Dr. Ikramul Haq
We need a paradigm shift in our entire tax system. In our peculiar milieu, a simple, fair and broad-based tax with lower rates will work provided it has a fool-proof enforcement capacity/appratus. There should be 10% income tax on all kinds of incomes earned by individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 50 million), 20% on companies and other entities. We should impose 8% sales tax on all goods and services (for exporters 0% tax). This system will fetch tax of Rs. 30 trillion from two taxes alone (Rs. 18 trillion income tax, Rs. 12 trillion as sales tax)! We can further collect Rs. one trillion from customs by levying 5% duty on all items) and Rs. 500 billion from excise duty taxing cigarettes etc.—2025: Tax Policy For Growth & Prosperity, Friday Times, December 28, 2024
By broadening of tax base, improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provision (except on salary, dividend, interest and payment to non-residents) and Pakistan can collect Rs. 31 trillion at federal level and Rs. 4 trillion at provincial level. For achieving this level of collection, Finance Minister Muhammad Aurangzeb needs to implement fundamental structural reforms to federalize national tax apparatus and unify value added tax (VAT) on goods and services. This will also help achieve a higher and sustainable growth rate of above five percent in the next ten years. This is not possible without simplification of tax system [FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021 and FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021].
The idea of restructuring of Federal Board of Revenue (FBR) and provincial tax agencies presented in Need for National Tax Agency, Business Recorder, November 1, 2013 was later elaborated in various articles, Need for National Tax Authority, Business Recorder, October 20, 2017, A case for National Tax Authority—I, Business Recorder, November 30, 2018, A case for ‘National Tax Authority’—II, Business Recorder, December 2, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018 and Growth Requires Effective Tax Administration, Friday Times, May 18, 2024.
The complete draft of national (federalized) tax agency is available in Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, November 2024, PRIME Institute, Islamabad) and in Tax Reforms in Pakistan: Historic & Critical Review (PIDE, Islamabad).
There cannot be two opinions that FBR or any other tax collection agency needs to be run by a competent board as a short-term reform measure before all of these are finally merged into a single national tax authority. The officers of FBR in the past reportedly suggested the name: Pakistan Revenue Board (PRB). This body, whatever may be the name, should not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes, otherwise voluntary tax compliance will remain a distant dream.
People must get free education, quality healthcare, decent housing/transport plus social security, such as universal pension, disability allowance, old age benefits, income support, child support, just to mention a few, in lieu of paying due taxes as suggested in There’s need for new tax model, Business Recorder, February 26, 2021 and Taxes And Social Democracy, Friday Times, October 12, 2024.
The National Tax Agency (NTA), as federalized tax authority, can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 of Constitution of Islamic Republic of Pakistan [The Constitution] by federal and provincial parliaments).
This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption and creating unnecessary compliance cost, rather than operating under one-window. Presently, taxpayers have to deal with multiple tax agencies, fragmented tax codes and jurisdictions, adding to their cost of doing business.
On March 12, 2020, according to Press release of Ministry of Finance, the National Tax Council [NTC] was established and its terms of reference (ToRs) approved. According to a Press report, “The harmonisation of GST is part of the World Bank’s budgetary support loan of US$750 to US$900 million”.
It is mentioned in the report that as “suggested by International Monetary Fund (IMF), the centre and provinces have finally agreed to establish NTC “to resolve all tax-related issues, especially for the harmonisation of general sales tax (GST) across the country”. It confirms that our governments do nothing unless lenders/donors force them to do. It was decided that NTC would have technical level representations from the federation and federating units to resolve tax-related issues without amending the constitution.
The NTC has an executive committee, comprising federal finance secretary, Chairman of FBR, provincial finance secretaries and heads of the provincial revenue authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA).
The executive committee of NTC, despite demand from various quarters and this scribe in various articles and books mentioned above, has failed to recommend the establishment of National Revenue of Board (NRB) to Monitoring Committee of the National Finance Commission (NFC). It could have been done by amending the Federal Board of Revenue Act, 2007 and passing of resolutions by all the provincial assemblies under Article 144 of the Constitution.
The NTC should seriously consider the models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) that not only collect taxes at all tiers of government but also extend benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA/NBA (complete digitisation) can be a great step towards an e-government model for the country that is presently non-existent.
The complete roadmap for achieving this goal is discussed in Federal Planning & The Need For A National Tax Agency, Friday Times, October 21, 2023, Time up for fiscal integration—I, Business Recorder, December 21, 2018, Time up for fiscal integration—II, Business Recorder, December 23, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, Doing business under scattered taxation, Business Recorder, September 7, 2018 and Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018.
In the forthcoming federal budget 2025, the policymakers and legislature need to restructure the tax system to tap the real tax potential at national level and at the same time provide quality social services to the citizens, drastically cut wasteful expenditures, get rid of mess in energy sector and stop further bleeding of public funds on loss-bearing state owned enterprises (SOEs). The real dilemma of Pakistan is outdated, colonial-style administrative and judicial structures, elitism, cronyism, greed and corruption on the part of parasitic predatory elites.
The exiting bureaucrats are parasites and since rent-seeking is accepted as a norm, even the private sector is neither growth catalyst nor ready for innovations. Muhammad Aurangzeb must give top priority to fundamental structural reforms to dismantle elitist and rent-seeking economic system as with this system inclusive growth for prosperity of all citizens is not possible.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.