Tapping the real potential
Huzaima Bukhari & Dr. Ikramul Haq
A country’s tax gap is measured by the amount of tax that remains uncollected due to non-compliance with tax laws.‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’(http://aysps.gsu.edu/isp/files/ispwp0811(1).pdf), a joint study of Federal Board of Revenue (FBR), Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail, tax gaps by type of tax and describes the methodologies and data used for such estimates. The report released in December 2008 under the name of Rubina Ather Ahmad (FBR) and Mark Rider (Andrew School) warns that views expressed “are of the authors and not of the Government of Pakistan.” It is shocking that FBR on the dictates of World Bank initiated this study and when final report was released it disassociated itself—this is typical of our government—always non-committal and hesitant to take any responsibility. After disowning this report, in 2019, FBR is still struggling to bridge the large tax gaps which are the direct result of its persistent inefficiency, incompetence and rampant corruption.
For fiscal year 2004-2005, according to this report, Pakistan’s federal tax gap was Rs. 409.5 billion or approximately 69% of actual tax receipts of Rs. 590.4 billion. Terming this as “conservative estimate”, the report claims direct tax gap at Rs. 262.8 billion (around 143% of actual collection of Rs. 183.1 billion) and indirect tax gap at 146.7 billion (36% of actual tax collection of Rs. 407 billion). In 2008, the data selected was for fiscal year 2004-2005 and tax gap was estimated at 45%. Since then tax gap has increased significantly and it can safely be concluded that it is not less than 80% of actual tax collection. This report and many others do not take into account the real tax potential of Pakistan and therefore estimates of tax gaps are under-assessed.
The real tax potential of Pakistan, by a very conservative estimate, is Rs. 8000 billion. However, the target for the current fiscal year at the time of budget announcement was fixed at Rs. 4435 billion. It was later reduced to Rs. 4398 billion but yet FBR is finding it difficult to meet—the shortfall for first ten months is Rs. 357 billion! From July 2018 through April 2019, FBR provisionally collected Rs. 2993 billion in taxes as against Rs. 3350 billion ten-month target
Who is responsible for the prevailing pathetic state of affairs? Our debt burden is increasing monstrously, fiscal deficit is getting beyond control, inflation is crushing the poor, taxes are being evaded and avoided by the rich and whatsoever little is collected, is mercilessly wasted by those who matter in the land. Debt burden under the previous regime witnessed a rising trend and reached a new high of 75% of GDP due to a widening budget deficit and fall in tax receipts. The financing of fiscal deficit through domestic channels by the present government of PTI is also alarming as highlighted by the State Bank of Pakistan in its report that has raised concerns regarding debt sustainability of the economy. A heavy reliance on expensive short-term debt has increased the debt servicing burden of the country. Pakistan has been reeling under a revenue deficit for the past many years, implying that a larger part of public borrowings, which financed the government’s current expenditures, did not add to the repayment capacity of the economy.
In view of the size and magnitude of public debt, a high fiscal deficit for 2018-19 is inevitable. Fiscal deficit even in 2012-13 reached 8.5% of GDP, against the original budget target of 4%, reflecting both revenue and expenditure slippages, including higher subsidies mainly to clear arrears in the power sector—the situation since then has been worsening. Collection by FBR in the past included substantial amounts not due (obtained as advance) and withholding of genuine refunds of billions of rupees. Ex-Finance Minister, Ishaq Dar, now a fugitive, while addressing Chief Commissioners’ Conference on April 15, 2014 praised Chairman and his team for growth of 17% in revenue, but never bothered to investigate the allegations of highhandedness in showing “higher” (sic) collection. Mr. Dar, an experienced chartered accountant, knew fully well how fudging of figures was being done under his nose. During his previous tenure as Finance Minister as well, Pakistan was found guilty of figure fudging and Shaukat Aziz admitted that Pakistan had to pay fine to IMF for such lapses—A history of figure fudging by Dr. Pervez Tahir, The Express Tribune, July 28, 2011.
It is a great tragedy that while the country is caught in a debt trap, the rich and the mighty are not only refusing to pay due taxes, but are also living an emperor-like life at the taxpayers’ expense and on borrowed funds. They are the de facto beneficiaries of the State’s resources—generated mainly by the landless tillers, industrial workers, professionals and white-collared employees. Unfortunately, like their predecessors, PTI Government is also giving them more tax incentives, immunities and amnesties.
Pakistan is not a poor country—the State’s kitty is empty because of the unwillingness of the rich to pay taxes, collossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural resources. Absentee landlords (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people alliance of the trio of indomitable militro-judicial-civil complex, corrupt and inefficient politicians and greedy businessmen—controlling and enjoying at least 90% of the State resources—contribute lower than 2% towards the national revenue collection. This tax gap has not at all been discussed in ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’, a study which is nothing but an eye wash.
