Generating extra revenue of billions
Huzaima Bukhari & Dr. Ikramul Haq
The biggest challenge on tax mobilisation front faced by Federal Board of Revenue (FBR) is bridging monstrous tax gap through automation and introduction of tax intelligence system and not levying more taxes or enhancing the rates of the existing ones. The World Bank in its report, Pakistan Revenue Mobilisation Project, has noted:
Pakistan’s tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower middle income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent respectively) and it is larger for the GST/GSTS than for income tax (65 percent vs. 57 percent respectively).
“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80-C and 80-CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52”—Supreme Court of Pakistan in Messers Elahi Cotton Mills & others v Federation of Pakistan & others [ PLD 1997 Supreme Court 582].
Budget 2020 for fiscal year 2020-21 is in the making amidst very difficult times when we are faced with economic meltdown due to Covid-19 outbreak and extreme hardships by weaker segments of society. It is expected to be presented on June 5, 2020. 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 three-part series, we will present concrete measures to increase revenues without hampering the already collapsed economy, how to revive it fast and then move towards growth.
While revenue (tax and non-tax) generation is very important to meet the needs of the governments, these are urgently required to help 40 million identified as poor in the latest Multidimensional Poverty Index [MPI] 2019. The central points of budget 2020 should be achieving the long-delayed and much-needed goal of simplification of the tax system, ensure welfare of the common people and provide universal entitlements [free education, health, decent living, affordable public transport, universal pension, income support, civic amenities etc] to all citizens through a comprehensive social security system. This would only be possible by following a rational tax system proposed in 2016 [Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute, 2016] and some concrete measures suggested below.
Like all other nations in the coming days, we will have to strive hard to ensure survival and revival of businesses adversely affected by Covid-19 pandemic that employ millions having no other source of income. Overwhelming majority of businesses in the wake of lockdown necessitated due to Covid-19 epidemic is on the verge of closure. These were already suffering due to sluggish economic activities, high utility bills and markup rate. Big to small and medium enterprises (SMEs) are demanding a comprehensive bailout, including tax reliefs. They are complaining of facing difficulties in securing loan facility announced by State Bank of Pakistan to pay salaries/wages. Those on rent are demanding remission/deferment/loan to pay the same. Their demand is of interest-free loan and/or grant to employees to avoid lay-offs as after opening of businesses, they argue it will require many months to recoup losses and achieve break-even position. Amid this bleak scenario, they claim, markup would be an additional burden. There is demand of massive tax reduction, deferment of old and forthcoming liabilities, tax amnesty, and zero taxation for employees earning up to Rs. 100,000 per month, waiver of advance income tax and over 70 withholding tax provisions contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services.
Unfortunately, nobody is talking about raising tax and non-tax revenues by taking some out of box measures. Somebody needs to tell the Prime Minister that the iniquitous prescription of erratic and oppressive taxes and austerity in the federal budget will not solve our problems especially in the prevalent circumstances. The federal and provincial governments need to generate and spend more money for infrastructure improvement to create more employments and ensure higher growth, engaging private sector to take part in public projects. This would kick-start the economy. Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their machinery, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive owned by the federation and provinces, should be leased out for industrial, business and commercial ventures. It will generate substantial funds, revenue (at public auction 5% as full and final tax can be collected amounting to billions) and facilitate rapid economic growth.
The dire need in today’s Pakistan is to undertake fundamental institutional and structural reforms. Our biggest burden on economy is the huge unproductive workforce comprising nearly four million people, in various governments (federal, provincial, local and corporations) and Public Sector Enterprises (PSEs), who waste time and money and mostly create hurdles for citizens and businesses rather than serving them. Right sizing of monstrous administrative machinery and improving quality of public services should be at the top of agenda for reforms. This can be done by transferring much of the work to local Governments, which should be installed from the lowest level up.
