FBR, Syed Muhammad Shabbar Zaidi, said that the timelines with reference to ‘reorganisation’ as given in October 3, 2019 letter “shall be put on hold”. “Meanwhile we at FBR shall strive to collect optimum revenue“, he added. It showed not only delaying the much-needed and much-delayed structural reforms but also serious doubts about achieving the target set originally in the budget that proved later on—presently reduced to Rs. 5238 billion . Now according to IMF, Pakistan’s budget deficit will slip from the projected 7.3% of GDP or Rs. 3.2 trillion to Rs. 3.4 trillion or 7.6% of GDP for the current fiscal year.
The Prime Minister in his address emphasised upon the FBR officials to collect minimum Rs. 8 trillion “if we have to survive as a viable State”. It was not a new statement on the part of Prime Minister, but as usual he and his economic team did not divulge any roadmap to achieve this goal. In the meantime, the people of Pakistan in general and businessmen in particular are disillusioned with the performance of PTI.
In recent months, prices of items of daily use (food, medicines, petrol, utilities) have skyrocketed and business activities have substantially slowed down leading to drastic cut in economic growth and unemployment. Inflation in November 2019 skyrocketed at 12.7%—highest during the last nine years. Situation till December 30, 2019 at the time of writing this piece was equally disturbing on this account. The PTI government took foreign loans of US$ 10.4 billion in its first year in power resultantly Rs. 571.6 billion were consumed by debt servicing alone from July to September 2019—foreign debt servicing was Rs. 77.7 billion, showing an increase of 70%. Circular debt is expected to swell to Rs. 1700 billion by end of this current fiscal year!
The cost of doing business has increased manifold making industries uncompetitive to produce exportable goods. The Small and Medium Enterprises (SMEs) that provide bulk of employment are in deep trouble especially after high interest rate by State Bank of Pakistan (SBP) and harmful and burdensome taxation. Manufacturing and agricultural sectors are facing the brunt of wrong tax and other policies (heavy taxation of inputs and costly energy among many other issues), reluctance to rely on indigenous expertise available with people like Asif Sharif, CEO of Pedevar to introduce modern and productive processes, while rural poverty is on the rise.
As explained above our real dilemma that is not tax collection alone, as highlighted out of proportion by the lenders/donors but non-utilisation of appropriate skills, knowledge and expertise as well as very high level of current expenditure. The issue has yet not been adequately addressed by the Prime Minister and his team—Minister, State Ministers, Advisers etc. Obviously, the monstrous size of government, army of ministers, state ministers, advisers etc would not like to brief Prime Minister on it as reducing wasteful expenditure will mean reduction in unprecedented luxuries available for the elite—militro-judicial-civil complex and politicians.
The following facts as contained in Budget Documents for 2019-20 are simply horrifying and need immediate attention of PTI Government:
“During the last five years, total revenue as percent of GDP on average reached to 14.9 percent, whereas it stood at 15.1 percent in Financial Year (FY) 2018. The total expenditures as percent of GDP on average reached to 20.5 percent, while during the FY2018, it was the highest at 21.6 percent. Resultantly, fiscal deficit on average stood at 5.5 percent, while during the last year it was recorded at 6.5 percent.
In FY2016, fiscal deficit was brought down to 4.6 percent of GDP but the low trajectory could not be maintained and increased to 5.8 percent and 6.5 percent during FY2017 and FY2018, respectively.
The performance of fiscal indicators shows that total revenue growth experienced a slowdown (5.9 percent in FY2018 against 11.0 percent growth in FY2017), while, total expenditure growth was contained at 10.1 percent in FY2018 as compared to 17.3 percent in FY2017.
The net revenue receipts for 2018-19 were estimated at Rs 3,070.4 billion, which decreased to Rs 2,569.0 billion or by 16.3% in revised estimates 2018-19. The provincial share in federal revenue receipts was estimated at Rs 2,590.1 billion during 2018-19, which decreased to Rs 2,462.7 billion or by 4.9% in revised estimates.
The overall expenditures during 2018-19 were estimated at Rs 5,932.5 billion, out of which the share of current expenditure was Rs 4,780.4 billion. Current expenditure in revised estimates 2018-19 showed an increase of Rs 809 billion from budget estimates. After the share of Provinces in gross revenue is transferred, the net revenue receipts of Federal Government were at Rs 3,070,439 million in the budget 2018-19, which later revised downwards to Rs 2,568,977 million in the revised estimates 2018-19 showing a decrease of 16.3%.
The budget estimates 2018-19 of the overall expenditure were Rs 5,932,463 million, which increased to Rs 6,419,111 million in revised estimates 2018-19 or by 8.2%. Current expenditure: Rs. 7. 288 trillion (FY 2019-20) showing an increase of 52.5% and 30.4% in budget and revised estimates respectively of the fiscal year 2018-19.
