Perplexity of tax managers

Dr. Ikramul Haq

The persistent failure of our financial managers and tax collectors to overcome fiscal deficit and remove fiscal imbalances has created a situation where the very economic survival of the country is at stake. Our economic survival now lies in collecting taxes wherever due by abandoning the policy of appeasement towards the powerful and the rich. An unshakable determination, consistency and political will is required to curb the 52-year-old habit of defying tax laws along with complete purge in tax machinery.

What has happened to resource mobilisation? What has happened to revenue growths? Can fiscal managers justify the shortfall in our total tax revenues every year, and reasons for downward revisions? If they cannot properly fix revenue targets how one can rely on their economic acumen. In fact, these worthy financial managers were telling lies to us. Gross misreporting of fiscal data to the International Monetary Fund (IMF) in December 1999 exposed our respected CBR stalwarts (sic). Subsequently, a commitment was made to the IMF to review fiscal data from financial year (FY) 1989-90 onwards. The data now compile for FY 1994 to FY 2000 confirms that tax revenues were inflated by Rs. 5.2 billion. The “gentlemen” tried to manipulate the figures to show higher tax collections and the nation had to pay a heavy cost for it (not only in terms of fine paid to the IMF) but by further tarnishing our image in the international community that nothing is transparent in our society.

It is an established fact that despite resorting to all kind of highhandedness, illogical policies and unjust withholding taxes, the CBR has failed to improve the tax-GDP ratio. It remains hovered in the range of 10.5 to 12.5 per cent of the GDP for the last seven years. The burden of ever-increasing presumptive taxes (which are nothing but indirect taxes), shamelessly levied under the Income Tax regime, has been shifted from income earners to consumers and clients. These presumptive taxes have distorted the whole tax system, destroyed the economic growth and made the consumer/client the ultimate sufferers. Moreover, these despotic, short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit. The presumptive taxes were imposed in the federal budget of 1991, when the fiscal deficit was just Rs. 80 billion. In FY 2000, our fiscal deficit soared to Rs. 206.7 billion, proving beyond any doubt that irrational taxes did not solve our fiscal management rather forced us to the verge of total economic collapse. Irrational tax measures have always played a decisive role in destroying civic society and paving way for anarchy and chaos. This is exactly what the rulers are doing in Pakistan.

What we have experienced is a complete failure on all fronts. Fiscal policy in Pakistan has become a tool of oppression. Resultantly our economy is facing unabated recession and the people of Pakistan are the victims of international “financial terrorism”, as day by day the IMF and other donors are imposing harsher and harsher conditions. The commercial importers (the mighty traders who do not want to pay their taxes) and powerful contractors (who get contracts by bribing officials) are passing on their tax burden to others, courtesy presumptive taxation in Income Tax law which increased the state revenue from Rs. 40 to 102 billion within five years under the so-called direct tax regime, whereas in reality it was a collection in terms of indirect tax. The levy of taxes on goods and services is the constitutional right of provinces. The federal government violated this constitutional command by levying such taxes under the garb of Income Tax. This is the worst example of “federal highhandedness” where the victims are the poor people of the less privileged provinces. The constitutional responsibility of distributive justice and social equality was altered, to show just higher collection of tax targets.

The policy-makers say that 52 years of problems cannot be solved in a few weeks or in a few months or even in 3 years’, the time given to the present military set up by the Supreme Court. Their main problem is how to deal with the tax machinery, which is inefficient and corrupt. In the businessmen versus tax machinery tussle, the underlying conflict is who should have the upper hand in the loot. Tax bureaucracy wants its complete monopoly, while the traders want “equal” power and share. This is a bizarre situation. The forces of loot are now at war with each other. It is a logical outcome of perpetuation of a deep-rooted corrupt system. The successive governments have been announcing unprecedented concessions for the corrupt in the form of tax amnesty and money-whitening schemes and that too in the name of “Economic Reforms Protection”. In fact they were protecting themselves, the corrupt and the plunderers of the national wealth. The present government wants “reforms”, while the corrupt sections want perpetuation of “favourable” policies and status quo. The tax bureaucracy has made an alliance with the corrupt segments of society to ensure the failure of policies designed by the present government.

