Huzaima Bukhari & Dr. Ikramul Haq
The federal budget for fiscal year (FY) 2021-22, third of the coalition Government of Pakistan Tehreek-i-Insaf (PTI) [hereinafter “the PTI Government”] and first of its fourth Finance Minister, Shaukat Fayaz Ahmed Tarin, announced on June 11, 2019 along with Finance Act, 2021 was a routine and ritual exercise with no innovation at all to make Pakistan a self-reliant economy—with no policy shift to promote business, facilitate existing taxpayers by reducing their tax burden under the heavy toll of three waves of Covid-19 endemic and create new jobs for which tax credit under section 64C of Income Tax Ordinance, 2001 to hire freshly qualified graduates from a university or institution recognized by Higher Education Commission is proposed to be withdrawn under Finance Bill, 2021. This is being done by a government that won elections on the promise of creating 10 million jobs!
Earlier, section 64C of Income Tax Ordinance, 2001 was withdrawn on the dictates of IMF before the release of US$ 500 million tranche to make amendments in the Income Tax Ordinance, 2001 immediately. The President of Pakistan in exercise of the powers conferred by Article 89(1) of the Constitution of the Islamic Republic of Pakistan [“the Constitution] promulgated Tax Laws (Second Amendment) Ordinance, 2021 (Ordinance VII of 2021) on March 22, 2021, with immediate effect. Can the same amendment be proposed in Finance Bill, 2021 when the said Ordinance is considered as Bill deemed to be laid down in the Parliament? It is blatant violation of the Constitution—details in Civil governments, ‘Ordinance’ factories, Surkhyian, March 15, 2021.
- The benefit represented by free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment:
Provided that National Tax Number of the hospital or clinic, as the case may be, is given and the employer also certifies and attests the medical or hospital bills to which this clause applies;
- any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment.
With complete focus on reduction in custom duties, corrective measures and business friendly budget, salaried individual has again been penalised. The medical facility/reimbursement and medical allowance provided by the employer has been proposed to be taxable as against the current exempt position narrated. It can be understood with the following example:
Mr X, salaried individual, earning annual salary of Rs. 8,000,000 and paying monthly tax of Rs. 112,083 withheld by employer under section 149 of Income Tax Ordinance, 2001.
Unfortunately, he underwent a major surgery on July 1, 2021 and cost of Rs. 4,000,000 reimbursed by employer on July 1, 2021. For withholding tax purposes for July 2021, it is added in his taxable salary that is now 12,000,000 and employer to withhold tax on monthly income of 12,000,000, an increase of 33%! This will fall in the 9th slab now, from earlier 8th and monthly withholding would now be Rs. 195,417 that means an increase of 57%.
As evident from above, the only benefit of medical reimbursement or free medical facility left with salaried class is intended to be withdrawn but the Federal government, without increasing slab rates, has tacitly increased tax burden of 57% in the above example. This impact has not been highlighted by anyone posing as tax experts and all-knowing anchors on popular TV shows. Obviously it will affect all government employees, including those working in FBR, or will they create a special exemption for them like clause [(27) of Part II of the Second Schedule to the Income Tax Ordinance, 2001 which says: “The tax on payments under the Compulsory Monetization of Transport Facility for Civil Servants in BS-20 to BS-22 (as reduced by deduction of driver’s salary) shall be charged at the rate of 5% as a separate block of income”. It shows hollowness of the PTI Government’s claims that it is committed not to increase the tax burden of employees and tall claims of prioritizing health needs of all citizens. The reality speaks otherwise as discussed above.
The local jargon of babu (bureaucratic) budget aptly applies to Budget for FY 2021-22 as to all the previous ones. Our elected leaders in national and provincial assemblies are either incompetent or least concerned with tax legislation. It is evident from the fact that we still have Income Tax Ordinance, 2001 by the military dictator General (retired) Pervez Musharraf, who in 2001 on the dictates of International Monetary Fund (IMF) promulgated it, though it was given effect from tax year 2003. He repealed the Income Tax Ordinance of 1979, promulgated by late Mohammad Zia-ul-Haq, Pakistani chief of Army staff, chief martial-law administrator, and president of Pakistan from July 5, 1977 to August 17, 1988.