Within development expenditure, total Public Sector Development Program (PSDP) expenditures posted a negative growth of 7.7 percent in FY2018 and stood at Rs 1,456.2 billion as compared with Rs 1,577.7 billion (growth of 33.1 percent) recorded in FY2017. Federal PSDP (net excluding development grants to provinces) spending witnessed negative growth of 20.6 percent (Rs 576.1 billion) in FY2018 against growth of 22.3 percent (Rs 725.6 billion) in FY2017. Provincial PSDP registered a growth of 3.3 percent in FY2018 compared with 43.8 percent in FY2017. Non-tax revenue decreed to Rs. 427.3 billion in FY 19 from Rs 760.9 billion in FY 18.
Total Revenues of all provinces in FY 19 were Rs. 2995.9 billion [in FY 18 it was Rs. 2,938.5 billion] out of which share from federal taxes was Rs. 2397.8 billion [in FY 18 it was Rs. 2,217.4 billion]. Total revenues of all provinces were Rs. 488.1 billion [in FY 18 it was Rs. 548.1 billion], out of which taxes were of Rs. 401.8 billion [in FY 18 it was Rs. 401.4 billion]. Total expenditures of all provinces were Rs. 2,857 billion [in FY 18 it was Rs. 2,960.9 billion] of which current expenditure were Rs. 2350.8 billion [in FY 18 it was Rs. 2,080.7 billion]”.
The root cause of our economic problems as highlighted above is not only inadequacy of revenue mobilization—especially non-tax—but primarily inefficient and corrupt government apparatus and incompetent political leadership that is not ready to impart training to farmers, unskilled labour force, privatize or make loss-bearing PSEs profitable, end wasteful expenditure and circular debt, eliminate numerous withholding tax provision—especially heavy taxes and duties at import stage—advance tax, minimum tax, alternate corporate tax etc and then on the top of that not releasing genuine refund to destroy liquidity of the business houses, especially exporters.
The biggest challenge on tax mobilisation front faced by FBR is bridging monstrous tax gap through automation and introduction of tax intelligence system and not levying more taxes or enhancing the rates of the existing ones. The World Bank in its report, Pakistan Revenue Mobilisation Project, has rightly noted:
Pakistan’s tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower middle income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent respectively) and it is larger for the GST/GSTS than for income tax (65 percent vs. 57 percent respectively).
It is clear from FBR Year Book 2018-19 that over 70% tax collection came from exorbitant taxes at import stage, withholding tax regime under income tax law and advance tax. This pattern continues under the government of PTI—it has taken no corrective measures till today. The main reliance of FBR since 1991 has been on indirect taxes, even under the Income Tax Ordinance, 2001—after Finance Act, 2019 it contains over 70 withholding tax provisions, many of which constitute minimum tax liability! Is it direct taxation? Even Chairman Shabbar Zaidi will certainly say NO!!
FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax (it was 65% last year). Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], Rs. 39.2 billion [2.7%] received with returns and Rs. 344.2 billion [23.8%] as advance tax. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR. The same trend continues in the first six months of the current fiscal year. Even after imposing all kinds of oppressive taxes, FBR is expected to face a substantial shortfall in respect of the target fixed for the first half of the current fiscal year [as per figures available for July-November, for December 2019 figures will be available in the first week of January 2020]. The overall shortfall vis-à-vis original target at the close of current fiscal year may rise to over Rs. 500 billion. Provisional figures show that achievement of target until now is 79%
The World Bank in an appraisal paper related to Pakistan Raises Revenue (PRR) has termed “vested interests lobbying for tax exemptions, internal tensions and wariness of change among the Federal Board of Revenue (FBR) staff, and potential disputes affecting provinces’ readiness to collaborate with the FBR as high-risk factors” for tax reforms. The World Bank has estimated “Pakistan’s tax gap at 10% of the GDP or Rs. 3.8 trillion. Our current tax-to-GDP ratio is 12.6% that according to the World Bank should be 23%. Among the 13 federal countries, Pakistan is second to last in the performance of provincial governments on tax collection. The World Bank analysis is that Pakistan has a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes”.
The issue of fragmentation of taxes and multiple collection agencies was discussed in detail in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged in any of its papers/reports related to Pakistan Raise Revenue Project, the contribution of local writers and presented it as its own recommendations. For example, it may be noted that we gave the idea of National Tax Agency in 2014 in an article Revamping tax system. This was later elaborated by us many a times in various articles and in a paper, Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute, April 2016]. It was also included by the Tax Reforms Commission in its final report submitted to the government in February 2016 [which was marked confidential and till today is not made public even by the PTI Government despite repeated requests].
