Dr. Ikramul Haq*
The persistent failure of our financial managers and tax collectors to overcome fiscal deficit and remove fiscal imbalances has created a situation where the very economic survival of the country is at stake. Our economic survival now lies in collecting taxes wherever due by abandoning the policy of appeasement towards the power of shutter and the rich. An unshakable determination, consistency and political will is required to curb the 52-year-old habit of defying tax laws along with complete purge in tax machinery.
What has happened to resource mobilisation? What has happened to revenues? Do fiscal managers really know why our total revenues have fallen from 18 per cent of the GDP to 12 per cent of the GDP during the last ten years? They tried to manipulate the figures of expenditure, and the nation had to pay a heavy cost for it (not only in terms of money but by further tarnishing our image in the international community that nothing is transparent in our society).
It is an established fact that despite resorting to all kind of highhandedness, illogical policies and unjust withholding taxes, the CBR has failed to improve the tax-GDP ratio. The burden of many presumptive taxes levied under the Income Tax regime (which are nothing but indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have distorted the whole tax system, destroyed the economic growth and made the consumer/client the ultimate sufferers. Moreover, these despotic, short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit.
What we have experienced is a complete failure on all fronts. Fiscal policy became a tool of oppression, economy suffered recession and the people of Pakistan were the real victims. The commercial importers (the mighty traders who do not want to pay their taxes) and powerful contractors (who get contracts by bribing officials) managed to pass on their tax burden to others, courtesy presumptive taxation in Income Tax law which increased the state revenue from Rs. 40 to 102 billion within five years under the so-called direct tax regime, whereas in reality it was a collection in terms of indirect tax. The levy of taxes on goods and services is the constitutional right of provinces. The federal government violated this constitutional command by levying such taxes under the garb of Income Tax. This is the worst example of “federal highhandedness” where the victims are the poor people of the less privileged provinces. The constitutional responsibility of distributive justice and social equality was altered, to show just higher collection of tax targets.
The policy-makers say that 52 years of problems cannot be solved in a few weeks or in a few months or even in 3 years’, the time given to the present military set up by the Supreme Court. Their main problem is how to deal with the tax machinery, which is inefficient and corrupt. In the traders versus tax machinery tussle, the main underlying conflict is who should have the upper hand in the loot. Tax bureaucracy wants its complete monopoly, while the traders want “equal” power and share. This is a bizarre situation. The forces of loot are now at war with each other. It is the logical outcome of perpetuation of a deep-rooted, mutually beneficial corrupt system. The successive governments have been announcing unprecedented concessions for the corrupt in the form of tax amnesty and money-whitening schemes and that too in the name of “Economic Reforms Protection”. In fact they were protecting themselves, the corrupt and the plunderers of the national wealth. The present government wants “reforms”, while the corrupt sections want perpetuation of “favourable” policies and status quo.
The bureaucracy has made an alliance with the corrupt segments of the society to ensure the failure of policies designed by the present government. The mighty ex-chairman of CBR arrested on corruption charges but was pardoned in exchange for just Rs. 10 million (which are really peanuts) by the National Accountability Bureau (NAB). If the accountability is an issue of recovering money alone, then the NAB should ask Mr. Nawaz Sharif and others to pay substantial amounts (which they are quite capable of paying) in exchange for their freedom. On the one hand, the strong headed but polite and humble General of NAB has shown unprecedented mercy while dealing with one of the most corrupt men of the tax machinery while on the other the military regime has suspended 1000 officials at the fag end of the financial year without realizing the set back it will have in the disposal of cases and collection of taxes. Those suspended are asking: “Are we more corrupt than the ex-Chairman of CBR who has been pardoned and do we also get an offer from NAB to buy our acquittal in exchange of a few bucks?” An atmosphere of disillusionment now prevails and one wonders under these circumstances if there is any hope left for the economic salvation of the people of Pakistan?
