Finance Bill 2021

Cautious optimism or justified pessimism?

Huzaima Bukhari & Dr. Ikramul Haq

The Finance Bill 2021 with federal budget will be unveiled today. Will it bring relief for the unemployed, pensioners with no other source of income, low-paid salaried persons and those having meagre incomes? They are suffering immensely due to health/financial toll of Covid-19 endemic, record food inflation, heavy cost of utilities, especially electricity bills in summer, unbearable cost of education and health—just to mention a few. After the budget speech, millions of Pakistanis will certainly be dejected, not because there will be no relief for them. Nobody expects it now in Pakistan in annual budget, except the rich and mighty. There will be no new tax on the wealthy class to help the needy as in Finance Bill 2020, Tax on luxury houses in Islamabad Capital Territory’,was proposed but dropped in Finance Act 2020. The continuation of unjust tax system, rather making it more burdensome for the less-privileged on the dictates of International Monetary Fund (IMF), is on the card. The heavy indirect taxes, even in the garb of income taxation, through withholding of taxes on transactions and not income, will keep on taking a large portion of income of the marganalised sections of society.

The cost-push inflation by high indirect taxes will further increase after withdrawal of sales tax exemptions on many items of daily use or raw materials imported for manufacturing the same. It will bring more miseries for the millions of households, especially those getting petty cash assistance under the Act of Parliament [Benazir Income Support Programme Act, 2010] now called Ehsaas Emergency Cash after Ehsaas [compassion] initiative was launched on March 27, 2019 by the coalition government of Pakistan Tehreek-i-Insaf (PTI).

“Inflation is taxation without legislation” is a famous quote of 1976 Nobel Laureate economist, Milton Friedman, considered twentieth century’s most prominent advocate of free markets. This aptly applies in today’s Pakistan. He, however, could not conceive that there would be a state in 2021, purportedly established in the name of Islam in 1947 for exemplary “socio-economic justice”, where the rich and mighty pay meagre income tax while the poor bear the main burden of indirect taxes. Adding insult to injury, the rich get amnesties, waivers, concessions and tax free perks. The members of militro-judicial complex enjoy extraordinary tax-free perks and benefits while in service and even after retirement—nobody, however, speaks about this ruthless wastage of taxpayers’ money.

Many crony capitalists, sitting in national and provincial assemblies and Senate, pay meagre tax on emoluments they receive as elected public representatives, but enjoy tax-free allowances/benefits in billions and unconstitutionally pass on benefits to their own businesses or those of their rich financiers through Statutory Regulatory Orders (SROs)—details in “Pro-rich Tax Regime’ (Huzaima & Ikram 2014) http://www.indusconsortium.pk/wp-content/uploads/2016/09/Abolishing-pro-rich-Dr.-Ikram-Final-Study-1.pdf.

After getting all concessions cited in the above study, the predatory elites and crony capitalists indulge in massive tax evasion and loan write-offs on political grounds. Many politicians in the past benefitted from loan write-offs of billions of rupees from government and private banks (both principal and markup). In Loan write–offs and tax losses, Business Recorder, March 18, 2016, this sordid story was narrated. The loan write-offs are taxable [proviso to section 18(1)(d) of the Income Tax Ordinance, 2001] but the Federal Board of Revenue (FBR) and National Accountability Bureau (NAB)  failed to take action against the beneficiaries of loan write-offs using political leverage  in violation of order of the Supreme Court and Article 189 of the Constitution of the Islamic Republic of Pakistan [“the Constitution”]. In banks as well, those who connived with beneficiaries of such loan write-offs were never punished. This shows how the unholy alliance of law-makers, law-keepers and law-breakers deprives the nations of taxes of billions of rupees. FBR has been favouring the political masters that assured lucrative and power positions as quid pro quo for not penalizing tax evaders and beneficiaries of loan write-offs.     

The unscrupulous traders do not file tax returns andindulge in hoarding of eatable items and black-marketing. They have support of politicians in power in fleecing the poor farmers and end consumers (even not depositing full sales tax collected from them). Many unscrupulous business-cum-politicians claim that charging high prices is permissible in tajarat (trade)! The traders will not be taxed once again on their real incomes. The meagre income tax and sales tax collected with electricity and gas bills and other withholding provisions will be taken as final settlement and onerous tax incidence will be passed on to the weaker sections of society. Facts and figures already given in PTI, FBR & tax directories—I, Business Recorder, April 23, 2021 and PTI, FBR & tax directories—II, Business Recorder, April 24, 2021.

The low-paid salaried and middle-income citizens are compelled to spend sizeable amounts from their salary on the educational needs of their children. The Supreme Court is requested to take it as Human Rights Case for enforcement of its decision 2014 SCMR 396 re Petition regarding miserable conditions of schools. Since the passage of Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”] during the last 11 years no serious effort is made by the federal and provincial governments for enforcement of a very important fundamental right guaranteed under section 25A of the Constitution: “The State shall provide free and compulsory education to all children of the age of five to sixteen years in such manner as may be determined by law”. The callousness of all the three elected governments since 2008 is well-established. Is Finance Bill 2021 going to give relief to all the parents for paying fees to the primary and secondary school as straight deduction from the income till the time the governments fulfill their obligation under Article 25 of the Constitution? It is a fair expectation, hopefully not turned into a dejection!

