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Huzaima Bukhari & Dr. Ikramul Haq
The reality behind annual growth of 16-20% in revenue collection of Federal Board of Revenue (FBR) from 2013 to 2018 remains untold. The facts reveal that behind the “extraordinary” (claimed and acclaimed) revenue growth lies not only blocking of refunds of billions of rupees, advances from big corporate taxpayers, but also substantial increase in number of withholding tax provisions and enhancement in their rates, exorbitant sales tax on petroleum products, and not by increasing the number of filers. Once de facto Prime Minister-cum-Finance Minister, now fugitive, Muhammad Ishaq Dar, was not only hiding these facts, but was also brazenly and blatantly hoodwinking members of the Parliament, international lenders/donors and the public at large.
For the last many years on instructions from top bosses of FBR, field officers have been denying adjustments of determined refunds against demands. They have been raising illegal demands and blocking genuine refunds. If Dr. Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, who has replaced Asad Umar, does not stop these malpractices, it will be highly lamentable. Field officers are saying that they have the same “instructions” from their bosses as were in the days of Ishaq Dar and Haroon Akhtar to squeeze the existing taxpayers as much as they can. It is high time that an audit by the Auditor General of Pakistan is commissioned by Parliament to ascertain the quantum of refunds unlawfully withheld and how much advances, not due, were taken to show higher tax collection.
Devising a rational and innovative revenue mobilisation strategy is never considered by politicians or self-styled wizards sitting in FBR. All agree that we need to adopt economic policies aimed at rapid growth and investment. In the last many columns, it was emphasised that our top most priority should be sustainable growth and prosperity for all—taxes will automatically increase but collecting oppressive taxes in an ailing economy can lead to further deterioration. Every political party promises rapid industrial growth as its main agenda on paper, but when in power fails to do so. Many say the same is the case with Pakistan Tahreek-i-Insaf (PTI). It is too early to say as PTI has yet not even completed one year in power. The biggest challenge before PTI is to dismantle the elitist structures that fleece the poor and benefit the rich. The culture of VIPs/plots/perks/benefits needs to end along with all waivers, concessions, exemptions, amnesties and immunities for the rich and mighty.
Only through sustainable growth rate of 7% for at least a decade we can generate required employments of two million per year. Without this growth rate we cannot overcome our fiscal deficit and enhance tax-to-GDP ratio. We need radical changes, namely, more tax from the rich, reduction in the exorbitant sales tax rate (it should be 8-10% across the board), bringing corporate tax rate to 20%, and introducing equitable tax base, simpler and fairer tax procedures—‘Towards Flat, Low-rate, Broad and Predictable Taxes’ [PRIME Institute (April (2016)].
We are all aware about massive sales tax evasion coupled with under-reporting and non-reporting of incomes in Pakistan. The challenge is how to bridge the tax gap of billions of rupees—it is 70% according to an official study whereas independent analysts say it is more than 100%. The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System (TIS), which is capable of recording, storing and cross-matching all inflows and outflows.
For checking massive leakage in revenues, all in-bound and out-bound containers should be scanned/x-rayed. At big retail outlets cash registers with sealed memory should be provided as state property with surveillance with CCTV network and any tampering should be punishable by summary trial. CCTV monitoring should be made mandatory at big factories, restaurants, waiting rooms of leading doctors, lawyers and other professionals.
There should be tax incentives for reporting purchase to FBR—at least 5% as refund of the amount paid as sales tax. The procedure for claiming refund should be simple, i.e. payer should email evidence to the Central Tax and Refund Depository, which authorises refund directly to the credit card/bank account used after verification of genuineness of the invoice (by checking sellers’ registration number). In this scheme, the people may choose not to claim full credit of sales tax paid since they might not be able to justify the sources of their expenses. For broadening of tax base, the government can announce immunity for 3 years from scrutiny of expenses declared through sales tax invoices alone—it would go a long way to document the economy yielding more and more revenues in the coming years under income tax regime.
The above scheme would encourage people to obtain sales invoice for each and every transaction, which is presently not being insisted upon. If buyers are given incentive, they will insist on invoice and the government without expending any money or making extra efforts would be able to substantially expand the tax net. Such schemes were successfully implemented in Taiwan, Turkey and Venezuela.
In Pakistan’s peculiar milieu, innovative measures would have to be employed to restructure the tax system and restore public confidence in tax officials. A State that has miserably failed to protect the life and property of the citizens lacks moral authority to collect taxes. Thus, even a good tax system will not work unless the prevalent situation—apathy of the elites in ignoring the masses—is not changed.
The Parliament, first of all, should introduce Taxpayers’ Bill of Rights assuring that money collected from citizens would be spent prudently on their welfare and not for the benefit of a few. Secondly, there should be taxation of all incomes irrespective of their source (agricultural or non-agricultural). Thirdly, broad-based and harmonised sales tax (HST), covering all goods and services, at a low rate of 8% should be introduced and implemented.
FBR should be made an autonomous and efficient body insulated from external political, financial and administrative pressures. The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts in the field and implement it after securing consensus in the Parliament. This alone can help in raising the much-needed revenues of at least Rs. 8 trillion at the federal and Rs. 2 trillion at provincial levels.
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The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)