Fair Taxation For PovertyReduction And EqualityDr Ikram-ul-HaqAdvocate Supreme Court of Pakistan Author of over 1500 articles and 19 Books onTaxes and Also a member of International Fiscal Association (IFA)Huzaima BukhariAdvocate of High Court and Editor ‘Taxation and Adjunct Faculty Lahore Universityof Management Sciences (LUMS)SummaryThe total number of Pakistanis deprived ofbasic facilities like health and education is not lessthan 30 million. It is disclosed in the latest reportof the Word Bank, Addressing inequality in SouthAsia, that of 1,000 children born in Pakistan’spoorest population quintile, 94 will die within 12months and 120 within five years. The reportfurther claims that tax avoidance and evasion arepervasive in Pakistan while a major share of thetax revenue is spent on regressive subsidies. Anunusually large fraction of the typically lowgovernment revenue is often devoted to reducingthe final price of food, fertilizer, gas, andelectricity which benefits the rich more than thepoor. The Federal Government in 2013‐14collected Rs. 2254.5 billion, as against official1claim of Rs. 2266 billion, and transferred Rs. 1264billion to the provinces that are now responsibleto provide health and education after the 18thConstitutional Amendment passed in April 2010.The allocations of provinces for these sectors areinsufficient as they lack commitment, if not,money, to meet the basic needs of the people.Moreover, there exist large income and wealthinequalities in Pakistan and these have social andeconomic costs, causing violence and politicalinstability. Fairer politics that provides moreequal opportunities can advance society bybringing peace, social cohesion and use ofcollective wisdom.Better tax policy is essential to increasegovernment revenues and to improve the lives ofthe poor. When taxes are fair and governmentspending prioritizes essential public services,both poverty and inequality can be reduced. This2is well described by Dreze & Sen: ‘the impact ofeconomic growth on the lives of people is partly amatter of income distribution, but it also dependsgreatly on the use that is made of the publicrevenue generated by economic expansion’.Progressive and fair taxation on all kinds ofincome and wealth are an effective way of3redistribution. Delivering essential publicservices, such as universal access to education,health, drinking water and sanitation for thepoor, will reduce disparities in the society.Unfortunately, the tax system in Pakistan isunfair. It inflicts fiscal injustices by providingprivileges to a select group and places adisproportionate burden on the majority ofpeople. This system is not only creating a largedebt burden for the government but alsoincreasing the fiscal deficit and fueling poverty.It is a skewed system in which the poor mansubsidizes the rich man. The problem starts at thetop. The average worth of Pakistani members ofParliament is $900,000, with its richest membertopping $37 million, according to a study(December 2014) by the Pakistan Institute ofLegislative Development and Transparency inIslamabad. A report released by the Center forInvestigative Reporting in Pakistan revealed thatin 2011, about 70% of legislators did not file taxreturns, but no action was taken against themunder the law. Resultantly, in 2013, many of themagain entered the national and provincialparliaments. Although many of them enjoy a veryhigh standard of living, none of 1,072 legislators ‐members of Senate, national and provincialassemblies ‐ qualified among top 100 taxpayersto whom FBR rewarded on the basis of taxdeclarations for tax year 2013. It is shocking toknow that all the legislators cumulatively paid Rs.251 million that is just 0.03% of total direct taxcollection. They and other rich segments ofsociety get exemption through the delegatedpowers given to the Executive to issue StatutoryRegulatory Orders (SROs) without bringing thesame for discussion in the Parliament and publicdomain. This is unconstitutional and against thenorms of democratic disposition. There is urgentneed to end the issuance of SROs, exemption orconcession if necessary must be given by theParliament.Pakistan needs a paradigm shift in tax policy1Full text is available at https://openknowledge.worldbank.org/handle/10986/203952The figure in Budget 2013‐14 was estimated at Rs. 1590 billion vis‐à‐vistax target of Rs. 2475 billion3An uncertain glory‐ India and its contradictions by Amartya Sen and Jean Dreze (2013)2and revamping of entire tax administration ‐establishment of a National Tax Agency, capableof generating sufficient resources for the federaland provincial governments must be the toppriority. Through consensus and democraticprocess, all the parliaments can enact laws forestablishing autonomous National Tax Agency,comprising specialists, rather than bureaucratsthat would facilitate people to deal with a singlebody rather than multiple agencies at national,provincial and local levels. The mode and workingof National Tax Agency can be discussed andfinalised under Council of Common Interest[Article 153] and its control can be placed underNational Economic Council [Article 156].Taxation, a potent instrument to shape andinfluence the socio‐economic policies of acountry, has not received due attention inPakistan. A rational tax policy discourages, evenpenalises those who possess assets that areeconomically unproductive. Heavy taxationdiscourages accumulation of such idle assets. Insocial democracy, the most important objectiveof taxation is to provide economic justice, whichrelates to distribution of tax burden and benefitsof public expenditure while maintaining verticaland horizontal equity. Taxation of the rich for thebenefit of the poor is at the core of sociald e m o c r a c y. I t e n c o m p a s s e s , b e s i d e sredistribution of wealth, such questions astreatment of weaker sections of society e.g.women and children, minorities, the disabled andunemployed. All these elements are missing inour polity and tax policy.Unfortunately in Pakistan, successive rulers,both military and civilian, used taxes as a tool toextort from the masses as much as possible fortheir own comforts and luxuries. By resorting torepressive tax laws, they make the rich, richer andthe poor, poorer. Our financial managers arecaught up in a dilemma. On the one hand there isa mounting pressure to reduce fiscal deficitthrough improved collections and on the other,they are not ready to abolish innumerable taxexemptions and concessions available to the richand mighty. They have no will to plug revenueleakages. Therefore we urgently call for thefollowing.∙ The federal government must increaseallocation and increase spending oneducation, primary health care, water andsanitation services to ensure universal access.∙ The federal government must introduceimmediate structural reforms in tax policy,based on the principles of equity, to expandthe domestic revenue base to finance theessential services mentioned above.Required reforms include:‐ Eliminating unnecessary concessions tothe affluent class and discretionary lawsto issue Statutory Regulatory Orders(SROs)‐ Shifting to progressive direct taxation ofi n c o m e , w e a l t h , a n d p r o p e r t ytransactions‐ Gradually reducing indirect tax, especiallysales tax which puts an undue burden onthe poor‐ Fairly taxing all economic sectors, alsosectors like agriculture, wholesalers, andreal estate that are currently notcontributing towards the tax revenue inproportion to their share in economy.Human development must be enhancedPakistan has a poor performance on humandevelopment indicators. In this situation,responsive democratic government must protectbasic rights of people on priority basis. ‘Diffusionof knowledge’ and skills is the powerful forceagainst inequality and positive force for upwardsocial mobility ‐ so is the access to quality healthcare services including safe drinking water andsanitation. Effective social protectionmechanisms have also worked well to reducedisparities. All these require additional4There is some previous research on the evaluation of tax progressivity in Pakistan. For example, see Ilyas (2004), Alauddin et al. (1981),Ahmed et al. (1986), Azfar (1972), Jeetun (1978), Malik et al. (1985, 1989) and Vaqar & Cathal (2009). However, there is no comprehensivestudy offering decomposition analysis of personal income tax system. In the developing countries like Pakistan, this area of research has inthe past received less importance, given that income tax constitutes relatively smaller portion of the overall revenue collections.3resources, targeting poor areas and people andused more effectively. In the light of abovesituation we call upon democratic government toimmediately take the following measures tonarrow down inequalities:Key facts on human development