You have 0 items in your cart
- Pakistan is facing education crisis where
5.5 million children are out of school, net
Primary enrolment is only 57% and adult
literacy about 58%. These national
averages even mask huge gender and
geographical disparities. - Access to basic public health services is
becoming a dream in Pakistan as public
sector pulls out with less than 1% of GDP
expenditure on health. Pakistan has
highest child mortality in South Asia region
with 89/1000 live births. Same is the case
with maternal mortality ratio which is
276/100,000 live births. - H u n g e r a n d m a l n o u r i s h m e n t i s
widespread in Pakistan and exacerbating
due to disasters and increased political
conflict. About 35 million people are
malnourished and 46% of children under 5
years of age are stunted, while 62%
children in bottom 20% families are
stunted. - More than half of Pakistani population
doesn’t have access to toilets‐ A shameful
condition and about 11% don’t have access
to improved drinking water sources.
Public expenditure on health in Pakistan has
always been under one per cent of GDP. This is too
low in the face of threats from deadly infectious
diseases, unsafe food, malnutrition and poor
access to basic health. There is a bias towards
tertiary care. Along with low priority, the primary
and preventive care now has the additional
problem of providing security for health workers,
especially the polio workers. The Budgetary
allocations continue to be low. In the entire
Federal and Provincial budgetary outlays for
2014‐15, health receives only 3.1 per cent.
Balochistan makes the highest allocation,
followed by KP and Sindh. The lowest allocation
has been made by the Punjab, i.e. 5.4 per cent,
which is slightly less than the revised allocation of
the previous year.
The internationally recognised right to
education is acknowledged in the 18th
Amendment to the Constitution by inserting
Article 25A to make elementary education a
fundamental right. The said Article states: “Right
to education.‐ The State shall provide free and
compulsory education to all children of the age of
five to sixteen years in such manner as may be
determined by law.” Education is considered as an
important means to realise other social and
economic rights. Equitable and sustainable
development is not possible without an educated
population. Budgetary allocations, however, do
not raise hopes of an early realisation of the goal
of universal primary education. The quality and
the content of education also continue to be
lower down in the scale of priorities.
As a percentage of GDP, the total expenditure
on education is increasing but at a snail’s pace.
The budgets for 2014‐15 promise to increase,
however, allocations are still far less than the
level achieved in most developing countries. The
expenditure is low even as a proportion of the
total budgetary expenditure. It was budgeted at
9.28 per cent in 2014‐15, which was lower than
the 10 per cent achieved in 2013‐14 and 9.75 per
cent in 2012‐13. While the Federal Government
has reduced its allocations after devolution of
education to provinces, the share of education in
In 2013‐14, the provincial component of the
PSDP was budgeted at an ambitious level of Rs
615 billion. The revised estimate was far lower at
Rs 390 billion. The ambition in the budget for
2014‐15 continues, as the allocation stands at Rs
650 billion. The Federal Government requires the
provinces to show a surplus of Rs 289 billion. In
simplest terms, this means that provinces will be
spending that much less on development. With
education, health, labour, law and order and
justice system being provincial subjects, the
delivery of social and economic rights will be
poorly resourced.
4
the respective budgets of
the provinces for 2014‐15
is less than the revised
expenditure in 2013‐14,
the largest reduction of
around 10 percentage
points being in the case of
the largest province. The
highest proportion of the
budget is allocated to
education in KP, followed
by Balochistan, Punjab and
Sindh.
The total spending on
social sectors by the
federal and provincial
governments is less that
2% of GDP which is one of
the lowest in the world.
presided over a hugely
successful redistribution
p r o g ra m m e t h a t h a s
reduced inequality has a
tax‐to‐GDP ratio of 34%.
But a more important
factor is to look at tax
potential in the economy
a n d s u f f i c i e n c y o f
collection. Sufficiency,
along with progressivity
are principal factors of a
fair tax system. Collection
of less revenue than
potential leads to reduced
social sector allocations
and external borrowing to
fill the fiscal deficit which
compromises political and
economic decision making
freedom.
In 1991, Pakistan’s fiscal
Pakistan can easily collect Rs. 8
trillion at federal level alone to
eliminate fiscal deficit. If 10 million
individuals having annual taxable
income of Rs 1.5 million (a very
conservative estimate) file their
returns, total income tax collection
from them at the prevalent tax
rates would come to Rs. 3750
billion. If income tax collected from
corporate bodies, other non‐
individual taxpayers and
individuals having income between
Rs. 400,000 to Rs. 1,000,000 is
added, the gross figure would not
be less than Rs. 5000 billion. FBR
collected only Rs. 716 billion as
income tax in the fiscal year 2012‐
T h i s r e q u i r e s
i n c r e a s i n g t a x
revenues
History of insufficient tax collection
To raise government spending on essential
services, Pakistan must increase total tax
revenues. Pakistan’s tax‐to‐GDP ratio remained
between 8.0 to 10.0percent of GDP during past 13
years, generally lowest in the world. As way of
deficit was just Rs. 80 billion. It increased to 8
percent of GDP against the budgeted target of 4.7
percent in 2012‐13. It was mainly due to 19
percent slippages in FBR budgeted tax revenue.
