Huzaima Bukhari & Dr. Ikramul Haq
The Government of Pakistan Tehreek-i-Insaf (PTI) contrary to its election promises after coming into power avoided fundamental structural tax reforms that could have yielded required revenue to make Pakistan self-reliant. It only resorted to patchwork here and there, thus, 2019 witnessed securing record loans, external and internal, no will to cut unproductive/wasteful expenditure, introducing regressive taxes etc. The prevalent stagflation leading to recession in economy amongst some have roots in oppressive and outmoded taxes.
The ex-Finance Minister, Asad Umar, while presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018 followed the traditional babu approach to balance the books. He failed to give a roadmap to fulfill the promise of collecting Rs. 8 trillion by PTI—in fact target of Federal Board of Revenue (FBR) was reduced by Rs.169 billion–a reduction of 3.5% over the original budget! He did not bother to study the paper Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016) that gives step-wise action plan for raising revenues of Rs. 8 trillion at federal level alone. The same was the case with the Finance Supplementary (Second Amendment) Bill of 2019 presented on January 23, 2019—once again no steps were taken to harness the real tax potential. 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, 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”. He went on to say that “I am ready to offend people for the sake of collecting Rs. 5503 billon taxes”. This confirmed that he had no concern whatsoever about the disastrous impact of oppressive taxes 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 Pakistan Tehreek-i-Insaf (PTI) was calling tax amnesties as “immoral”, “undesirable”, “unlawful” and a “slap on the face of honest taxpayers”. After coming into power, PTI 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 declared Rs. 31.8 billion worth of assets by paying only Rs. 1.7 billion.
The Prime Minister, 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 includes 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 is: Will the above actions desired by World Bank under its US$ 400 million ‘Pakistan Raises Revenue Project’ 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 Rs. 5000 billion, after transfer to provinces under 7thNational Finance Commission (NFC) Award, net tax collection available to the federal government will be around Rs. 2400 billion—short by Rs. 491 billion for debt servicing of Rs. 2891 billion! This shows the gravity of the fiscal crisis faced by Pakistan and rightly highlighted by Prime Minister. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government, military and civilian alike, to broaden the tax base through lowering of rates and effective enforcement—PTI has also proved that it is no exception.
According to a Press report, after meeting of Prime Minister with top officials of FBR, 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.
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. The cost of doing business has increased manifold making industries uncompetitive to produce exportable goods. Agricultural sector is also facing the brunt of wrong policies (heavy taxation of inputs and costly energy), reluctance to rely on indigenous expertise, while rural poverty is on the rise.
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 meritorious awards and rewards), 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”. Resultantly, PTI Government is becoming unpopular as people are feeling the real heat of high inflation. However, the Government still has a chance it has missed in the first year of its rule to end oppressive taxation. It still has time to reverse its ant–people policies and make Pakistan a prosper country in 2020 by adopting the following agenda:
- 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.
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)