Every year before the announcement of annual federal budget—which has become an official ritual—plethora of tax proposals are received by FBR from trade and professional bodies, tax bars and industry’s representatives and even individuals, including ex-Chairman from the private sector. For the last many years, FBR itself has been soliciting budget proposals by placing detailed guidelines on its website. However, each year the Finance Bill proves to be just a hopeless document—containing innumerable meaningless amendments in tax codes, imposing more and more burden on the existing taxpayers—especially through cumbersome withholding of taxes and those collecting it are not entitled to any compensation [barred under section 168(6) of Income Tax Ordinance, 2001]. It reads as under:
“Notwithstanding anything contained in any other law or any rules for the time being in force, no amount shall be deducted on account of service charges from the tax withheld or collected by any person under the provisions of this Ordinance”.
The above provision added through Finance Act 2009 is in violation of fundamental right under Article 11(2) of the Constitution of Islamic Republic of Pakistan [The Constitution] that prohibits all forms of forced labour. All those who are made withholding agents should challenge it under the Constitution. The Legislature passes such laws on the recommendation of FBR after approval by Cabinet as it has never taken note of this gross violation of the supreme law of the land. The Supreme Court of Pakistan and High Courts under the Constitution are mandated to protect the fundamental rights of citizens, but unfortunately, forced labour (duties as withholding agents under the Income Tax Ordinance, 2001) have never been examined from the perspective of Article 11(2) of the Constitution. The judicial interpretation of “forced labour” as used in Article 11(2) even covers forcing somebody to do which he/she is not willing to perform even for consideration (Enforcement of Fundamental Rights, Constitutional Case No. 1 of 1988, decided on 18/09/1988, reported as 1989 SCMR 139 and Human Rights Commission of Pakistan v Federation of Pakistan PLD 2009 Supreme Court 507).
Since 1996, by taking credit of advance tax relating to the next tax year(s), during the current tax year, FBR not only overstates collection figures, but does not also pay back the excess amount received as withheld or advance tax. What makes the situation more excruciating is the fact that the government pays no compensation to the taxpayers for using their funds received in advance and retained though prior to 1996 the same was paid at the time of assessment and 6% compensation was compulsory for advance tax paid under section 53 of the repealed Income Tax Ordinance of 1979.
It needs to be highlighted that since its inception and until assessment year 1995-1996, section 53 dealing with advance tax under the repealed Income Tax Ordinance of 1979, had the following three specific attributes:
- Advance tax was paid by the taxpayer on the basis of latest declared/assessed/estimated income for that assessment year;
- Credit for any advance tax collected for an assessment year was accounted for in the related 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 (not yet due) remained with the government.
With increasing pressure on FBR for achieving assigned (inflated) targets (fixed in utter disregard to ground realities after deadly Covid-19 outbreak and frequent complete or partial lockdowns especially after deadly third wave that is receding but still persisting), panic-struck measures are adopted to display a high level of efficiency (artificially) destroying businesses and growth with the following features:
- Credit for advance tax is being taken in the year of collection whereas it pertains to next tax year;
- Basis for determining advance tax shifted from income to ‘turnover’ and many other aberrations; and
- Compensation for utilising funds of taxpayers is no longer available.