Local elected authorities should handle all health, education, water and sanitation, local roads, local policing, local property transfer, property and income tax etc. For making Pakistan a self-reliant economy, we need to stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, the government-owned corporations should be run with private-public partnerships giving stock shares to the employees and introduce other steps to make these profitable through complete restructuring, increasing productivity through better technology and trained human resource, improving agricultural sector to meet local needs and creating exportable surplus; and reducing economic inequalities through redistribution of income and wealth using rational tax policy.
The following are measures to generate additional revenues (tax & non-tax) to become self-reliant, both by the federal and provincial governments, as well as steps for providing relief to all, especially the weaker section of society. Additionally, creating nation-wide data of all showing their earning/expenditure levels and assets for providing a comprehensive social security system. The Pakistan Tehreek-i-Insaf (PTI) has coalition government in centre and three provinces and can easily implement these. The government of Pakistan People Party (PPP) in Sind will certainly follow the suite of face the wrath of its voters.
- For the next three years, the actual quantification of income of non-corporate businesses and professions should be given up and taxation be moved to gross basis at fixed rate (after determining the fair rate for each class of business/profession). There will be audit, no raids and in books be shall be allowed to take credit of imputable income. Presently, barring a few, income tax is levied on net income with minimum tax to the extent of amounts collected through over 60 withholding provisions. It is patently unconstitutional, as held by Supreme Court in Elahi Cotton Mills & others v Federation of Pakistan & others [ PLD 1997 Supreme Court 582]. The apex court held that the National Assembly through Money Bill can impose taxes on income under Entry 47, Part I, Fourth Schedule to the Constitution or impose the same under Entry 52 on the basis of capacity to earn, but “it cannot adopt both the methods in respect of one particular tax”. The Finance Act 2019 violated this constitutional command. For ease of doing business and waiving lengthy disclosures in exception circumstances, if presumptive tax is imposed on turnover/receipts under Entry 52, the collection will around Rs. 800 billion from all businesses and profession other than companies. The total collection if we add corporate sector’s contribution of Rs. 1200 billion under the head income tax for fiscal year 2020-21 alone will be Rs. 2000 billion, against the net collection of Rs. 1445.4 billion in 2018-19 [we are not taking 2019-20 collection into account due to massive shortfall in the wake of Covid-19 outbreak and lockdown]. The additional revenue of Rs. 554.6 billion under one head alone will be a great achievement without hampering the revival and, in fact, giving the businesses and profession a stimulant to grow in the next three years.
- The federal government should also amend the definition of “agricultural income” to bring into its ambit receipts from sale of orchards, lease of lands, nurseries and in this way the rich absentee landowners and those engaged in businesses of nurseries will come under the Income Tax Ordinance, 2001. The addition revenue of Rs. 200 billion come from this if taxation is based under Entry 52 as discussed above. The historic decision of taxing “agricultural income” by the federal government was passed by Federal Parliament in the shape of Finance Act, 1977, but was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” to tax big absentee landlords in the ambit of federal income tax law. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan but was successfully foiled by a military dictator. It needs to be revived. The small farmers having holding up to 15 acres are already exempt from income taxation and will remain so. There is no need to amend the 18th Constitutional Amendment or disturb National Finance Commiussion Award (NFC) Award if this measure is taken in Finance Bill 2020.
- Military rulers abolished all progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax etc. Now these are with provincial governments after the 18th Constitutional Amendment, but they are also least interested in taxing the rich and mighty. If these taxes are imposed on the rich, additional revenue of Rs, 120 billion can be generated.
- During Zia’s 11 years rule and that of General Musharraf for nearly 9 years, absentee landowners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax.
- Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan under Entry 47. All the four provinces have enacted laws to this effect, but total collection during the last five years never reached even Rs. 2 billion (share of agriculture in GDP on average was about 20% for this period). Therefore, there is need to impose on the rich absentee landowners the tax as suggested above.
- Multi-national Companies (MNCs) through abusive transfer pricing mechanism, deprive Pakistan of taxes of over Rs. 200 billion every year and this can easily be recouped.
- Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before he took charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his global assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis. The repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite substantial revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan. The successive governments through amnesties and asset-whitening schemes caused loss of billions of rupees to the national exchequer. Levy 1% tax on the those having net moveable assets exceeding Rs. 10 million by the Federal Government and the at the same rate on immovable assets by the provincial governments will bring equity as the rich will contribute at least Rs. 100 billion for these levies.
- The total collection by imposing unified sales tax on goods and services as did by India in 2017 can be Rs. 3000 billion as against the collection of around Rs. 1659 by the Federal Government through sales tax on goods [Rs. 1459 billion in 2018-19] and provinces by sales tax on services [cumulatively Rs. 190 billion]. The additional revenue collection of Rs. 1341 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but also more distribution for the provinces. The slogan of ‘One nation, One Tax’ adopted by India and Harmonised Sales Tax (HST) by Canadian federal and provincial governments is the way forward.
- In Customs, the massive evasion takes place due to under-invoicing and mis-declarations. The collection in 2018-19 by FBR was 686 billion in 2018-19. If revenue leakages are plugged as suggested in ‘Dismantle containers’ mafia’, Business Recorder, September 14, 2018, it can be Rs. 1200 billion. The extra generation of Rs. 500 billion under this head is possible.
- The loss in Federal Excise Duty (FED) due to illicit and smuggled cigarette sector alone is Rs. 100 billion a year. It can be plugged by trace (T&T) system [ see detailed study by Huzaima & Ikram, Revenue Losses and illicit tobacco trade, 2020].
As evident from above, the revenue generation of at least Rs. is possible in fiscal year 2020-21 if remedial measures as suggested above are taken. In the next instalment, we will discuss paradigm shift required in various areas and structural reforms to make Pakistan self-reliant and a truly welfare state.
- All individuals having taxable income or below taxable limit should be facilitated to file simple tax returns [no wealth statement]. Those earning below taxable limit should be paid income support [negative tax]. Return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create data bank at national level of all households—about 37 million as per last census. Their earning levels will determine who need to pay and who should be entitled to social benefits under Ehsaas and other like programmes.
- All entities—individuals, association of persons/firms/companies/artificial juridical persons—should be offered to pay income tax/sales tax for any tax/assessment year/tax period for any past lapse under National Tax Clemency Scheme. They should be encouraged and facilitated to pay past liabilities and thereafter would not face any penal action—prosecution, penalties, additional tax, default surcharge etc.
- The State must not offer any amnesties/immunities—these are incentives to the dishonest and penalising the honest taxpayers. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit.
- In the next three years’ time, the businessmen instead of being overburdened with advance/heavy taxes/duties/other charges should be facilitated by improving all indexes of ‘Ease of Doing Business’ that must also include reducing cost of doing business. They should be given tax credits/incentives for compulsorily investing in human resource so we have trained and qualified workforce in all areas—providing employment and paying them decent/livable wages.
- We must encourage and offer all possible facilities and incentives to all kinds of entrepreneurs, especially Small & Medium Enterprises (SMEs) to concentrate on growth and productivity.
- All the governments—federal, provincial and local—should join hands and prepare national level data of all citizens determining their economic and social status. There should be universal pension, social security and food stamps for the needy at the same time empowering them to come out of poverty trap.
- In three years, after achieving consensus through consultation with all stakeholders we should have National Tax Agency manned by members of All Pakistan Unified Tax Services having professional expertise in all related fields. This Agency would be in a position to communicate to all citizens what their income/expenditure levels are—it will determine tax obligations as well as who needs income and social support from the State.
- After national debate and taking input from all stakeholders national and provincial legislators should go for simple, predictable and low rate taxes—there should be income tax on all incomes including agricultural income to be under the exclusive domain of federal government and harmonised sales tax on goods and services to be given exclusively to the provinces—it will create fiscal consolidation and make federal and provincial governments self-reliant.
- We must abolish multiple taxes and collect local taxes e.g. property, vehicle taxes etc to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
- All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems—of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine and/or imprisonment.
