Dr. Ikramul Haq
The government of Pakistan Tehreek-i-Insaf (PTI) has been trying to improve tax administration and enhance revenues but not succeeded so far. Now amid Covid-19 epidemic it is facing a tough challenge for economic revival. It desires to prepare a budget entailing reliefs/incentives/concessions to all, but International Monetary Fund (IMF) is adamant for fiscal consolidation, austerity and fixing target of Rs. 5.1 trillion for Federal Board of Revenue (FBR) when government projects GDP growth of 2.3% in 2020-21. FBR has never collected even Rs. 4 trillion in good times. After 68 years, Pakistan is expecting contraction of 0.38%. Under this bleak scenario, fixing higher tax target is illogical. In such circumstances, what measures do we need to revive? This question is baffling all, especially when cases of coronavirus are rising sharply.
FBR never collected due taxes from high-net-worth individuals, powerful industrial giants, tax-defiant traders and militro-judicial-civil-complex enjoying exemptions. We were collecting even meagre taxes before Covid-19 outbreak from them. Lawyers, doctors and other professionals, businessmen-turned-politicians, absentee landowners, high-class dress designers, beauticians and stylists, event-arrangers, artists etc as per tax directories published by FBR declare income that cannot even justify a fraction of the lavish life they enjoy. Amnesties, immunities, exemptions, waivers still exist for the rich and mighty. They are demanding further tax breaks due to economic toll caused by Covid-19 endemic. Multinational companies keep on fleecing us through abusive transfer pricing. FBR lacks the capacity to tax them and political master do not allow to deploy tax audit experts under assistance programme of international tax organisations or tax authorities outside Pakistan though it is provided in section 177(11)(e) of the Income Tax Ordinance, 2001.
Failure of FBR to act as efficient tax agency, besides capacity and integrity issues, is also due to elite capture and political interference by successive governments. Main blame goes to the legislators for giving frequent asset-whitening schemes, exemptions, amnesties, waivers and immunities. Scheme in 2018 by Pakistan Muslim League (Nawaz) [PMLN] and in 2019 by coalition Government of PTI caused loss of billions to national exchequer. Every year, FBR fails to collect downward revised targets what to speak of originally assigned in the budget. This widens fiscal deficit resulting in more borrowing and resultantly a large part of the federal revenue, after distribution under NFC Award, goes into debt servicing. In 2020-21, it will be Rs. 3 trillion plus. Fiscal consolidation is one of the daunting challenges faced by Pakistan. Successive governments have failed to end wasteful expenses, rationalise taxes and utilise untapped resources to increase non-tax revenues. No government made any serious effort to restructure tax system to help grow businesses and productivity, revatilise agriculture, encourage import-substitution and promote export-led growth.
All elected governments since 2008 gave free hand to tax officials to block bona fide refunds, take advances not due, raise unjust demands and freezing bank accounts for recovery. Exporters and other taxpayers, even under the PTI Government are begging for bona fide refunds, withheld unlawfully, released partly as “relief package”—what a shame! Had governments in power from 2008-18 concentrated on growth above 6%, as done by China, India and Bangladesh during this period, Pakistan could have avoided the present mess, now accentuated by Covid-19 outbreak. Tax increase comes with growth. Harsh/distortionary/excessive taxation hampers growth and discourages investment in existing/new businesses. Dr. Abdul Hafeez Shaikh in the coming budget must reverse the tax policy making it growth-oriented. Directions of Prime Minister are “give maximum relief” and constraints are demands/conditions by IMF to collect more and spend less on development. Can he convince IMF that with lower-rate taxes, withdrawing exemptions and increasing public spending, we can get better numbers, bring reliefs for businesses and create jobs as well as help the poor? This is his main challenge and he can prove his acumen in these difficult times by prevailing over IMF.
FBR collected Rs. 3534 billion from July 2019 to May 2020. Definitely, it is going to miss the original target of Rs5555 billion by a huge margin because of amnesties and disastrous impact of Covid-19 pandemic. Even prior to Covid-19 outbreak, FBR was far behind the revised target of Rs. 5238 billion after first review under IMF’s $6 billion Extended Fund Facility (EFF) programme, later reduced to Rs. 4,803 billion on the eve of incomplete second review and after coronavirus outbreak to Rs. 3908 billion. In 2018-19, target was Rs. 4435 billion, revised downwards twice [first to Rs. 4398 billion and then to Rs. 4150 billion] but FBR collected Rs. 3828.5 billion registering negative growth of 0.4 percent.
The sordid story of tax collection through withholdings/advances continues unabated even under the PTI Government. The main reliance of FBR since 1992 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains 66 withholding tax provisions, majority of which constitute minimum tax liability. FBR cannot be blamed entirely as it is prevented by political masters to collect due taxes from the rich and consequently emphasis shifts to withholding taxes.
FBR has issues of competence/resources/training but main fault lies with politicians/legislators who have been giving unprecedented exemptions to the powerful classes and amnesties to tax evaders, even after having information about their foreign undeclared accounts/assets under Tax Information Exchange Agreements (TIEAs), signed under initiative of Organisation for Economic Co-operation and Development (OECD).
As many as 135 persons, named in the database received under TIEAs, availed the 2018 tax amnesty scheme of PMLN and declared Rs. 62.4 billion in assets paying just Rs. 2.9 billion, whereas, actual liabilities without the tax amnesty could have been Rs. 43.7 billion, getting a relief of Rs. 40.8 billion. About 56 people, whose data was shared under TIEAs, availed PTI’s amnesty scheme, declared assets of Rs. 31.8 billion, paid only Rs. 1.7 billion, getting relief of Rs. 20.6 billion!
For reducing fiscal deficit, mitigating negative impact of Covid-19 and reviving economy, the following measures are required in the forthcoming budget:
- Substantial reduction (at least 40%) in non-development expenditures.
- Tapping the non-tax avenues by leasing out state land situated in the heart of big cities and palatial official bungalows through public auctions for commercial ventures, giving space to SMEs and other to boost economic activities and generate jobs.
- Provide affordable finance to all by lowering discount rate to 3-4 percent.
- Taxes at all levels—federal, provincial and local—be simple, low rate, broad-based, payable with ease—model is available [Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute].
- For the next two years, non-corporate entities may be taxed on gross receipt basis (after determining the fair rate for each class of business/profession). Tax incentives/credits for creating new jobs (50% for women), training human resource and investing in innovation and research.
- Bring informal businesses, especially retail sector, into tax net as elaborated in Simple and fair taxation for retailers, Daily Times, May 24, 2020.
- Give all facilitations/incentives to exporters.
- Tax receipts of big absentee landlords as business income, waive all taxes on small farmers engaged in self-cultivation and give them training/finance to boost productivity.
The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)