Shamelessness is the correct word for all of us. Even feeling ashamed is a virtue showing that at least one still has a conscience that pricks. But “shamelessness” is the stage where one even loses the capacity to be ashamed of his wrongdoings. At this critical juncture of our history, where our economic survival and sovereignty is at stake, certain sections of society are staging a tax revolt. Some of their grievances may be genuine, but there is no justification whatsoever to say that GST at retail stage will not be paid. The National Tax Survey and imposition of GST at retail stage are steps in the right direction. The whole nation must support these steps and ensure that those amongst them who are not paying taxes (despite possessing enormous wealth) should be taken to task. The will of Pakistani people, the support of the masses and a revolutionary agenda are what we need today.
Resource mobilisation should be our priority number one. The main strategy in the forthcoming budget should be to achieve the goal of reducing/eliminating the fiscal deficit to the level of 2% /0%of the GDP at any cost. Our revenue collection should not be less than Rs. 600 billion in the next financial year i.e. 2000-2001. There is no justification whatsoever to reduce the development expenditure, which are already dismally low at little over 3% of GDP. The fiscal adjustment through reduction in development expenditure will not solve our problems. There is certainly a need to reduce non-developmental, wasteful expenditure, but the real salvation lies in resource mobilisation. The broadening of tax net is the need of the hour. But we should not forget that those who enjoy exemptions and concessions should be brought into net. The existing taxpayers, who even grossly under report their incomes, should be tackled with skillful policies (carrot and stick!) by gradually making them pay the exact taxes.
The rich and mighty who do not pay are the real culprits. The exemptions and concessions that are prevalent in our tax laws (The whole of Second Schedule in the Income Tax Ordinance, 1979, most of the items of Sixth Schedule of Sales Tax Act, 1990 and innumerable SROs relating to Customs and Excise) should be done away with. There should be a level playground for everybody. The revenue impact of these exemptions and concessions is to the extent of Rs. 200 billion. The wise step will, therefore, be to immediately abolish these exemptions and concessions instead of increasing the incidence of taxes on the common people of Pakistan. In view of the prevalent fragile economic conditions, there should be a gradual transition from under reporting to full reporting, but those who do not pay (especially the privileged members of society) should not be spared any more.
If the present government removes all these exemptions and concessions, brings big absentee feudal landlords to tax net, manages to get the taxes from the influential ones and succeeds in imposing GST across the board (preferably with a low rate of 2% at one single point), there will be no budget deficit. This goal can only be achieved if the government simultaneously tackles the issues of tax evasion and rampant corruption in the tax machinery (not just throwing them out of job but to make the system workable fair and just).
The present tax machinery is not only corrupt (for that a larger blame goes to the State as no reforms have been made to improve their economic lot and working conditions) but is also inefficient, incompetent and ill-equipped to increase the revenue. Radical changes are needed to: –
(a) Revamp the entire tax apparatus.
(b) Improve both structural and financial conditions of tax machinery.
(c) Make it a service-oriented organization (even better than banks) aimed at solving people’s tax problems by giving them proper guidance and counseling and not harassing them for self aggrandisement. There should be a complete change in the image of tax machinery. It should be a people-friendly organization and not an exploitative, oppressive, ruthless colonial-model tax apparatus.
(d) It should be remembered that introducing irrational, harsh, unjust and unfair tax measures couldn’t broaden the tax base. The issues of justice, fairness and equity instead of fixing unreasonable budgetary targets should be the main concerns of our tax policy.
Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within two year’s time provided that a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation. The policy of ad-hocism due to which we have already suffered a lot will not work. Sacking of 1000 or more officers alone will not improve our tax collection. We need a fair and equitable tax system, which should be managed by thorough and honest professionals. The people of Pakistan should be part and parcel of this revival plan, without whose support and participation no war – even the economic one – can be won.
* The writer, a leading International Tax Counsel, specialises in international tax, Press, Intellectual Property, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email firstname.lastname@example.org). He is member of Visiting Faculty of Institute of Direct Taxes in Lahore. From 1984 to 1996 he was associated with Civil Services of Pakistan as Deputy Commissioner of Income Tax. He is author of numerous books on Pakistani Tax Laws. He received Doctorate of Law for his research: Tax Reform in a Quasi-Constitutional Perspective.