Finance Minister, Mr. Shaukat Tarin, appointed under Article 91(9) of the Constitution has been rightly talking about higher and sustainable growth above 7 percent to provide jobs to millions of fresh and young graduates but not aware of anti-growth provisions in Income Tax Ordinance, 2001. He is totally oblivious about withdrawing the beneficial provision like section 64C of the said law for recruiting fresh graduates from recognised universities! It shows how the tax bureaucrats [‘Revenuecracy’, term coined by Dr. Pervez Tahir, highly respected economist and former Chief Economist of Planning Commission in Giving FBR a decent burial, The Express Tribune, November 8, 2019] are keeping the Prime Minister and Cabinet updated about the role of taxation in revival of economy. No expert on taxation, including the ex-chairman from private sector, talked about it in marathon “budget special transmissions” that are still being aired on electronic media at the time of writing these lines. Not a single journalist raised this issue during Press brief on budget and Finance Bill, 2021 on June 12, 2021—another annual ritual!
Mr. Shaukat Tarin sincerely wants to reform FBR but he is being misguided with respect to collecting 97% income tax done through withholding provisions, advance tax and with returns [PIDE Reform Agenda for Accelerated and Sustained Growth]. For just 3% income tax collection a staff of over 25,000 FBR employees is busy extorting funds from the citizens, even when not due. FBR’s performance in achieving collection targets is irrationally measured taking into account figures for the past closing year as well as of the future closing year or years as well. For example, banks having calendar year as tax year during 2021 are paying advance tax on monthly basis for tax year 2022! The credit of advance tax being paid for tax year 2021 every month till 31st December 2021 will be given credit when banks file returns on September 30, 2022—due date under the law. But FBR will take this amount as collection for the current fiscal year ending on June 30, 2021. Does our Finance Minister, an ex-banker, know about it? If answer is yes, he must restore pre-1996 position as elaborated above.
Pakistan has a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes, yet not collecting enough and pushing the country into deeper debt trap. The PTI Government since August 2018, despite making tall claims, has made no effort to reform the fragmented and highly complex tax system, remove policy distortions and reduce fiscal deficit. Unfair taxation is the root cause of our multiple socio-economic ills, resulting into inequitable distribution of resources.
The FBR as it exists today is incapable of tapping real tax potential, as in addition to capacity issues, mindset of highhandedness and rampant corruption, even those want to work honestly are not allowed by men in power and other vested interests. In these environments and mundane realities, draconian powers under proposed section 203A in the Finance Bill, 2021 need reconsideration unless we restructure the existing incorrigible FBR. On the one hand, Mr. Shaukat Tarin says he wants to curtail the powers of FBR and on the other gives them such unbridled, rather unconstitutional powers that can be disastrous. The outsourcing of audit also needs debate as two big auditing firms recently mentioned in FIR’s for collusive arrangements with robber barons where one is even fined, subject to their right under Article 10A, we cannot say anything adverse but since their credentials are doubtful, matter must be debated in the Parliament on both issues of power of arrest and audit by third parties. The second experiment in the past has failed miserably. The protection of information/data under section 216 of the Income Tax Ordinance, 2001 and power to arrest are prone to abuse and violation of fundamental Article 10A. Mr. Tarin knows about the mindset of majority of FBR’s lower staff and cognizant of the fact that the system is rotten and corrupt to the core! However, his prescriptions to correct the things are not aligned with existing realities.
We need a National Tax Agency (NTA)—FBR high-ups prefer the name, ‘Pakistan Revenue Board’ (PRB). This body, whatever name may be given, shall not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. This body must be under the government but supervised by an independent Board of professionals. 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, pensions, just to mention a few, in lieu of paying fair taxes—details were discussed in Agenda for tax reforms, Surkhyian, May 18, 2021 and Budget 2021: Taxes, Inflation Growth & IMF, Surkhyian, May 23, 2021. Punishing them before providing this when all paying taxes with mobile is unfair. Mr. Shaukat Tarin and all the legislators before passing Finance Bill, 2021 may kindly read:A better tax model, Business Recorder, May 21, 2021 and Respect to taxpayers, PIDE P&R, PIDE’s Guide to Tax Policy & Research, Volume II, Issue VI, June, 2021.