- For reducing fiscal deficit to the level of 6% of GDP, it is imperative to (i) curtail unproductive and wasteful expenses by 30%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc through public auction for specific activities to generate employment/boost economic activity and (iii) taxes at all levels—federal, provincial and local—should be made simple, low rate, broad-based, payable with ease as the Punjab Government recently decided to abolish around 50 taxes.
- Multi-national Companies (MNCs) through abusive transfer pricing mechanism, deprive Pakistan of taxes of over Rs. 200 billion every year.
- In 2003 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemptions 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 market where the sharks continued to engulf small investors through unholy maneuverings; or was used to artificially enhance the prices of 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.
- According to a conservative estimate, from 2003 to this date we have lost Rs. 300 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. The wealthy should now be taxed at grass root level through local governments according to the size of houses they own. Tax on immovable property after the Eighteenth Constitutional Amendment is the sole prerogative of the provinces. By levying capital gain tax on disposal of urban immovable property, the provinces can generate sufficient resources rather than look towards the federal government for money all the time.
- Section 111(4) of the Income Tax Ordinance, 2001 is abused by powerful segments, politicians, government officials and businessmen through benami transactions. The loss caused due to this provision alone for the last 20 years is estimated at nearly Rs. 1500 billion.
The above are just a few areas showing how much tax loss we have been incurring perpetually since 1977. Total loss of revenue through Statutory Regulatory Orders (SROs) issued during the last 25 years alone is estimated at about Rs 3000 billion — unprecedented concessions to the rich made the State poorer and the masses indebted enormously. We did not need any borrowing at all, if SROs were not issued and taxes had been collected fairly and justly.
Tax revenues have a critical role in municipal self-governance in all successful social democracies. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or those for which they are responsible for under the law. Take the example of Finland where the most important levy is municipal tax, which amounted to almost 44 billion Euros in 2018—Pakistan collects less than 30 billion Euros as taxes both at federal and provincial level!
If a country of 5.4 million people (Finland) can achieve this level of taxation at municipal level alone, then we a nation of over 210 million can do much more, but only if there is the will. One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. We have the resources but system for self-governance as in vogue in Finland and elsewhere in the world is non-existent despite the clear command vide Article 140A of the Constitution. Resultantly, power is not with the people but in the hands of the privileged few.
Economic equality and prosperity, peace and social tranquility can never be achieved unless taxation system is reformed completely. It needs partial decentralization where taxes are collected for education, health care and social welfare services through municipalities working on the principle of self-governance ensuring that revenues are spent for the benefit of public and not the powerful segments of society alone.
In the present circumstances, in the forthcoming budget a fair and transparent tax system as elaborate in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, 2016] has assumed renewed importance and relevance. In this update to this study, we are presenting a plan that can help to overcome the prevailing challenge through Finance Bill 2020. It is a golden opportunity for the federal and provincial governments to take some right measures to not only help the needy but also ensure return to a vibrant economy with partial and ultimately full withdrawal of lockdown caused due to Covid-19 pandemic. The most essential step towards this is simplification of the tax system, guaranteeing ease of doing business, reducing cost of doing business, providing level-playing field, free and independent market operations. The governments should also focus on improving human capital, tapping resources and generating employment. For all these, dismantling and reconstructing the oppressive, inefficient and unproductive tax system is a prerequisite. The existing system imposes high taxes but yields low revenues. Only 2000 companies pay 75% of total taxes. The standard sales tax rate is 17% but effective collection rate is not more than 8%. Refunds of billions of rupees of sales tax and income tax were unlawfully withheld to show higher figures in the past many decades.
One of the many maladies in the tax system is cumbersome withholding tax system contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services. It is operationally inefficient, anti-business, complex, time-consuming and costly and must be abolished except for payroll and payment of dividends, interest and payment to non-residents.
