Agenda for tax reforms

Huzaima Bukhari & Dr. Ikramul Haq

Since the introduction of Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”], fiscal management, both at federal and provincial levels, is posing serious challenges for the country. The agenda/roadmap for reforms to achieve accelerated and sustained growth, launched April 22, 2021 by Pakistan Institute of Development Economics (PIDE) in ‘PIDE Reform Agenda for Accelerated and Sustained Growth, must be seriously considered by the policymakers and legislators. In Part 10, reforms and actions for fiscal consolidation have been discussed succinctly.  

The nation should demand that all political parties evolve consensus on areas of reforms highlighted by PIDE and many other institutions and individuals. There should be pre-election agreement on one point: We all want to make Pakistan a true egalitarian state as envisaged under the Constitution. For achieving this goal, political parties must debate for comprehensive reforms in all areas pointed out by PIDE with the aim to move towards the cherished goal of self-reliance and becoming a welfare state. It is not possible to make Pakistan a welfare state unless we undertake structural reforms in the prevailing politico-economic system that favours the minority elites against the majority that is less-privileged.

In this article we are not only focusing on establishing a fair and just tax system. Taxes should be collected justly and spending must be prudent ensuring delivery of social services, equal opportunities and economic justice to all citizens.  

Reform in one sector ignoring the ills in the other, resorting to improving something at the cost of leaving aside the one interlinked, will not yield desired results. The case of tax reform divorced from elimination of black economy is the point in focus. The main cause of fiscal deficit is allowing an unprecedented size of underground economy to flourish and the perpetual existence of incompetent and inefficient tax machinery as well as borrowing for non-productive projects to receive hefty kick backs. The inquiry ordered by Prime Minister, Imran Khan, on this issue has yet not been completed whereas under the existing bilateral and multilateral tax treaties, this kind of information can very easily be obtained. In fact information did come but the PTI Government and National Assembly together gave amnesty, see details in Unconstitutional asset-whitening schemes & amnesties, Surkhyian, January 7, 2021.   

The lesson from above is clear that reforms in tax administration without routing the causes of parallel economy and vice versa is not going to improve our fiscal woes. The failure of democracy in Pakistan, among many other factors, is attributable to lack of democratic values within political parties—they do not file their own tax returns. It is highlighted in Civil governments, ‘Ordinance’ factories, Surkhyian, March 15, 2021 as under:

“Exemplary punishment should be awarded to all holding public office, members of services, or holding any constitutional position, as custodians of public trust, if they commit corruption or are found guilty of wrong declarations of their assets/liabilities or avoid paying any dues (taxes and/or others).

The main job of the legislators is to pass laws to protect public rights, ensure welfare for all, especially the less-privileged and provide effective justice system safeguarding that rule of law and transparency are key to counter private interests over public interests. On the contrary, since 2008, all successive governments have shown formidable resistance against establishment of an independent anti-crime authority, as National Crime Agency of United Kingdom. We follow its model of democracy but when matter comes to accountability, defy it with impunity. All in power and in opposition know that such a body would expose their corruption and other malpractices—especially the command of the Constitution under Article 17(3) saying: Every political party shall account for the source of its funds in accordance with law.

It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan  despite section 114(1)(ac) of the Income Tax Ordinance, 2001 that makes it mandatory. How can we expect rule of law in Pakistan, when 125 political parties are committing flagrant violation of Article 5(2) of the Constitution? They keep on bashing FBR but fail to fulfill the commands of the Constitution.

The civil society and media should join hands to force the Parliament to abolish all laws of secrecy and/or immunity and enact a law in terms of Article 19A of the Constitution for compulsory disclosure of assets/liabilities/taxes paid by judges/generals/high-raking civil officers. In 2020, members of Women’s Action Forum (WAF) sought under the Right of Information Act, 2017, information regarding assets, salaries and perks of honourable judges of Supreme Court and High Courts as well as of military leadership. However, none responded, except Justice Qazi Faez Isa, who provided the details of him and his spouse and all family members”.

It is, thus clear that unless the parties reform themselves by introducing fundamental changes in their working, there is dim hope for meaningful (sustainable) democracy in Pakistan. In all established democracies, political parties regularly hold elections, publish their audited accounts, file tax returns, disclose details of expenses and names of donors—all these elements are conspicuous by their absence in our political culture. Media must start a campaign asking political parties to meet these standards. 