The country has a potential to generate tax
revenue of Rs. 12 trillion at federal and provincial
levels, this will be 4‐5 times higher than current
collections by taking effective measures
and can domestically finance pro‐poor
social protection programmes, universal
primary education and health care‐ which
in turn have high value for low income
groups.
[The blue box on revenue capacity also
fits in this section]
Collection falls short of revenue targets
FBR faces major challenges including
political and institutional, to meet revenue
targets every year. In 2012‐13, shortfall
recorded of Rs. 441 billion was the worst
ever in history. FBR has failed to tap the
actual tax potential that is not less than Rs.
comparison, India’s rate, whilst still low, is almost
double, whilst Brazil whose government has
8 trillion that was lost due to exemptions,
concessions and institutional inefficiency. At
5
FBR: Historical Collection Trend
(Rs. in Billion)
Source: FBR’s Biannual Review, Volume 13, No. 4, January‐June (2013‐2014)
provincial level, there is no will to collect
agricultural income tax from the rich absentee
landlords.
Better to give following table to back up the
above claim:
Proportion of taxes in total revenue 14‐15
High indirect taxes worsen inequality
The single most disturbing factor for
increased income and wealth inequalities
remains the regressive tax system in Pakistan.
Regressive tax system in Pakistan is in the form of
indirect taxes that take larger portion of meager
income of a poor man and a very small slice of the
substantial income of a rich citizen. Incidence of
tax on the poor during the last 20 years has
increased substantively (35%) while the rich are
paying less on their colossal income and
wealthfor them tax burden has decreased by 18%
for the same period. Since 1977 regressive taxes
have gradually been replacing progressive
onesthe real brunt came in 1991 when
presumptive taxes were introduced and the rich
got cover of laws like Protection of Economic
Reforms Act, 1992. The progressive taxation
further distorted in year 1999 and later when the
rich were given exemption from wealth and
capital gain taxation and personal income tax
Details of indirect taxes
Source: Federal budget 2014‐15
rates were reduced for higher income earners”.
Figures below depict the proportion of direct
taxes and their contribution in overall revenue.
Figure at upper left shows that indirect taxes
contribute 41% in total revenue in comparison to
30% contribution of direct taxes, similarly figure
5
Figures now verified by the State Bank of Pakistan
6
Poverty figures, Business Recorder, 21 October 2011
7
Available at www.fbr.gov.pk
6
on left further breaks down the composition of
indirect taxes for the year of 2013‐14 in which
1,622 billion of indirect taxes, 65% [Rs. 1054
billion] are generated through sales tax which
includes all items used by the poor hence
disproportionately affects the income of poor
people.
Even a cursory look at FBR’s Year Book 2013‐
14 and s Year Book 2012‐13, , reveal that main
reliance (75%) is on indirect taxes, burden of
which is borne by the poor, the weaker and the
less privileged sections of the society.
In Pakistan, there has been a shift from
equitable taxes to highly inequitable ones. The
dependence on indirect taxes ‐ even in income tax
law under the garb of presumptive income has
transferred the burden of taxes from the rich to
the poor. The common people are paying an
exorbitant sales tax of 17% (in fact 35%‐40% on
finished imported goods after duties, mandatory
value addition under sales tax law and income tax
at source) on essential commodities while the
rich are paying no wealth tax/income tax on their
colossal assets/incomes. Following table depicts
was 3.5% [source: FBR’s Year Books 2004‐05 to
2013‐14 and Economic Surveys 2004‐5 to 2013‐
14].
Subsidizing rich and taxing poor
The current regressive taxation system in
Pakistan can be categorized pro‐rich as it
disproportionately taxes majority and benefits
few. The narrative that Pakistanis do not pay
taxesis a farce. The ground reality is that the
common citizens are over‐taxed; whereas the
affluent class enjoys tax breaks. It is an
undeniable fact that about 60 million active
mobile users with effect from July 1, 2013 are
paying exorbitant tax of over 34.5%federal excise
or sales tax of 19.5% and adjustable income tax of
15%. Majority of them have income below the
taxable limit. There is no way they can get refund
of the adjustable 15% income tax withheld at
source, as cost of filing of return would be a lot
more and the procedure is too cumbersome.
Example‐I: Lower tax rates for Rich property
owners
Rich property owners ‐ who, after getting state
lands at throw‐away prices, sell them at market
rate and the gain is not taxed as “adventure in
the nature of trade,” though so required under
section 18 read with section 2(9) of the Income
Tax Ordinance, 2001. Those who convert them
into income‐generating assets e.g. commercial
buildings etc ‐ have been paying lower rate of
tax on rental income till tax year 2013 whereas
salaried persons on the same income were
made to pay higher tax! This concessional tax
regime for the rich property owners has now
been removed with effect from tax year 2014
bringing it at par with others.
Year
Income tax as percentage of GDP
2012‐13
2.1%
2011‐12
2.2%
2010‐11
2.4%
2009‐10
2.5%
2008‐09
2.6%
2007‐08
2.9%
2006‐07
3.2%
2005‐06
3.3%
2004‐05
3.5%
Source: Year books 2004‐05 to 2012‐13 of FBR and Economic Surveys.
gradual reduction, rather increase in the total
share of income tax as percentage of GDP.