All professionals working on salary basis have to spend money to keep their knowledge up to date, yet no provision is available to them for claiming cost of buying manuals and books. This is hampering growth of the commercial, financial, industrial and service sectors where specialization is the call of the hour. For example in the IT industry any highly paid software engineer, capable of bringing enormous foreign exchange for the country, would be discouraged to work in Pakistan merely for this unjust tax burden. There is an urgent need to rationalize our tax policies towards the salaried persons—both professional and non-professionals. They contribute substantially towards economic growth and social development and we should not harm their productivity by unjust, higher tax slabs for salaried individuals, as mentioned in many press reports.

Tax credit of 50% for senior citizens (60 years and above) and the special persons, (holding a National Database Registration Authority’s Computerized National Identity Card for disabled persons as per Income Tax Ordinance, 2001) was earning income up to Rs. one million was withdrawn by the Government of Pakistan Muslim League (Nawaz) in its last budget through Finance Act 2018 as basic taxable exemption was raised to Rs 1.2 million. The strong advocate of establishing Riasat-e-Medina after coming into power vide Finance Supplementary (Amendment) Act, 20I8 restored the old rates but failed to restore the tax credit for the above categories. This Act received assent of President on October 8, 2018, who also in public appearances and TV interviews frequently plead the importance of education and helping the weaker sections of society. Nobody has taken note of it in the National Assembly and Senate till today! No tax professional appearing on TV talk shows including the former Chairman coming from private sector (who had a chance for beneficial legislation for the weaker segments of society) ever demanded to restore this concession. This exposes the reality of all, including the PTI, as self-styled champions of the downtrodden. It also confirms apathy of all successive governments towards the senior citizens and the disabled having incomes just to survive. The same is true for the salaried class earning up to Rs. 100,000 per month. On the contrary, unprecedented tax breaks and benefits have been extended to the wealthier echelons of society as documented in Corrupt body politics—I, Business Recorder, December 28, 2018 and Corrupt body politics—II, Business Recorder, December 30, 2018. There is a legitimate expectation of reversal of this trend in Finance Bill 2021. For persons earning taxable income up to Rs. 1.2 million per annum, there should be provision to deduct the entire amount of educational expenses incurred by them provided they furnish receipts of fee and other education related expenses.

Before the passage of Finance Bill 2021, the PTI Government can insert incentives for educational expenses to industrial houses only if they give scholarships to their workers’ children and spouses for acquiring skill-based education. It will improve human capital. Premier Imran Khan can change the fate of nation in the remaining period of his rule if education-related and gender-based tax benefits for empowering women are made core of the government’s tax policy. The chances are bleak, as experts say, “IMF-loyal advisers will tell Prime Minister: “Sir, it is against our agreement with lender of the last resort”!

The prevailing situation is aptly highlighted by renowned economist and former Chief Economist of Planning Division, Dr. Pervez Tahir, in his op-ed of June 4, 2021: “On April 26, the finance ministry notified thematic groups of the Economic Advisory Council (EAC) to “develop short-term, medium-term, and long-term solutions to economic challenges”. These included an expenditure sub-group consisting of economist Arshad Zaman and the finance secretary…. Out of the 17-odd groups, this was the only one that came out with a well-researched report, not just routine PowerPoints….Under the donors-prescribed managerial governance…the country has suffered from “the erosion of ideas, institutions and structures combined with a prolonged failure of political will [that] has led to a steady descent into economic chaos”.

Judging from above, the budget speech by Shaukat Tarin will be full of clichés as is the case every year, no matter who is ruling the country, and none of the above will be offered in Finance Bill 2021. Opposition parties are constantly crticising the PTI leader that he cannot find a finance minister from the party (first one was sacked and second was just a stopgap arrangement for signing ‘Medium Term Budget Strategy Paper (2021-22—2023-24)’till the time another was appointed in terms of Article 91((9) of the Constitution, which says:

 “A Minister who for any period of six consecutive months is not a member of the National Assembly shall, at the expiration of that period, cease to be a Minister and shall not before the dissolution of that Assembly be again appointed a Minister unless he is elected a member of that Assembly:

Provided that nothing contained in this clause shall apply to a Minister who is member of the Senate”.  

The challenges faced by the fourth Finance Minister of PTI Government, were explained in Budget FY 22: Tarin faces Herculean task, Business Recorder, May 20, 2021. The solutions to come out of fiscal mess and achieve stability and move towards higher growth were given in A better tax model, Business Recorder, May 21, 2021, Budget FY 22 and taxation, Business Recorder, May 28, 2021 and Taxes, inflation & social welfare, Business Recorder, June 4, 2021. Earlier, it was proposed in Simplification of taxes for growth—III, Business Recorder, April 2, 2021 that all the adult persons having mobile connectivity, but never filed income tax return, should be registered compulsorily under the law to file a simple profile. On the basis of this, FBR will have ‘National Socio-Economic Registry’ of all households to determine fair tax base and collect income tax of Rs. 5 trillion to create judicious balance between direct and indirect taxes. Hopefully, this initiative and compulsory integration of large retailers to Point of Sale (POS) system will be included in Finance Bill 2021.

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The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)