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Huzaima Bukhari & Dr. Ikramul Haq
“We need to lower tax rates for everybody, starting with the top corporate tax rate. We need to simplify the tax code. The ultimate answer, in my opinion, is the fair tax, which is a fair tax for everybody, because as long as we still have this messed-up tax code, the politicians are going to use it to reward winners and losers”—Herman Cain, US ex-presidential candidate and entrepreneur, who died of Covid-19 on July 31, 2020
The Federal Board of Revenue (FBR) has finally launched a comprehensive initiative for reforms and modernisation for which a separate wing and full-time Member Reforms and Modernisation has been appointed. It is a positive move and must involve all the stakeholders, rather than making it a closed-door bureaucratic exercise as was done in the past. Secondly, the process should not be confined to administrative reforms or patchwork here and there in tax codes, rather a paradigm shift in tax policy is needed for Pakistan to achieve the objectives highlighted in OECD Tax Policy Studies No. 19 of October 28, 2010 [Choosing a Broad Based–Low Rate Approach to Taxation] emphasising that “fiscal consolidation should be as growth-friendly as possible. In general, tax base-broadening reforms are identified as growth-oriented reforms. To the extent that they reduce distortions to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare”.
According to a Press report [FBR launches programme on broad-based reforms, Business Recorder, July 1, 2020], FBR’s top management on July 30, 2020 approved establishing ‘Reforms and Modernization Wing’ and a ‘Reform Bureau’ at the level “to ensure optimal revenue collection, high quality public service delivery, integration with other federal and provincial organizations and facilitation of economic environment to encourage domestic and foreign investment in Pakistan”.
The Reforms and Modernisation Wing will ensure monitoring and evaluation of reform process to ensure effective implementation of time-bound goals and objectives, and consolidation of efforts to transform FBR into a modern, progressive, Information and Communication Technology (ICT)-based and resulted-oriented organisation, the report adds.
The Reform Bureau and the Reforms and Modernisation Wing, the report further says, “will focus on four key areas: policy measures, structural reforms, automation and modernisation and revamping of human resource management”under the supervision ofMember Reforms and Modernisation.
According to report, “The FBR’s new reform programme would also ensure a single line of reporting to the Prime Minister for various reforms initiatives of the FBR, and upgrade and modernise tax machinery without further delay as desired by the Government of Pakistan-Tehreek-Insaf (PTI)”.
Time and again, it has been emphasised in these columns that Pakistan needs a new modern, automated, efficient and taxpayers’ friendly federalised tax agency, detailed given in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018]and viable solutions were offered for its establishment in subsequent follow up articles. Strangely, the World Bank has not acknowledged it in any of its papers/reports related to US$ 400Pakistan Raise RevenueProject, though presenting the same concept. It is worth mentioning that the idea of National Tax Agency (NTA) was given way back in 2013 inNeed for National Tax Agency [Business Recorder,November 1, 2013],Revamping tax system,[The News, December 7, 2014] and Abolish pro-rich tax regime[Huzaima & Ikram 2014].
The idea of NTAwas not only elaborated inTax proposals—VII: Need for NTA,Business Recorder, May 22, 2015 andCase for “NTA”, Business Recorder, November 27, 2015, but its draft law was also included inTowards Flat, Low-rate, Broad and Predictable Taxes[PRIME Institute, April 2016]. It was suggested that the NTA must be run by an independent and competent Board and its members should be selected by Joint Committee of Senate and National Assembly. The NTA should not only collect taxes at all tiers of government but also disburse benefits like social security, food stamps, universal pension, healthcare coverage and income support etc.
The idea of NTA was also included by the Tax Reforms Commission (TRC) in its final report submitted to the government in February 2016. This report was unlawfully marked “strictly confidential” by the then Finance Minister, Muhammad Ishaq Dar, now a fugitive. It should be made public immediately by the PTI government to initiate meaningful debate on reforming and modernising tax collection agency/agencies at federal and provincial levels.
The linkage of database of various bodies with NTA (comprehensive digitisation) has been stressed upon time and again as a necessary 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) have been suggested as worth studying/adopting after debate and suggesting necessary modifications suiting our peculiar conditions [Tax reforms strategy, The News, December 3, 2017and Comprehensive Tax reforms, The News, September 9, 2018].
The issues faced on revenue mobilisation front and how to remove various impediments in its way have been discussed in detail in a number of articles for the last many years, some recent one are, Need for new income tax law, Business Recorder, March 13 & 18, 2020, ‘Avant-garde budget proposals’, Business Recorder,May 10, 17, 24 & 31, 2019, 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.
Unfortunately, till today, the concrete proposals contained in the articles written in 2018 after coming into power by PTI Government have not been considered as earlier were ignored by the successive governments. These are also never discussed and/or quoted by IMF or World Bank in their papers/studies. Hopefully, the recently-established Reforms and Modernisation Wing of FBR will consider these and seek input from experts and feedback from all the stakeholders before finalising its proposals. Surprisingly, the PTI Government, World Bank, IMF and FBR also ignored the proposals presented in various articles for generating revenue of Rs. 8 trillion at federal level alone, especially in ‘Flawed tax reforms agenda’, Business Recorder, November 15 & 21, 2019 and ‘Raising Rs. 8 trillion’, Daily Times, November 12, 2017] enabling Pakistan to overcome monstrous fiscal deficit, get rid of loans, achieve rapid economic growth and provide social services to all citizens.
The IMF in its first review of December 19, 2019 [Country Report No. 19/380] admitted that “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”. This fact of oppressive and narrow-based taxation was highlighted repeatedly by us in various articles and viable solutions were offered to make it fair and broad-based, but the Government paid no heed to these. The World Bank in US $ 400-million Pakistan Raises Revenue Project has also made no reference of these, though many proposals were endorsed without any acknowledgement of published work by many local writers.
It is time that the Prime Minister must concentrate on the principle of reciprocity—in return for taxes, the PTI-led governments in provinces must establish a system to provide the citizens facilities of quality education, health, housing, social security, transport, clean drinking water, sewerage etc. by implementing Article 140A of the Constitution.
Our existing tax system extends extraordinary tax-free perks and perquisites to the powerful segments of society, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are pushed to become what Franz Fanon called, ‘The Wretched of the Earth’. Due to pro-rich policies, wealth is concentrated in a few hands and there is no devolution of administrative, political and fiscal powers as ordained in Article 140A of the Constitution to ensure delivery of necessary social services at grass root level.
For implementing meaningful tax reforms, the Government, instead of experimenting with failed models of donors/lenders must concentrate on fundamental structural reforms as discussed in above mentioned articles and in recent studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economyand Growth inclusive tax policy: A reform proposal,quoting Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016).
The recently launched ‘Tax Payers Alliance Pakistan’ (TPAP), a voluntary network of Pakistani tax payers to act as a pressure group comprising professionals, business owners and individuals, in a pre-budget for fiscal year 2020-21 maiden Press release, reminded the Government that “Pakistan needs a low-rate, broad-based and equitable tax system as well as the federal and provincial governments must demonstrate transparency and end undue and wasteful expenditures”—details at https://primeinstitute.org/tax-payers-alliance-pakistan-tpap/.
We need a simple, fair and predictable tax system: 10% tax on individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 10 million), 20% on companies and other entities, 10% harmonised sales tax on goods and services (for exporters 0% tax), low-rate customs duty (One Chapter, One Rate on all items) and federal excise duties on luxury items and on health-hazard products like cigarettes, beverages etc. This will fetch us tax of Rs. 8 trillion [working is available in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016].
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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).