It was suggested that the FBR or any other tax collection agency need to be run by a competent board as a short-term reform measure before all of these finally merged into a single national tax authority [NTA]. The NTA should not only collect taxes at all tiers of government but should also disburse benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitisation) can be a great step towards e-government model for the country that is presently non-existent. The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth studying/adopting after debate and suggesting modifications suiting our peculiar requirements [see details in Tax reforms strategy, The News, December 3, 2017and Comprehensive Tax reforms, The News, September 9, 2018].
The issues faced on fiscal front and how to deal with them, especially in budget for 2019-20 were discussed in detail in a serious of articles, carried out under the title, ‘Avant-garde budget proposals’, published in four parts in Business Recorder on May 10, 17, 24 & 31, 2019. These and many other articles such as Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018, PTI and tax reforms, Business Recorder, August 17, 2018 and Wither tax reforms, Business Recorder, August 2, 2019, were not considered by PTI Government and never discussed or quoted by IMF or World Bank.
Shockingly, the World Bank, IMF and FBR ignored the proposals presented in various articles mentioned above suggesting how to generate revenue of Rs. 8 trillion at federal level alone [Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019 and ‘Raising Rs. 8 trillion’, Daily Times, November 12, 2017] enabling Pakistan to overcome monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens. The IMF in its first review of December 19, 2019 [Country Report No. 19/380] has admitted that “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”. The fact of oppressive and narrow-based taxation was highlighted repeatedly by us in various articles and viable solutions were offered to make it fair and broad-based, but FBR and IMF paid no heed. The World Bank in 400-million Pakistan Raises Revenue Project has also made no reference of these, though many proposals have been endorsed with acknowledgement.
In the above articles, among other things, it has been repeatedly emphasised that Pakistan is caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and on its own collects too little to meet the national overall demand. Since the size of cake (Divisible Pool—distribution of revenues under National Finance Commission Award) is small, the provinces lack sufficient resources for the welfare of their people as they also not ready to impose progressive taxes [wealth tax, inheritance tax, gift tax, capital gain tax etc] on the rich and mighty that are under their domain now after the 18thAmendment—in this scenario, the real sufferers are the masses as elaborated in Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019.
The taxation rights under the prevalent Constitution of Islamic Republic of Pakistan [“the Constitution”] between the federation and federating units need reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the federal government. For example, Balochistan should get “net proceeds” of Excise Duty, which is presently not the case, on natural gas and Khyber Pakhtunkhwa on electricity, as envisaged in Article 161(1)(a) & (b) of the Constitution. Their present share in sales tax from NFC Award—commonly known as Divisible Pool—is as low as 9% and 14% respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. The same is the case for Sindh. They should get right to levy sales tax on goods as well as was the case at the time of independence.
In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. The planning, in the aftermath of 18th Amendment should be federalised rather than centralised. The 18th Amendment redefined National Economic Council (NEC) on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. The 18th Amendment also through Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. This subject was earlier held by the federal government. It needs to be implemented. Presently, many economists and politicians are arguing that the 18th Amendment and 7th National Finance Commission (NFC) Award are harming fiscal stability of Pakistan. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically.
The provinces should have the exclusive right to levy sales tax not just on services but also on goods within their respective physical boundaries as was the case in British India. It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling. After the 18th Amendment, right to levy wealth tax, capital gain tax on immovable property, gift tax, inheritance tax etc is with provinces but they are not ready to levy such taxes on the rich and mighty. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich classes—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and the Centre in fiscal year 2018-19—is lamentable.
It is also imperative that further amendment should be made after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government. This will help FBR to collect income tax as per actual potential and the provinces by levying sales tax on goods in addition to services will generate sufficient funds for their needs. It will also reduce fiscal deficit at the federal level. This is the only way to achieve fiscal stabilisation in Pakistan. However, this can only be achieved if we also reform and merge all tax collection agencies at federal and provincial levels for which we need comprehensive structural reforms.
The FBR and all provincial tax collection agencies, after necessary reforms, should ultimately merge into single National Tax Authority [NTA], manned by members of All Pakistan Unified Tax Service (APUTS) after debate and agreement between the federation and federating units. The NTA will collect taxes at all levels that would be distributed as per Constitution to respective entities. It will also disburse benefits like pension, social security, food stamps and income support etc. The linkage of database of various bodies with NTA (complete digitization) will be a great step towards e-government model that is presently non-existent, but efforts are now initiated for achieving this goal. The mode and working of NTA can be discussed and finalised under CCI and its control can be placed under (NEC).
The agenda for the remaining six months of the current fiscal year and beyond should include among others:
- All individuals having taxable income or below taxable limit should be facilitated to file simple tax returns [no wealth statement]. Those earning below taxable limit should be paid income support [negative tax]. Return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create data bank at national level of all households. Their earning levels will determine who need to pay and who should be entitled to social benefits under Benazir Income Support Programme, Ehsaas etc and how to improve social/economic mobility ending poverty trap.