The agenda of simplification of tax codes and rationalisation of tax system can improve tax compliance, unless there is substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools. The present structures of the federal and provincial tax bodies have failed to achieve these objectives. Therefore, the fundamental challenge is providing a simple tax system that is manned by an efficient and competent administration, which is presently non-existent.
Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Tax reforms certainly do not mean mere alteration of tax laws or making cosmetic changes here and there. Meaningful tax reforms are not possible without first establishing an efficient, workable structure. The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverket that maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish National Tax Authority (NTA) on the same lines as highlighted in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, 2016].
The issue of fragmentation of taxes and multiple collection agencies was discussed in detail in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged in any of its papers/reports related to Pakistan Raise Revenue Project, the contribution of local writers and presented the same ideas as its own recommendations. For example, it may be noted that we gave the idea of National Tax Agency first time in 2013 in this newspaper [‘Need for National Tax Agency’, Business Recorder, November 1, 2013] then in Tax proposals—VII: Need for NTA, Business Recorder, May 22, 2015 and Need for “NTA”, Business Recorder, November 27, 2015.It was suggested that the FBR or any other tax collection agency need to be run by a competent board as a short-term reform measure before all of these finally merged into a single national tax authority [NTA]. The NTA should not only collect taxes at all tiers of government but should also disburse benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitisation) can be a great step towards e-government model for the country that is presently non-existent. The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth studying/adopting after debate and suggesting modifications suiting our peculiar requirements. This was later elaborated by us many a times in various articles and in a paper, Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute, April 2016] and in Need for National Tax Authority, Business Recorder, October 20, 2017, ‘A case for ‘National Tax Authority’, Business Recorder, November 30, 2018 and December 2, 2018. It was also included by the Tax Reforms Commission in its final report submitted in February 2016 [which was marked confidential and till today is not made public despite our repeated requests].
The issues faced on fiscal front and how to deal with them, especially in budget for 2019-20 were discussed in detail in a serious of articles, written under the title, ‘Avant-garde budget proposals’, published in four parts in Business Recorder on May 10, 17, 24 & 31, 2019. These and many other articles such as Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018, PTI and tax reforms, Business Recorder, August 17, 2018 and Wither tax reforms, Business Recorder, August 2, 2019.
The failure to tap real tax potential is the failure of both the federal and provincial governments. Poor performance of FBR [Annexure A] adversely affects the provinces as they are overwhelmingly dependent on the Divisible Pool. Provinces are not ready to collect taxes wherever due e.g. agricultural income tax from rich absentee landlords and property tax from owners of palatial houses/bungalows/farm houses etc and not giving fiscal powers to local governments as envisaged under Article 140A of the Constitution of Islamic Republic of Pakistan [“the Constitution”].
FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax (it was 65% last year). Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], Rs. 39.2 billion [2.7%] received with returns and Rs. 344.2 billion [23.8%] as advance tax. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR. The same trend continues in the first nine months of the current fiscal year and after Covid-19 crisis, the situation further worsened.
In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution between the Centre and provinces. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is hardly 6%—in overall national revenue base (tax and non-tax revenue) it is around 8%.
In 2020, our economic managers are relying on 7th NFC Award signed on December 30, 2009, before the Constitution (Eighteenth Amendment) Act, 2010 [commonly called 18th Amendment]. Article 160(3A) of the Constitution, inserted by 18th Amendment, categorically says: “The share of the Provinces, in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award”. However, outside the ambit of Article 160 of the Constitution, the Centre can impose taxes to meet budgetary gap as it did in 2013 by enacting Income Support levy Act, 2013, but repealed it the very next year [A tax for the poor that the rich never paid, Daily Times, October 21, 2018]. When the federal government can impose any tax/levy/cess to meet its needs without sharing proceeds with the provinces then what is the motive behind starting a controversial debate over the 18th Amendment? The issue is not that of 18th Amendment, but poor collection of taxes by the federal government that hurts the provinces as well, which also do not collect taxes from the rich and mighty. This real dilemma of Pakistan is discussed in detail in Revisiting NFC Award, Daily Times, February 10, 2019 and IMF, NFC Award and PTI, Daily Times, October 14, 2018.