The balancing of books through more loans—going to IMF 22 times and 13 bail-outs in 60 years—to bridge fiscal deficit has been the favourite mantra of all governments, military and civilian alike and PTI is no exception. The result is obvious, more debts and enhancement in debt servicing, yet instead of following fiscal prudence and debt management, more borrowing, internal and external for meeting ever-increasing fiscal deficit. Mindless borrowing and reckless spending on useless programmes wasting billions of rupees for winning popular vote under federal and provincial public sector development programmes (PSDPs). There is much talk about reducing non-development expenditure whereas the reality is quite the opposite. The estimate of current expenditure for fiscal year (FY) 2021-22 is Rs. 7523 billion, in which debt servicing alone is Rs, 3060 billion (40.6%)whereas defence (excluding pension of Rs. 360 billion) is Rs. 1370 billion (23% after including pension). The total net revenues (tax and non-tax) estimated in Federal Budget 2021-22: Annual Budget Statement for budget 2021-22 are Rs. 4497 billion against the total estimated expenditure of Rs. 8487 billion, which means fiscal deficit of Rs. 3990 billion. What makes the situation more painful is the fact that for bridging this gap, the federal government has forecast surplus of Rs. 570 billion from the provinces. In other words, they are incentivised not to spend money available under the 7th NFC Award in the most difficult days when millions need help from the provincial governments due to heavy financial toll of three waves of Covid-19 endemic. The other sources of meeting the huge fiscal deficit are: net external financing of Rs. 1246 billion; net internal financing of Rs. 2492 billion and privatization proceeds of Rs. 252 billion.
The expenditure side tells the real story of fiscal challenges faced by Pakistan, which are evident from the official figures released. Out of total current expenditure of Rs. 7523 billion, the debt servicing alone is Rs, 3060 billion whereas defence (excluding pension of Rs. 360 billion) is Rs. 1370 billion. In other words, the federal government after meeting these two expenditures will be left only with Rs. 67 billion. It confirms beyond that only entire federal public sector development (PSDP) expenditure of Rs. 900 billion but current expenditure to the extent of Rs. 7456 billion will be met from borrowing.
The loans for long term development programmes, if executed on time and aimed at adding to our sustainable growth, increase in GDP, income and employment generation, are desirable. However, as the above facts show, the PTI Government will be borrowing huge amount of Rs. 7456 billion to meet budget deficit that is arising out of total revenue minus total current expenses, excluding outlay for the development programmes that are usually cut or remain unutilized or delayed adding more cost and resultant more borrowing, leading to greater debt servicing that will cross the mark of Rs. 3 trillion as per Federal Budget 2021-22: Budget in Brief and Annual Budget Statement.
Tax target of FY 2021-22 of Rs. 5829 billion as usual for FBR is not based on any concrete plan except clichés to use technology to broaden the tax base, which is easier said than done. No taxes on the rich to narrow down fiscal deficit without passing on burden of indirect taxes on the common citizens. In a report, this fact is highlighted as under:
“The single largest tax measure is Rs1 tax on every call lasting more than three minutes, 10 paisa tax on every SMS and Rs5 tax on use of each 1 gigabyte (GB) of internet to generate Rs100 billion additional taxes.
Similarly, the government has also imposed 17% sales tax on import of crude oil to generate another Rs38 billion in taxes. However, the crude oil import tax estimates appeared on the lower end.
The government has imposed new taxes on almost every important consumable and daily use item, including sugar that will now be taxed at a retail stage and its price will go up by about Rs7 per kilogram. However, the industrialists and stock market players have been given relief in their tax burden.
“The government has proposed Rs383 billion gross revenue measures and has also given Rs119 billion tax concessions,” said Chaudhry Mohammad Tariq, Member Inland Revenue Policy of the Federal Board of Revenue (FBR) while briefing media about new tax measures. Tariq said that the net new revenue measures were Rs264 billion for fiscal year 2021-22, starting from July 1.
At least Rs116 billion worth of additional income tax measures have been proposed by the government for the next fiscal year. Tariq said that the government has also given relief of Rs58 billion in tax, thus, the net impact of the income tax measures will be Rs58 billion.