The gigantic and useless government apparatus—doing nothing for public welfare—is also busy wasting whatever taxes are collected. The army of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) is not willing to cut down their perquisites and privileges. They are not ready to live like the common man by surrendering unprecedented perks and privileges they are enjoying at the cost of taxpayers’ money. For their luxurious life they are burdening the poor, property-less masses with more and more taxes. Time and again we have made a case for monetizing all perks and perquisites and right-sizing of government departments and corporations, but civil-military complex and their cronies in politics are not ready for such reforms.
The existing exploitative, rotten, regressive, ill-directed and unfair tax system is widening the existing gulf between the rich and the poor—leading to gang wars, crimes, commotions and break down of the entire society. The sole emphasis on regressive indirect taxes [even under the garb of income taxation through presumptive and minimum tax regimes on goods and services] without evaluating their impact on the economy and lives of the poor masses and lack of political will to tax the rich and mighty, is the real dilemma of our State—not scarcity of resources or narrow tax base (nearly 95 million active mobile users are paying exorbitant sales tax at 19.5% and 12.5% income tax). Equity demands higher taxes from those who have higher incomes and wealth, but in Pakistan since 1991 all tax policies have been aimed at decreasing tax burden on the rich but increasing its incidence on the poor.
The realistic and correct working of tax gaps in Pakistan is not possible unless the quantum of loss of revenue of trillions of rupees caused by all governments since the first military era of Ayub Khan is not taken into account. Successive governments—civil and military alike—have extended unprecedented exemptions and concessions to the rich and mighty, some of which are mentioned below:
- Ayub Khan, Ziaul Haq and Musharraf abolished all the progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax on immovable property and Wealth tax etc.
- The historic decision of taxing “agricultural income”, passed by the Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” as contained in section 2(1) of the Income Tax Act, 1922 then in existence, to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income for the first time in Pakistan, but foiled by a military dictator, supported by Mullahs, who were funded by big landlords and businessmen. It is now well-established that pro-people economic policies of the Bhutto regime posed a great threat to neo-imperialists and their gumashtas in Pakistan.
- Zia’s rule continued for 11 long years and that of General Musharraf for nearly 9 years, but absentee land owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax.
- Taxation of “agricultural income” is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan (“the Constitution”). All the four provinces have enacted laws to this effect, but total collection in 2013 was less than Rs. 2 billion (share of agriculture in GDP in 2013 was about 22%).
- Non-taxation of long-term capital gains at stock market—exemption is meant for the rich and mighty and not for the small investors who lose more money than they make due to manoeuvrings of big players—caused annual loss of billions of rupees to the national exchequer [loss from 2007 to 2013 alone was more than Rs. 512 billion as admitted by the government in Economic Surveys of Pakistan]. Despite, this so-called tax incentive, market billions of rupees of the small investors are being gobbled up by big fish—once small brokers, are now owners of many banks and investment companies and bid for vital national assets when privatization offers are made! From 2011 onwards a nominal tax is imposed on capital gains if holding is less than a year and that too as a separate block of income. Full and proper taxation of the big sharks is still a distant dream due to influence of the mighty whose benami accounts are managed by big brokerage houses. Annual tax gap under this one head alone is Rs. 125-200 billion.
- Tax losses for exempting (in fact not taxing) speculative transactions in real estate are to the extent of billions of rupees per annum. According to Economic Survey of Pakistan 2012-13, the loss for fiscal year 2011-12 was Rs. 700 billion.
- Multi-National Companies (MNCs) through abusive transfer pricing mechanism deprive Pakistan of tax loss of over Rs. 200 billion every year.
- Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before taking charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his world assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability annually. Repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without showing income, was shown to be justified despite tremendous revenue losses, distortion in the social set-up and the resultant misery inflicted on the majority of the people of Pakistan. From 2010, the right to levy wealth tax, to the extent of immovable property, is devolved to the provinces and they are least pushed to tax the rich landowners as they dominate the Parliaments.
- In 2002 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemption given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US$ 60 billion) started pouring in from all over the world, remitted by all and sundry without any fear of being investigated, courtesy amnesty given under section 111(4) of the Income Tax Ordinance, 2001. Influx of enormous wealth was directed to the stock exchanges and real estate markets where hungry sharks continued to devour the small investors through unholy manoeuvrings; or was used to artificially enhance prices of immovable property. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.
- From 2003 to 2018, according to a conservative estimate, we have lost Rs. 400 to 500 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life.
- Section 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium of 1% to 2% of the entire proceeds! The loss caused due to this provision alone in the last five years is nearly Rs. 275 billion.
The above are just a few areas showing how much tax loss we have been incurring perpetually. In ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’, no effort was made to take into account all these factors to correctly determine total federal tax gap.
The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).