As suggested in the study of PIDE, Pakistan has to move towards higher growth for which comprehensive tax reforms are inevitable. We must strive for 7% sustainable growth for at least a decade for achieving desired tax-to-GDP ratio of 20-25%. This is not possible unless we have a paradigm shift in tax policy and revamping of national tax administration for generating sufficient resources for the federal and provincial governments with drastic cuts in wasteful and unproductive expenses and bring innovation and efficiency in public and private sectors. It must be the top priority in Budget 2021-22 amid covid-19 economic toll to reduce rate of all taxes and broadening the base. It will help in bringing prices down and provide answer to what Prime Minister is seeking “out-of-box proposals to help the weaker sections of society” [Revolutionizing agriculture, Daily Times, March 27, 2021].

The enactment of new income tax law, taxing all sources, including agriculture, and harmonised sales tax (HST) on goods and services and establishment of single national tax agency [National Tax Agency (NTA)] are essential. This is possible under Article 144 of the Constitution. While the collection will be through NTA, distribution is going to be strictly under Article 160 of the Constitution. The fully automated NTA, operated by professionals under All Pakistan Unified Tax Services, will be supervised by an independent Board of Directors. The status of the NTA should be as provided in Federal Board of Revenue Act, 2007 that after merger will be renamed as National Revenue Board (NRB).

The crux of our studies [‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/ and Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE) (available  free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf] is: lower, predictable and broad-based taxes, administered through efficient tax apparatus enabling Pakistan to achieve fairness in taxation system. It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society.

Our studies analyse the structural and operational weaknesses of the existing tax system at federal level and suggest alternate solutions in the following areas that require fundamental reforms:    

Area                                                                            Solution

Complex Income Taxation:                                    Low-rate Income Taxation

Distorted/Multiple Sales Taxes                              Single-stage, single-digit Sales Tax

Customs/SRO Culture                                             Single-rate Customs Duty Multiple Tax Collection Agencies                                                        National Tax Agency

Inefficient Appellate System                                  Federal Tax Tribunal

The NRB, unlike FBR, should not have any role in framing tax policy. For this a permanent Tax Policy Board should be established in the light of Article 156(2) of the Constitution with Planning Commission to become a permanent secretariat for federalised economic development. The role of Policy Board in this permanent secretariat should be of a think-tank to recommend policies for equitable and accelerated growth on national level as well as helping all assemblies and Senate for legislation to achieve the desired goals. For example, 2% cess exclusively for debt retirement, imposed on the ultra-rich.  

Through democratic process, all the provincial parliaments may pass resolutions under Article 144 of the Constitution, giving powers to the National Assembly and Senate to enact laws for harmonising sales tax on goods and services and income tax from all sources to be collected through NRB. It would facilitate people to deal with a single body, one-window facility at national and provincial levels.

The mode and working of NRB can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156]. Tax collection and compliance at national level cannot be improved without establishing NRB and introducing an integrated Tax Intelligence System (ITTS) that can correlate imports, exports, sales tax collection on goods and services with income tax returns and monitor all transactions. A fully automated, professional and efficient NRB would alone be in a position to improve capacity by detecting tax avoidance and evasion through ITTS.

India, after long consultations and deliberations enacted the Central Goods and Services Tax Act, 2017 (CGST Act). The CGST Act, through harmonising indirect tax on goods and services, has broadened the tax base. Voluntary compliance, due to a robust IT infrastructure, has increased registration by almost 90% (12.3 million active CGST Act registrations, as on March 31, 2020). Collection showed substantial growth, from INR 7.7 trillion in FY 2018 to INR 11.7 trillion in FY 2019 to 12.2 trillion in FY 2020.  Due to the seamless transfer of input tax credit from one state to another in the chain of value addition, there is an in-built mechanism in the design of CGST Act that incentivizes tax compliance by businesses.

It is thus imperative that the PTI Government with the consultation and consent of all provincial governments introduce Harmonised Sales Tax (HST) on goods and services in Pakistan that will foster a vibrant market and contribute significantly to the growth of economy. Pakistan needs to move fast towards harmonising taxes and collection through NRB. In India, this is under Goods and Service Tax Council. It will not only reduce the cost of collection of taxes but help in creating a centralised data bank for efficient collection of taxes and counter avoidance and evasion.

Before establishing NRB as an efficient and integrated tax administration, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with development-oriented tax policy. Tax reforms are meaningless without an effective tax administration and rational tax policy that can ultimately provide funds for social services to all citizens at grass root level as envisaged under Article 140A of the Constitution. As a long-term reform measure, we must concentrate on devolution of political, administrative, financial responsibility and authority to the elected representatives of the local governments, after training candidates (preferably fresh graduates) with millions near home getting jobs for secretarial support, achieving the Prime Minister’s target for employment.

Tax reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.