- All entities—individuals, association of persons/firms/companies/any other artificial juridical persons—should be offered to pay income tax/sales tax for any tax/assessment year/tax period for any past lapse under National Tax Clemency Scheme. They should be encouraged and facilitated to pay past liabilities and thereafter would not face any penal action—prosecution, penalties, additional tax, default surcharge etc.
- The State must end the culture of appeasement—no more amnesties and immunities giving incentives to the dishonest and penalising the honest who have been paying taxes diligently at normal rates. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit. It would bring in much-needed revenues—even exceeding the revised target fixed for FBR at Rs 5.2 trillion.
- For reducing fiscal deficit to the level of 4% of GDP this year, it is imperative to (i) curtail unproductive and wasteful expenses by 30%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc through public auction and for specific activities to generate employment and boost economic activity and (iii) taxes at all levels—federal, provincial and local—should be made simple, low rate, broad-based, payable with ease.
- In the next three years’ time, the businessmen instead of being overburdened with advance/heavy taxes/duties/other charges should be facilitated by improving all indexes of ‘Ease of Doing Business’ that must also include reducing cost of doing business. They should be given tax credits/incentives for compulsorily investing in human resource so we have trained and qualified workforce in all areas—providing employment to all and paying them as ordained in Article 3 of the Constitution. We must encourage and offer all possible facilities and incentives to all kinds of entrepreneurs, especially Small & Medium Enterprises (SMEs) to concentrate on growth and productivity.
- All the governments—federal, provincial and local—should join hands and prepare national level data of all citizens determining their economic and social status. There should be universal pension, social security and food stamps for the needy at the same time empowering them to come out of poverty entrap.
- In three years, after achieving consensus through consultation with all stakeholders we should have National Tax Agency manned by members of All Pakistan Unified Tax Services having the professional expertise in all related fields. This Agency would be in a position to communicate to all citizens what their income/expenditure levels are—it will determine tax obligations as well as who needs income and social support from the State.
- After national debate and taking input from all stakeholders national and provincial legislators should go for simple, predictable and low rate taxes—there should be income tax on all incomes including agricultural income to be under the exclusive domain of federal government and single harmonised sales tax on goods and services to be given exclusively to the provinces on the basis of goods produced and supplied and services rendered or performed within their territories—it will create fiscal consolidation and make federal and provincial governments self-reliant.
- We must abolish multiple taxes and collect local taxes e.g. property, vehicle taxes etc to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
- All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems—of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine and/or imprisonment.
Let Prime Minister be informed that the iniquitous prescription of World Bank and IMF of more taxes, austerity and high interest rate will not solve our problems—this has miserably failed in the past. The only solution is to reduce wasteful expenditure, right-size the monstrous size of the government, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive, should be leased out for industrial, business and commercial ventures. It will generate substantial funds and facilitate rapid economic growth. For progressing, we need no more anti-growth and anti-business taxes but to dismantle all elitist structures. Empowerment of masses at grass root level, which is possible by implementing Article 140A in letter and spirit—this alone can ensure economic prosperity for masses. No other strategy will work, not even the recent US$ 400 million loan from World Bank for Pakistan Raises Revenue Project.
Determination of a tax base capable of measuring an individual’s ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from progressive to regressive taxes where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as awards and rewards or at concessional rates), rich industrialists and greedy businessmen are paying meagre personal taxes. On the contrary, the poor are compelled to pay exorbitant sales tax on goods and services (levied under federal and provincial laws). This is absolutely criminal and blatant violation of Article 3 of the Constitution which says: “The State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability, to each according to his work”. For flawed fiscal measures, the PTI Government is becoming unpopular as people are feeling the real heat of high inflation and rising unemployment. However, the Government still has a chance that it missed in 2019 to end oppressive taxation and reduce drastically wasteful expenditure. The PTI Government’s New Year resolve should be: “Reversal of all anti-people policies, making 2020 Year of Prosperity for all”—the agenda for this as narrated above is available, and the only lacking is will to implement it.
The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS). “Huzaima Bukhari and Dr. Ikramul Haq have designed a tax reform plan that would dramatically change the structure of taxation in Pakistan by correctly aligning incentives to promote economic growth and voluntary tax compliance. An ideal tax system should consist of the lowest possible tax rate on the broadest possible tax base. Such a system gives people the least incentive to evade, avoid or otherwise not report taxable income. Along with sound money, free trade, spending restraint and minimal regulation, the adoption of these recommendations will launch Pakistan onto a new trajectory of economic growth and prosperity for all” —Dr. Arthur B. Laffer, Father of Supply-Side Economics, Creator of “Laffer Curve”