Dr. Ikramul Haq
Pathetic performance of Federal Board of Revenue (FBR) and provincial tax agencies in bridging the huge tax gap and wasteful expenses on the part of federal and provincial governments are badly affecting the fiscal scene. On the one hand, the federal government is in a debt trap, and on the other, provinces—heavily dependent on transfers under National Finance Commission Award—are getting less than budgeted amounts. Provinces have also miserably failed to collect due agricultural income tax from rich absentee landlords.
In the first five months of the current fiscal year, according to a Press report, “The cumulative spending on debt servicing and defence remained at Rs.2.2 trillion, equivalent to 107% of the federal government’s net income. The net income of the federal government was Rs2.04 trillion, after paying the provinces their shares under the National Finance Commission award”. This confirms the real dilemma faced by the federation, highlighted in New year challenges, BOL NEWS, December 25, 2022.
As usual, FBR is facing shortfall in its half-yearly target of Rs. 3.65 trillion by at least Rs. 250 billion as per media reports. The bulk of taxes collected by FBR are from withholding taxes. According to a report:
“Of Rs1.1 trillion that the FBR collected, on account of income tax during the July-November period, Rs734 billion were collected by those who are not employees of the FBR. The amount paid as advance income tax by taxpayers is over and above this collection”.
The International Monetary Fund (IMF) in its Country Report No. 19/380 also revealed, “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”.
Many writers and institutes like Pakistan Institute of Development Economics (PIDE) have been highlighting the vices of oppressive and narrow-based taxation in various reports/articles/research papers. Viable solutions have also been offered to make it fair and broad-based, but FBR has never paid any heed. The following need consideration on macro level:
- Corporate tax rate should not be more than 20% including super tax etc.
- Income tax rate should be lowered to maximum 10% with alternate tax of 2% on net wealth exceeding Rs. 100 million, whichever is higher.
- All individuals should be facilitated to file simple income tax return [no wealth statement]—those earning below taxable limit should be paid income support [negative tax].
- Single-page 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 needs to pay and who should be entitled to social benefits and how to improve social/economic mobility ending poverty trap.
- The State must end the culture of appeasement—no more amnesties/immunities giving incentives to the dishonest and penalising the honest. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit. It will yield much more than target fixed for FBR at Rs. 7.47 trillion.
- For reducing fiscal deficit to the level of 4% of GDP, 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. 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 and payable with ease.
- Instead of being overburdened with advance/heavy taxes/duties/other charges businesses should be facilitated by improving all indexes of ‘Ease of Doing Business’ and reducing ‘Cost of Doing Business’. Tax credits/incentives for investing in human resource development (HDR) and research & development (R&D) to have qualified workforce in all areas—providing employment to all and paying them as ordained in Article 3 of the Constitution.
- All possible facilities and incentives to all kinds of entrepreneurs/innovators, especially Small & Medium Enterprises (SMEs) to concentrate on innovations, growth and productivity. Banking sector must be proactive in lending to SMEs and big businesses. Banks are overwhelmingly extending loans to the government considering it as a safe bet. Banking laws need to be amended for quick disposal of disputes as done in many countries.
- Facilities to foreign investors including grant of long-term visas and/or nationality. Many Afghans and Iranians are keen to invest.
- Central data creation/management of all citizens to determine their economic status. There should be universal pension, social security/food stamps for the needy, at the same time empowering them to unshackle themselves from the trap of poverty.
- Establishment of National Tax Agency (NTA) and All Pakistan Unified Tax Services having professional expertise in all related fields. NTA would communicate to all citizens what their income/expenditure levels are—it would determine correct tax obligations and bona fide entitlement of social support from the State.
- National/provincial legislators should impose simple, predictable and low rate taxes—income tax on all incomes including agricultural income should be under the exclusive domain of federal government and harmonised sales tax on goods/ services exclusively to the provinces on the basis of goods produced/supplied and services rendered/performed within their territories—it would ensure fiscal consolidation making the country 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.
- Allocation of minimum of 4% of GDP for education and additional 2% for R&D by federal and provincial governments.
- 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.
Shockingly, both IMF and FBR have ignored proposals given in Tax reforms: Agenda for Self-Sustainability for collecting Rs. 14 trillion at federal and provincial levels enabling Pakistan to overcome monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens.
Failure to undertake fundamental reforms as suggested above is the real problem. The federation can easily collect taxes of Rs. 12 trillion at federal and Rs. 2 trillion at provincial levels to create adequate fiscal space to come out of the present economic mess and provide the much-needed and long-delayed benefits/entitlements to all citizens and reliefs to trade and industry.
For achieving the above levels of taxes, our focus should be on rapid/sustainable higher growth that will increase taxes as a byproduct—harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will politicians in power care to take corrective measures? Let us pray 2023 brings prosperity for Pakistan and equal opportunities and universal entitlements for all citizens as guaranteed in the Constitution.
The writer, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)