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Huzaima Bukhari & Dr. Ikramul Haq
The coalition Government of Pakistan Tehreek-i-Insaf (PTI) is facing grim challenges on the fiscal front as Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, released by the Ministry of Finance (MoF) on February 3, 2021, for the first six months of the current fiscal year, shows that even part of defence spending is now funded by borrowing. It is more than a fiscal fiasco—a serious cause for concern threatening economic viability and national security of the country. The negative impact of mindless and costly borrowing, both external and internal, resulted in 15% increase in debt servicing, with fiscal deficit reaching Rs 1.4 trillion. These facts were highlighted in More on the fiscal fiasco, TNS, [Political Economy] The News, February 28, 2021.
Federal Board of Revenue’s (FBR) claim behind annual growth of 16-20% in revenue collection of from 2013 to 2018 is now an open secret. Facts prove that behind the “extraordinary” revenue growth was not only blocking of refunds of billions of rupees, advances from big corporate taxpayers, but also substantial increase in number of withholding tax provisions, enhancement in their rates and exorbitant sales tax on petroleum products. There was just a marginal increase in the number of filers. Once de facto Prime Minister-cum-Finance Minister, now fugitive, Muhammad Ishaq Dar, was not only hiding these facts, but was also hoodwinking members of the Parliament and citizens, yet received many waivers from International Monetary Fund (IMF).
Total collection of FBR for fiscal year 2019-20 was Rs. 3998 billion after retaining accumulated refunds of over Rs. 710 billion. However, the data released by MoF and used by IMF in its latest review of April 8, 2021 ignored the figure of 710 billion as liability. It is despite the fact that FBR’s officials on September 2, 2020, before the National Assembly Standing Committee on Finance & Revenue admitted that actual liability of income tax and sales tax refund as on June 30, 2020 was Rs. 710 billion (sales tax Rs. 142 billion and income tax Rs. 568 billion).
For the last many years, on instructions from top bosses of FBR, field officers were denying adjustments of determined refunds against demands. They have been raising illegal demands and blocking genuine refunds during the previous government and this malpractice still continues. If Shaukat Fayaz Ahmed Tarin, replacing Hammad Azhar, as Minister for Finance & Revenue for six months, subject to becoming member of National Assembly or Senate, does not stop these malpractices, there will be highly damaging impact on businesses facing difficulties in the wake of Covid-19 endemic, especially after its third deadlier wave. The legacy of Ishaq Dar to squeeze the existing taxpayers must end now. It is high time that an audit by the Auditor General of Pakistan is commissioned by Shaukat Tarin to ascertain the quantum of refunds unlawfully withheld and not paid with compensation, where applicable, till today.
Devising a rational policy and revenue mobilisation strategy is the biggest challenge before Shaukat Tarin. All agree that we need to adopt economic policies aimed at rapid growth and investment. On taking charge, the newly-appointed Shaukat Tarin rightly highlighted that his top most priority would be sustainable growth and prosperity for all the citizens. Taxes will increase with growth and not by high taxes and withholding provisions. The contrary prescription by IMF of higher taxes and costly energy will lead to unemployment and dismal growth. Every political party promises rapid growth and welfare as its main agenda on paper, but when in power fails to do so as proved by the PTI Government. The PTI Government since August 2018 has failed to dismantle the elitist structures that fleece the poor and benefit the rich. The culture of VIPs/plots/perks/benefits needs to end along with all tax waivers, concessions, exemptions, amnesties and immunities for the rich and mighty. Without it Mr. Shaukat Tarin will not be able to achieve what he is claiming.
Only through sustainable growth rate of above 7% for at least a decade we can generate required employments of two million per year. Without this growth rate we cannot overcome our fiscal deficit, debt retirement and tax-to-GDP ratio. We need radical changes like lower tax rates on broad base, reduction in the exorbitant sales tax rate (it should be 5% across the board), bringing corporate tax rate to 20%, and simpler compliance procedures as elaborated in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, revised and enlarged version (December 2020) is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/).
In the wake of Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”], the federal and provincial governments have shown a lukewarm attitude in restructuring the country’s tax system to achieve efficiency and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable withholding and indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are main factors for huge gap in tax collection.
Instead of broadening the tax base and simplifying tax laws, federal and provincial governments offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer. Shaukat Tarin must take immediate steps for revamping and restructuring of the entire tax system without which, it is not possible to reduce debt servicing and further borrowing and attain growth of 7% and above.
Tax reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. The reform committees and commission, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), miserably failed to achieve voluntary tax compliance. In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project. The total cost of PRR Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million.
Following in the footsteps of the Federal Government, the Punjab Government also borrowed US$304 million from the World Bank named, Pakistan: ‘Punjab Resource Improvement and Digital Effective Program’. Like earlier programmes, these are also bound to fail. The only viable option for meaningful change is to replace the existing tax systems—federal and provincial—with lower, flat and predictable rates that are simple, pragmatic, growth-oriented, and broad-based. With such a country-wide system in place, those who are not into the tax net or who avoid true disclosures would be incentivised to pay their due taxes. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole, inclusive of growth and economic well-being of every citizen.
The provinces must participate in devising national tax policy and collection apparatus as their share under 7th National Finance (NFC) Award is larger than the federal government. Article 156(2) of the Constitution of the Islamic Republic of Pakistan after 18th Amendment requires federalised and not centralised economic planning. There is a dire need for a new tax model entailing harmonised sales tax on goods and services, uniform rates for agricultural and non-agricultural income and its collection through a single national agency, though distribution be strictly as per NFC Award under Article 160 of the Constitution—all governments must participate in retiring debts and eliminating fiscal deficit.
Tax reforms without a fair and efficient tax administration can never be enforceable. For this purpose National Tax Agency (NTA), is needed not only to collect 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. 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, pension, just to mention a few, in lieu of paying taxes.
The existing four-tier tax appellate system has also failed to deliver. It needs to be restructured as suggested in Tax Reforms in Pakistan: Historic & Critical Review (PIDE, 2020).
Till establishment of NTA, FBR should be insulated from external political, financial and administrative pressures and must collect taxes efficiently. The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts and implement it after securing consensus in the Parliament and provincial assemblies. This alone can help in raising the much-needed revenues of at least Rs. 8 trillion at the federal and Rs. 2 trillion at provincial levels, presented through a concrete roadmap in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME 2020) and Tax Reforms in Pakistan: Historic & Critical Review (PIDE, 2020).
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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)