The official document [Budget in Brief] of budget 2016-17 says: “The 8th NFC was constituted on July 21, 2010, but it did not give any Award”. Subsequently, the 9th NFC was constituted on April 24, 2015 followed by its demise on April 24, 2020. This is a sad reflection on meeting the constitutional obligations on the part of the federal and provincial governments.
A special feature of the 7th NFC Award was recognition that for Balochistan, share from the divisible pool was guaranteed at Rs.83 billion in financial year 2010-11 which was more than double from the actual divisible pool share of financial year 2009-10. It was also ensured that Balochistan province would receive provincial share in the divisible pool based on the budgetary projections instead of actual collection by Federal Board of Revenue (FBR). Shortfall, if any, based on the actual collection reported by FBR would be made up by the Federal Government itself. Initially, this arrangement was for five years of the 7th NFC Award but later on in order to cater for the financial needs of Balochistan, an amendment was introduced in the Presidential Order No.5 of 2010 [containing text of 7th NFC Award] providing that this arrangement “shall remain protected throughout the Award period based on annual budgetary projections”.
After 10 years of 18th Amendment and 11 years of 7th NFC Award, during Decade of Democracy [2008-18] neither PPP nor PMLN made efforts to ensure adequate collection of revenues by FBR so that distribution of their net proceeds—commonly known as divisible pool—could bring fiscal consolidation for the federation. The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per command of Article 140A of the Constitution.
On assumption of power in August 2018, the coalition governments of Pakistan Tehreek-i-Insaf (PTI) in the centre, Punjab and Balochistan and having two-third majority in Khyber Pakhtunkhwa also miserably failed in improving tax collection and devolution under Article 140A of the Constitution. It exposes the political elite—their utter disrespect for Constitution and complete apathy towards well-being of people and transferring powers at grass root level to empower them.
The culprit is not the 18th Amendment but the vested interests of elites. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely since 2008, now miserably after the Covid-19 outbreak and lockdown. In the coming week, they will notify 10th NFC Award but nothing will change unless oppressive, exploitative and elitist structures are dismantled!
The federal government after imposing all kinds of oppressive taxes has miserably failed to reduce the burgeoning fiscal deficit. The reason being that FBR has been persistently failing to achieve the assigned targets, what to speak of tapping the actual tax potential that at federal level is not less than Rs. 8 trillion at federal level and Rs. 2 billion at provincial levels—Raising Rs. 8 trillion, Daily Times, September 20, 2018.
The Centre is unwilling to grant provinces their legitimate taxation right of sales tax on goods, while it collects too little to meet overall needs of the federation and federating units. Sales tax on goods at time of independence was a provincial subject. The subject of sales tax was on the Provincial Legislative List at Serial No.48 in the Government of India Act, 1935 and was described as “Taxes on sales of goods and on advertising”. In the Constitution, 1956, “tax on sales and purchases” was mentioned at Serial No.26 of the Federal Legislative List, and therefore, for the first time it became a Federal subject. The position was maintained in 1962 Constitution, which mentioned “tax on sales and purchases” on the Federal Legislative List as clause (j) at Serial No.43 in the Third-Schedule. In 1973 Constitution as originally adopted ‘tax on sales and purchases’ was kept on Federal Legislative List at Serial No.49 of Part I of the Federal Legislative List given in the Fourth Schedule. The item was, however, completely substituted by Constitution 5th Amendment Act, 1976 with effect from September 13, 1976 to read “Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed”. The second half of the amended entry appears to have been taken from the amendment made in Sales Tax Act, 1951 by Finance Ordinance, 1960. Through that amendment the words “consumption of goods” in the preamble were substituted by “importation, exportation, production, manufacture or consumption” [see details in WAPDA v. Collector of Central Excise and Sales Tax (2002 PTD 2077 and also in Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak)]. The size of the cake is so small that it cannot help the country to come out of debt trap and spend adequately for the welfare of the masses, no matter which part of the country they belong to. The relief/stimulus package announced on March 24, 2020 by Prime Minister exposed our economic and fiscal vulnerabilities during testing times. Under the given scenario, Pakistan will remain in debt prison, and more and more people will be pushed below the poverty line, especially due to corona crisis. If we want to overcome it, the Parliament will have to reconsider the prevailing social contract between federation and the provinces.