Similarly, around Rs215 billion worth sales tax and federal excise duty measures have been taken in the budget. The government has also provided relief of Rs19 billion under the GST, bringing net impact of the GST and FED measures to Rs196 billion”.
Taxation in Pakistan is oppressive, lopsided and counterproductive—there is only 2% of corporatization of total business. By heavily taxing corporate sector vis-à-vis firms and association of persons and through numerous withholding taxes, FBR has consistently been encouraging undocumented sector. Till June 30, 2020, 120,395 companies were registered with Securities & Exchange Commission of Pakistan (SECP), out of which return filers for tax year 2020 were less than 55,000 (46% compliance) till March 31, 2021. Please see details in PTI, FBR & tax directories—II, Business Recorder, April 24, 2021.
Taxation should serve as a catalyst for industrial/business expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes. It is impossible to enhance revenues with stagnation in economy, and over-taxing an ailing economy, as is being done in Pakistan that has destroyed our investment climate.
We need no borrowing, if all the citizens, especially the rich, are taxed according to the established norms of democratic dispensation of justice. The dire need in today’s Pakistan is to reduce inequalities through a policy of redistribution of income and wealth by taxing the rich and mighty. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends in all democratic countries. In Pakistan, there has been a gradual shift from equitable to highly inequitable taxes since 1977.
The shift from removing inequalities through taxes to presumptive and easily collectable withholding and indirect taxes has destroyed the fundamental principle of horizontal and vertical equity. The equity principle can be held to be satisfied when the overall classification of individuals into categories is reasonable and broad enough to contain many individuals within each category and there is equality of treatment within each category.
For social justice and pro-people economic development, the government, through tax policies, must discourage certain activities, which are considered undesirable, for example, excise duties on liquor (though prohibited but consumed using names of non-Muslims) and tobacco and special excise on luxury and semi-luxury goods as well as fizzy and other like drinks causing diabetes in millions of Pakistanis, especially the youth, Such measures act as deterrents in avoiding a spill-over of these items and creating disturbance in the society as a consequence. For achieving the cherished goal of a self-reliant economy and prosperous state, we need to take the following steps through the ability of the taxation system to influence allocation of resources:
- transferring resources from the private sector to the government to finance public investment programme.
- Directing private investment into desired channels (rapid industrialisation) through heavy taxation of collossal income earned by absentee landlords from lease of land and/or orchards by amending the definition of agricultural income provided in section 41 of the Income Tax Ordinance, 2001
- Influencing relative factor prices for enhanced use of labour and economizing the use of capital and foreign exchange.
- Increasing the level of savings and capital formation by enhancing investment resources for economic development. In Pakistan, we find a reversal of this principle. Recent years have experienced flight of capital, closure of huge industries and recession in the trade market. Lack of consistency in the tax policies have forced the business community to move towards safer havens depriving the country of invaluable capital. Similarly, foreign investors feel shy to make use of the tremendous Pakistani talent that goes waste for lack of proper funding.
- Protecting local industries from foreign competition through the use of import duties, turnover taxes/VAT and excise. This has the effect of transferring a certain amount of demand from imported goods to domestically produced goods. Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But unfortunately due to wrong policies, our dependence on imported products has been hit with an upward surge in the last two decades. Due to the introduction of harsh tax measures and higher cost of doing business, our industrial sector has suffered so badly that instead of being able to export goods, we are forced to import in order to cater for the demands of the nation.
- Stabilizing national income by using taxation as an instrument of demand management. Taxation levels could be used to eliminate inflationary or deflationary gap in the economy. Taxation reduces the effect of the multiplier and so can be used to dampen upswings in trade cycle.
FBR and provincial tax authorities are not collecting taxes diligently. There exists huge tax gaps at all levels. Undoubtedly, the rich, despite having substantial undeclared, untaxed wealth, thrive on amnesties and immunities. This is our real dilemma. Elites are not paying taxes due from them as highlighted in Restructuring of tax system: a blueprint, Business Recorder, May 7, 2021, Simplification of taxes for growth—II, Business Recorder, March 26, 2021, FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021 and FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021.