Reduction in the size of middle class is causing
a negative impact on contribution of direct taxes
in the overall revenue of Pakistan. The share of
income tax, according to official figures, as
percentage of GDP is continuously declining; it
was merely 25 in 2013‐14, 2‐1% in 2012‐13, 2.2%
in 2011‐12, 2.4% in 2010‐11, 2.5% in 2009‐10,
2.6% in 2008‐09, 2.9% in 2007‐08, 3.2% in 2006‐
07, 3.3% in 2005‐2006, whereas in 2004‐2005 it
Example‐II: Poor widows vis‐à‐vis wealthy
investors ‐ interest income taxation
A rich person earning Rs. 6 million per annum as
interest from bank pays Rs. 600,000 as tax under
presumptive regime, whereas tax liability on
this income of a businessperson for tax year
2013 comes to Rs. 1,322,500. The person has
been saving an average tax of over Rs. 700,000
per annum since 1991 when 10% flat taxation
7
was introduced benefitting the rich. Total tax
saving by him/her in 22 years is more than Rs. 122
million. In contrast, a widow, who is earning a
paltry income of Rs. 390,000 per annum from the
same source, investing her deceased husband’s
gratuity in a national saving scheme or a bank
account to make both ends meet, has had to pay tax
of Rs. 39,000 although her income maybe below
taxable limits or marginally taxable. In 22 years, she
would have paid Rs. 858,000. This kind of tax
system creates economic disparities by benefiting
the rich.
industrialists, causing loss of Rs. 8 billion to the
national exchequer. - 50% cut of sales tax for steel melters causing
revenue loss of nearly Rs. 4 billion.
According to the findings of a study conducted by
FBR “aggregate tax expenditure being the cost of
exemptions, concessions and erosion of the tax base
in the federal tax system during the last five years
(2008‐13) was not less than Rs. 750 billion ”.
Approximately 2,000 tariff lines (representing 50
8
What is driving fiscal injustices?
The nexus of wealth concentration; capture of
per cent of the SROs) are liable for import duties of
less than 5.1 per cent, with almost 900 of them zero‐
rated! Government faces a massive revenue shortfall
as two third imports are duty free.
Tax Havens
In their local currency, the total funds held by
individuals and entities from Pakistan in Swiss banks
stood at over Rs. 1.5 trillion as on December 31,
2012.The report confirming that Pakistanis possess
larger funds than Indians in Switzerland alone and
were moving the same elsewhere. If we add Dubai
and other such centres where the rich and mighty
have been shifting billions, the figure would be
horrendously large ‐ many times what is lying in
Switzerland. It is not a matter of a few billions ‐ the
amount is at least ten times the collection of FBR. The
issue of alleged stashing of black money in Swiss
banks has been a matter of intense debate in
Pakistan, as there are reports of some top former
government leaders having parked their money in
banks in the European country due to their hugely
popular ‘safe‐haven’ status. However, a higher
amount than Indian entities assumes significance
because Pakistan is a much smaller country in terms
of population and area. Still, the quantum of money
resources and government power including
parliament are the major challenges. Tax laws made
by powerful elites allow loopholes, making
concessions legal. This vicious cycle‐ in which power
creating loopholes in tax system in order to draw
wealth through illegal means‐in turn uses same
wealth to strengthen power‐ is a major cause of
rising inequalities.
Pro‐rich tax exemptions are unfair and undermine
revenues
The tax codes of Pakistan are operated and
controlled through executive orders called statutory
regulatory orders (SROs). In many cases, these SROs
give exemptions and concessions to the rich,
distorting the entire tax base and aligned with
shifting the burden of tax on the poor.
Federal Government‐in real terms FBR‐ is
empowered to exempt any income or specific
persons from income tax, prescribe special reduced
rates of tax for certain persons or allow a reduction in
tax liability by making amendments in the Second
Schedule to the Income Tax Ordinance, 2001. The
held by Swiss banks for their Pakistani clients was
FBR under the existing income law since 2002 has
inserted a number of exemption clauses in the
Second Schedule to the Ordinance. The sales tax and
federal excise laws are also infected with numerous
exemptions and concessions. Some examples of tax
concessions are: - withdrawal of the biggest new revenue spinner ‐
1% withholding tax on manufacturing ‐ resulting
in a revenue loss of Rs. 18 billion. - drastic cut of federal excise duty on sugar to 0.5%
aimed at benefiting the influential sugar
about 1.5 per cent higher than the equivalent figure
for Indians at 1,421 million Swiss francs (about Rs 910
billion) at the end of 2012 .
Recommendations
This policy brief has been developed by Oxfam
Novib in collaboration with Indus Consortium &
Centre for Inclusive Growth with the aim to push for
structural tax reforms to deepen fiscal space, narrow
down growing inequalities and reducing critical gap
in human development.
9
8
Statement reported in daily The News, March 26, 2014
9
The Times of Indiaof June 21, 2013