The way forward is that provinces should have the exclusive right to levy sales tax not just on services but also on goods as was the situation in 1947. It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilisation in Pakistan.
The following measures/steps are necessary to recoup damage already inflicted to the economy by pre-Covid-19-lockdown policies, due to closing down of businesses [now partly opened from May 9, 2020] and other global factors resulting into demand contraction and absence of reliable national socio-economic registry as maintained by Skatteverket and many other tax agencies:
- All individuals, whatever the level of income may be, should be facilitated to file simple and easy tax returns made available both in English and Urdu—incentive for filing return should be Rs. 2,000 cash payback in the bank account of the filer. It would enable the process of creating National Registry about households and their earning levels at national level. Individuals earning below Rs. 400,000 should be paid income support (negative tax) till the time the State provides them employment and not keep them beggars for life.
- For individuals, income tax rate exceeding income of PKR 0.6 million should be 10% with alternate minimum tax 1% of net wealth exceeding Rs. 20 million. Corporate income tax rate should be reduced to 20%.
- All citizens should be given a chance to pay any past unpaid liability due to non-reporting or under-reporting by just paying 10% tax latest by June 30, 2021. After the deadline, stringent action including confiscation and imprisonment should be provided.
- For the next three years due to challenges posed by Covid-19 economic toll, under a self-assessment scheme if any taxpayer pays more than 25% tax over the last year’s liability, no audit should be conducted. If definite information for underreporting or non-reporting of any income is received, the retrieval be made with penalty of 100%.
- Simplified and harmonised sales tax on goods and services at a low rate of 5% by making recourse to Article 144 of the Constitution. The collection will be through single national agency but provinces will get shares according to the provisions of the Constitution.
- Simplify Customs tariff with ‘One-Chapter One-rate’.
- Radiographic scanning of all inbound and outbound containers to plug revenue leakages.
- Effective mechanism to counter unfair practices on the part of tax administrators—subjected to punitive actions and pecuniary damages after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
- Taxpayers’ rights must be safeguarded and strengthened by giving adequate rights under Taxpayers’ Bill of Rights ensuring quality of treatment, guaranteeing privacy and confidentiality of their declarations, providing right to assistance by the State in tax matters, ensuring unfettered right of appeal through an independent tax appellate system and providing facilities for independent review of disputes with tax authorities.
- In Pakistan under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz.
- Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;
- Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and
- 6% mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.
The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001 which will help in ascertaining collection for the current tax year without accumulation of refunds after abolishing all regressive withholding provisions.
- Recovery of tax demand should be made only after decision of National Tax Court as suggested below.
- An efficient tax judiciary to help in removing impediments in the way of collection of genuine tax demands by the State and settling tax dispute within 12 months. For this we need to make the Tax Appellate Tribunals a truly independent forum. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Tribunal (NTT) and placed directly under the Supreme Court as is the case with Service Tribunal. After one intra-court appeal right with the NTT, only the substantial questions of law to go to the Supreme Court by way of leave to appeal as provided in Article 185(3) of the Constitution. Members for NTT should be recruited in the same manner as judges of High Court. The pay, perquisites and salary structure of NTT members and staff should be at par with that of High Courts.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)
Annex A: FBR’s performance (1996-97 to 2018-19)
Source: State Bank/Economic Annual Surveys & FBR Year Books
(Rs. in billions)
|Year||Targets||Collection||Growth in Collection (%)||Target Achieved (%)||Tax to GDP ratio||Ratio in total taxes (%)|
|Indirect taxes||Direct taxes|