With the present inefficient, outdated and corrupt tax system, FBR cannot collect taxes as per the real potential—even target of Rs. 5829 billion for next fiscal year 2021-22 would be an uphill task. We need to shift to low rate, broad-based taxation that is simple, fair and predictable with strong enforcement mechanism: 10% tax on individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 10 million), 20% on companies and other entities, and 8% sales tax on all goods (for exporters 0% tax) as explained in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, December 2020, available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/). This will fetch more than double the tax we are presently collecting (Rs. 5 trillion as income tax, Rs. 3 trillion as sales tax and Rs. 500 billion from customs by levying 3% duty on all items and no other tax collection at source, except salary, dividend, interest and payments to non-residents if taxable under the domestic law and avoidance of double taxation agreements, if applicable).
For promoting exports, exporters importing or buying raw material locally may get refund by State Bank of Pakistan once export proceeds are realised through banking channels with bonus as is paid by Bangladesh and elsewhere.
The provincial tax authorities after 18th Amendment are not collecting taxes diligently. The total collection of agricultural income tax by all the four provinces in FY 2018-19 was only 0.06 percent of GDP and of total provincial taxes was one percent of GDP (ref. 70 page of PIDE Reform Agenda for Accelerated and Sustained Growth) registering fiscal deficit of 9.1% of GDP. Pre-Covid position is taken by PIDE as in FY 2019-20, there was negative impact of Covid-19 endemic.
There exists huge tax gaps at all levels. According to data prepared by National Database & Registration Authority (NADRA) when Tariq Malik was Chairman there were 3.5 million individuals (ultra-rich) having income levels attracting annual income tax of at least 1,800 billion. If we add another 1.5 million falling under different income brackets (from Rs. 1.5 million to 6 million per year) the estimated collection should not be less than Rs. 1,200 billion from them. In the case of corporate bodies and other non-individual taxpayers, collection should be around Rs. 2000 billion. This means that total income tax collection should not be less than Rs. 5000 billion but target fixed for FY 2021-22 is just Rs. 2171 billion and sales tax atRs. 2506 billion.
It is apparent that with the present rotten, inefficient, outdated and corrupt tax system and faulty tax policy, FBR cannot collect taxes as per real potential—despite tall claims, a person from private sector failed to meet the target of Rs. 5500 billion for fiscal year 2019-20.
The low rate for small and medium enterprises (SMEs) or optional tax on turnover proposed in the Finance Bill, 2021 is faulty because it will give a chance to many to manipulate their turnover. It says:
- Where annual business turnover does not exceed Rupees 100 million: 7.5% of taxable income or optional: 0.25% of gross turnover
- Where annual turnover exceeds Rupees 100 million but does not exceed Rupees 250 million: 15% of taxable income or optional: 0.5% of gross turnover
- The provisions of sections 177 and 214C shall not apply to SME who opts for taxation under turnover basis.
The SMEs, according to Finance Bill, 2021, for the purpose of this taxation scheme means “a person who is engaged in manufacturing as defined in clause (iv) of subsection (7) of section 153 of the Ordinance and his business turnover in a tax year does not exceed two hundred and fifty million rupees:
Provided that if annual business turnover of a small and medium enterprise exceeds two hundred and fifty million rupees, it shall not qualify as small and medium enterprise in the tax year in which annual turnover exceeds that turnover or any subsequent tax year”.