The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. The number of tax filers has fallen since 2003 (excluding those filing income below taxable limit of paying negligible amount to become part of Active Taxpayers List to avoid higher incidence of withholding taxes). In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of Pakistan Raises Revenue (PRR) Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million. Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US$304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020. Like earlier programmes, these are also bound to fail as the consultants of lenders/donors have not idea of our constitutional framework and mundane realities.   

The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. With such a system in place, those who are not into the tax net or who avoid true disclosures would be induced to pay their taxes voluntarily. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.

Our study, Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2020) suggests  not only we have s single tax agency, the same should also administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security schemes, such as, disability allowance, old age benefits,  income support, child support, pension, just to mention a few, in lieu of paying fair taxes.

The existing four-tier tax appellate system has also failed to deliver. The problems faced by taxpayers in appeals/references speak volumes of the ineffectiveness of various judicial forums that have been assigned the statutory obligations to safeguard them against unjust imposition of taxes. The revenue authorities are also unhappy with the tax appellate system as litigations take years for settlement of tax disputes. Therefore, in order to make the appellate system more responsive, the existing tax tribunals dealing with direct and indirect taxes need to be restructured.

Our study,  Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2020), proposes a two-tier tax appellate system where first appeal goes to National Tax Tribunal with the right of another appeal in the form of intra court appeal. Subsequently, if any substantial question of law needs consideration, it can be referred to the Supreme Court by way of leave to appeal. This will help in achieving uniformity of decisions since at present High Courts in different provinces sometimes differ on identical questions of law and it takes years for final authoritative pronouncement by the Supreme Court. The two-tier tax justice system can ensure expeditious settlement of tax disputes, preferably within a year’s time of first order.

Income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum, alternate corporate tax have been added to distort the entire concept of personal income taxation.

Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2020) also suggests simple and flat rate taxation of 10 percent or 2.5% of net wealth exceeding Rs. 10 million,  for all individuals and for AOPs and companies, 20 percent.

We have proposed single-stage, single-digit sales tax on goods by federal government at the rate of 5 percent across the board with no exemption, albeit exporters shall have zero-rated regime. The only exemption shall be on food, life-saving drugs, books, children’s garments and educational equipment. Provinces can also consider imposing harmonised sales tax (HST) at the same rate on services, details of which requires a separate study. Alternately, we should move towards a unified sales tax on goods and services through national consensus whereby provinces give right under Article 144 to the National Assembly.

Under the current Customs Act, 1969, exemptions/concessions are granted to goods in three categories under Pakistan Tariff: (i) Fifth Schedule of the Customs Act and Statutory Regulatory Orders (SROs), (ii) Chapter 99 of Pakistan Customs Tariff and (iii) export promotion schemes announced time to time.

There are over 5,000 effectively traded tariff lines and 2448 tariff lines (33% are under 20% slab). In fiscal year, 2019-20, on 5521-tariff lines additional customs duty (ACD) and on 2075 tariff lines regulatory duty (RD) was charged. Heavy taxation at import stage (50% of FBR revenue is collected at import stage) encourages smuggling, undervaluation, misreporting, misdeclarations and tax evasion.

The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various “conditions and requirements” are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and misdeclarations for evading duties. Recognizing these problems, this paper proposes that there should be a single slab of for all imports to end these undesirable practices.

Budget 2021 for fiscal year 2021-22 is in the making amidst very difficult times when we are faced with economic meltdown due to Covid-19 endemic—the third wave is playing havoc with complete and partial lockdowns in many cities. The protection of human lives and mitigating extreme financial hardships faced by weaker segments of society needs to be given the top most priority. The traditional approach adopted for decades in Pakistan for balancing the books, levying more taxes, containing fiscal deficit and other number games will have to be reconsidered in totality under the prevalent exceptional circumstances. In this series, we will present concrete measures to simplify taxes for growth leading to better revenue collection without hampering the already troubled and sluggish economy suggesting ways to revive it fast.

The only viable option for meaningful change is to replace the existing tax system with simple, low-rated tax on a broad-base, pragmatic and growth-inducive. With such a system in place, those who are not into the tax net or who avoid true disclosures would be encouraged to pay their taxes voluntarily, honestly and diligently. It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.

_______________________________________________________________

Ms. Huzaima Bukhari, MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram and Huzaima Ikram & Ijaz, leading law firms of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals.

She has coauthored with Dr. Ikramul Haq many books that include  Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

She regularly writes columns/articles/papers for Pakistani newspapers and international journals. She has contributed over 1500 articles and research papers on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.

______________________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, IT, intellectual property and international tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax.

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.