Shamelessness is the correct word for today’s Pakistan. Even feeling ashamed is a virtue showing that at least one still has a conscience that pricks. But “shamelessness” is the stage where one even loses the capacity to be ashamed of his wrongdoings. At this critical juncture of our history, where our economic survival and sovereignty is at stake, certain sections of society are openly defying tax laws. Some of the grievances of businessmen are genuine, but there is no justification whatsoever to say that taxes will not be paid. Resource mobilisation should be our priority number one. The main strategy in the forthcoming budget should be to achieve the goal of reducing/eliminating the fiscal deficit to the level of 2% of the GDP at any cost. Our revenue collection should not be less than Rs. 500 billion in the next financial year i.e. 2001-2002. There is no justification whatsoever to reduce the development expenditure, which are already dismally low at little over 3% of GDP. The fiscal adjustment through reduction in development expenditure will not solve our problems. There is certainly a need to reduce non-developmental, wasteful expenditure, but the real salvation lies in resource mobilisation. The broadening of tax net is the need of the hour. But we should not forget that those who enjoy exemptions and concessions should be brought into net. The existing taxpayers, who even grossly under report their incomes, should be tackled with skillful policies (carrot and stick!) by gradually making them pay the exact taxes.

The rich and mighty who do not pay are the real culprits. The exemptions and concessions that exist in our tax laws (The whole of Second Schedule in the Income Tax Ordinance, 1979, most of the items of Sixth Schedule of Sales Tax Act, 1990 and innumerable SROs relating to Customs and Excise) should be done away with. There should be a level playground for everybody. The revenue impact of these exemptions and concessions is to the extent of Rs. 200 billion. The wise step will, therefore, be to immediately abolish these exemptions and concessions instead of increasing the incidence of taxes on the common people of Pakistan. In view of the prevalent fragile economic conditions, there should be a gradual transition from under-reporting to full reporting, but those who do not pay (especially the privileged members of society) should not be spared any more.

If the present government removes all these exemptions and concessions, brings big absentee feudal landlords to tax net, manages to get the taxes from the influential ones, plugs the huge revenue leakage  (estimated at Rs. 200 billion every year) that takes place due to connivance of tax officials, and succeeds in imposing GST across the board (preferably with a low rate of 2% at all stages), there will be no budget deficit. This goal can only be achieved if the government simultaneously tackles the issues of tax evasion and rampant corruption in the tax machinery (not just throwing them out of job but to make the system workable fair and just).

The present tax machinery is not only corrupt (for that a larger blame goes to the State as no reforms have been made to improve their economic lot and working conditions) but is also inefficient, incompetent and ill-equipped to increase the revenue. Radical changes are needed to: –

(a)        Revamp the entire tax apparatus.

(b)        Improve both structural and financial conditions of tax machinery.

(c)        Make it a service-oriented organization (even better than banks) aimed at solving people’s tax problems by giving them proper guidance and counseling and not harassing them for self-aggrandisement.  There should be a complete change in the image of tax machinery. It should be a people-friendly organization and not an exploitative, oppressive, ruthless colonial-model tax apparatus.

(d)       It should be remembered that introducing irrational, harsh, unjust and unfair tax measures couldn’t broaden the tax base. The issues of justice, fairness and equity instead of fixing unreasonable budgetary targets should be the main concerns of our tax policy.

Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within two year’s time provided that a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation. The policy of ad-hocism due to which we have already suffered a lot will not work. We need a fair and equitable tax system, which should be managed by thorough professionals. The people of Pakistan should be part and parcel of any reform/revival plan, without whose support and participation no war – even the economic one – can be won.