The definition of manufacturer in section 153(7)(iv) of Income Tax Ordinance, 2001 is as under:
“manufacturer” means a person who is engaged in production or manufacturing of goods, which includes–
(a) any process in which an article singly or in combination with other articles, material, components, is either converted into another distinct article or product is so changed, transferred, or reshaped that it becomes capable of being put to use differently or distinctly; or
(b) a process of assembling, mixing, cutting or preparation of goods in any other manner”
The above, according to Mr. Ehtisham Ahmad, renowned economist and having rich experience of restructuring tax systems of various countries, “may also create incentives for larger firms to masquerade as SMEs, or hide value chains by transacting with untraceable SMEs. Much depends on how the GST/VAT is applied. The Mexicans solved the problem by effectively dropping the VAT registration threshold to zero, bringing in complete value chains without the possibility of manipulation by the SMEs or the larger firms using the SMEs (important in textiles for example)”.
We need to shift to low rate, broad-based taxation that is simple, fair and predictable with strong enforcement mechanism for all and not for SMEs as defined above in Finance Bill, 2021: 10% tax on individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 20 million), 20% on companies and other entities, and 8% sales tax on all goods (for exporters 0% tax). This will fetch more than double the tax we are presently collecting (Rs. 5 trillion as income tax, Rs. 3 trillion as sales tax and Rs. 600 billion from customs by levying 3% duty, with anti-dumping duty to protect local industries as per world best practices giving level playing field to all. Federal Excise Duty at higher rates should be levied to discourage consumption of items that are considered undesirable, for example, cigarettes, other tobacco-based products, liquor (though prohibited but consumed using names of non-Muslims) on luxury and semi-luxury imported and local goods as well as on fizzy and other like drinks causing diabetes in millions of Pakistanis, including youth which is our future. Such measures act as deterrents in avoiding a spill-over of these items and creating disturbance in the society as a consequence as explained in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, December 2020, available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/).
For prompting exports, the exporters importing or buying raw material locally may get refund by State Bank of Pakistan once export proceeds are realised through banking channels. The complete roadmap is available in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, December 20200 and there is still opportunity for the PTI Government and Opposition in Parliament to agree on it and make Pakistan a self-reliant, prosper country with inclusive growth of over seven percent for a decade and empowering all the citizens through employment and not hooked on charity or ill-directed subsidies as highlighted in the following:
- Tax Reforms in Pakistan: Historic & Critical View, (PIDE)
- PIDE Reform Agenda for Accelerated and Sustained Growth
- Doing Taxes Better: Simplify, Open & Grow Economy (PIDE)
- Growth inclusive tax policy: A reform proposal (PIDE).
Presently, FBR is depending heavily on indirect taxes, withholding taxes and advance tax. In the past, FBR used coercive measures forcing taxpayers to make payments of advance tax even when not due (for future years) and then withholding refunds. It was under the fugitive Ishaq Dar and his team that “extraordinary (sic) collection was shown by FBR while IMF was looking the other way by giving Ishaq Dar 13 waivers. According to a report: “Conceding a couple of slippages in the last quarter ending June 30, 2016, Mr. Dar termed as “highly satisfactory” the government performance throughout the programme that included a total of 13 waivers by the IMF since the programme was contracted in September 2013”. The $6.4 billion bailout programme ended in August 2016 with IMF failing or ignoring over-reporting of FBR’s collection by blocking bona fide refunds and taking advances of billions. Recently, the same objection, according to a report, is raised against the present team of FBR by Auditor General of Pakistan. In any case, FBR has no resources to pay past withheld refunds by Ishaq Dar et al. If pre-1996 position of advance tax is restored by the PTI Government in Finance Bill, 2021, the taxpayers will be relieved of paying huge amounts under section 147 or taxes under many withholding provisions at import stage and many transactions having no link to their incomes e.g. 12.5% with mobile/internet. The proposed reduction of 10% is illogical. There should be no tax on internet [Taxing ‘Digital Economy’: Global & Domestic Challenges, Management Accountant, Volume 30.2, March-April 2021 and Morbid taxation of digital Pakistan, TNS, [Political Economy] The News, May 23, 2021]. Even otherwise such unjustified and anti-growth impositions should be suspended till the time businesses and individuals liable to pay these recover from the economic toll of Covid-19 and its variants.
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.