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Ailing economy & regressive taxes

Huzaima Bukhari & Dr. Ikramul Haq

In their respective budgets, the federal and provincial governments, by just enhancing the existing tax rates and imposing new regressive taxes have confirmed that they lack visions to fix the ailing economy where trade and industry are facing extreme hardships due to less demand, higher cost of doing business and lack of ease of continuing their operations. Our economic wizards have failed to realise that in such a situation it is more important to provide incentives and reliefs so that business activities are restored. Once, lost pace of growth is retrieved, jobs are ensured, taxes as a byproduct automatically increase.

We all know that the key issue is dismantling of the prevalent oppressive tax systems at federal and provincial levels and reforming dozens of agencies (incompetent and corrupt). No government is ready to undertake fundamental reforms knowing well that their tax policies and administrations are the main impediment in facilitating business growth, achieving productivity and efficiency. Most of the time, from small and medium enterprises (SMEs) to large multinationals, are engaged in tax litigation or meeting their obligations as withholding/collecting tax agents without any compensation, rather facing harsh penalties from tax officials, who are only concerned with meeting targets by squeezing the existing taxpayers. What makes it all the more painful is the fact that no government is inclined to change this situation, rather allows free hand to corrupt officials to operate fearlessly.

In a social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden and benefits of public expenditure while maintaining vertical and horizontal equity. It encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society e.g. senior citizens, writers, researchers, women and children, minorities, the disabled and unemployed etc. All these elements are missing in our polity and tax policy.

Unfortunately in Pakistan, successive rulers, both military and civilian, used taxes as a tool to extort from the masses as much as possible for their own comforts and luxuries. By resorting to repressive tax laws, they make the rich, richer and the poor, poorer. Our financial managers are caught up in a dilemma. On the one hand there is a mounting pressure to reduce fiscal deficit through improved collections and on the other, they are not ready to abolish innumerable tax exemptions and concessions available to the rich and mighty.

The country is surviving on heavy loans and bailouts from International Monetary Fund due to perpetual failure of the ruling elite to tax the rich and powerful. Revenues worth trillions of rupees have been sacrificed by governments—civil and military alike—since 1977 extending unprecedented exemptions and concessions to the privileged classes. Gradually, the federal and provincial governments since then have abolished all progressive taxes e.g. Wealth Tax, Estate Duty, Gift Tax etc.

If we calculate revenues forgone through various exemptions, amnesties, immunities and non-taxation of benefits enjoyed by the rich and mighty and through Statutory Regulatory Orders (SROs) issued during the last four decades, the number comes to over Rs. 100 trillion—this explains how unprecedented concessions have made the state poorer rendering every citizen of this country to enormous indebtedness. We would not have required any borrowing at all, if these tax concessions were not given. Our tax system serves the interests of the privileged classes. The ultra rich, representing about 1% of the entire population, own 95% of national resources but their contribution is less than 2% in revenues. They exploit labour of landless tillers, poor urban workers and white-collared employees to amass more and more wealth. Additionally, they create artificial hike in prices of essential items to snatch back whatever little is earned or saved by the 99% ordinary people.

Our rulers live lavishly while Pakistan ranks at bottom ten of 187 countries in the latest Human Development Index (HDI). Not less than 25 million children are out of school in gross violation of Article 25A of the Constitution—see judgement of Supreme Court 2014 SCMR 396 re Petition regarding miserable conditions of schools. Yet the federal government is not allowing education expenses incurred by parents as deductibles in computing taxable income. It is not ready to exempt the income of writers who contribute towards promotion of science, literature and other fields.

Since long, Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental projects, meeting trade deficits, fiscal deficits and balance of payments, in addition to numerous others. One of the factors responsible for the present situation is mafia-like operations in tax administrations as well as exemptions and immunities trough the infamous system of SROs, amnesties and asset whitening schemes—all meant for the rich and mighty.

The existing complex tax system is anti-business, anti-people and anti-growth. It protects the interests of the rich who can obtain “services” of crafty tax advisors knowing how to beat the system. Those who cannot do it have to grease the palms of tax officials to survive. There are at present about 95 million unique mobile users who pay both income tax and sales tax but only 5 million have taxable incomes. Federal Government wants returns from those who do not earn taxable income though they are already burdened with undue liability to pay income tax in advance. More returns mean more exploitation by tax officials as these people demand refunds, but who will give them refunds?

If we want to correct the situation, we need a simple system where return filing is not a hassle. We must promote SMEs and big businesses that generate employment and are engines of growth. Excessive and regressive taxation prevent individuals and businesses from taking full advantage of the opportunities of the new knowledge-based economies. Taxpayers should share the burden of protecting those who are less privileged in society, either through well-designed social protection but not through excessively rigid job protection measures and inflexible labour regimes that penalise productivity. That is why a fair and transparent tax system is so essential for maximising economic growth.

In a nutshell, the main goal of tax policy and administrative reforms should be aligned to economic policy that is how to unshackle the constituent elements of economic growth by letting market forces play their respective roles. For achieving this goal, simplifying tax system and eliminating fiscal deficit, a detailed study is available, Towards Flat, Low-rate, Broad and Predictable Taxes, published by PRIME Institute. The vested interests do not want to simplify the tax system and facilitate businesses so they never discuss it, open it for public debate and adopt after input from all stakeholders. Unless we revamp the entire tax system, our economic mess will continue to persist.


The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).

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