Huzaima Bukhari & Dr. Ikramul Haq[i]

 

The outdated and oppressive tax structures at federal and provincial levels have created further fiscal mess[1] that is highlighted in the new chapters and solutions offered for their resolution[2]. We have also included a model ‘Pilot Project’ of low and flat rate taxation of retail sector showing its potential of US$ 5 billion whereas FBR in fiscal year 2019-20 collected total tax of Rs. 3998 billion that includes total sales tax collection of Rs. 1596 billion (after retaining accumulated refunds of over Rs. 710 billion). Surprisingly, the data released by Ministry of Finance in respect of federal and provincial fiscal operations for fiscal year 2019-20, is still showing collection of FBR at Rs. 3998 billion. FBR’s officials on September 2, 2020, before the National Assembly Standing Committee on Finance confessed 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).   

Federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the country’s tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are main factors for low tax collection.

Instead of broadening the tax base and simplifying 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. Our study[3] argues radical revamping and restructuring of the entire tax system, suggesting broad, low, flat and predictable taxes.

Tax reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.

The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. The number of tax filers has fallen since 2003 (excluding those filing income below taxable limit of paying negligible amount to become part of Active Taxpayers List to avoid higher incidence of withholding taxes). In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of Pakistan Raises Revenue (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 decided to borrow US$304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020[4]. Like earlier programmes, these are also bound to fail[5].

The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based.

With such a system in place, those who are not into the tax net or who avoid true disclosures would be induced to pay their taxes voluntarily. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.

In the wake of Constitution (Eighteenth Amendment) Act, 2010, the fiscal management, both at federal and provincial levels needs fresh thinking. The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential even though the country is heavily indebted. On the other hand, provinces, which are almost entirely dependent on the NFC Award, have failed to raise their own sufficient resources for increasing needs of the ever-growing population. The provinces must participate in national tax policy and collection apparatus as their share in NFC Award is larger than the federal government and Article 156(2) 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 and its collection through a single national agency as well as low tax rates on broader base, though distribution would be strictly through Article 160—all participating in retiring debt burden that would eliminate fiscal deficit.

Our study[6] analyses the structural and operational weaknesses of the existing tax system at federal level and suggests alternate solutions in the following areas that require fundamental reforms:    

Area                                                                            Solution

Complex Income Taxation:                                    Flat-rate Taxation

Distorted/Multiple Sales Taxes                              Single-stage Sales Tax

Customs/SRO Culture                                             Single-rate Customs Duty Multiple Tax Collection Agencies                                                        National Tax Agency

Inefficient Appellate System                                  Federal Tax Tribunal

These fundamental reforms will provide the basis for an alternate tax system. Tax reforms without a fair and efficient tax administration can never be enforceable. For this a new tax collecting agency, National Tax Agency (NTA), is proposed. The officers of the Federal Board of Revenue (FBR) have reportedly suggested the name: Pakistan Revenue Board (PRB). Our suggestion is that this body, whatever may be the name, shall not only be responsible for collection of 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 fair taxes.

 The NTA can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 read with the Fourth Schedule to the Constitution of Pakistan by federal and provincial parliaments). This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption.

Presently, taxpayers have to deal with multiple tax agencies adding to their cost of doing business. A well-equipped, automated and efficient tax agency is imperative to facilitate the citizens for discharging their tax obligations through one-window operation and also to disburse to all tax-related benefits (pensions, social security, income support etc.). The non-existence of tax-related benefits is the most neglected area of our discourse on reforms.  

The existing four-tier tax appellate system has also failed to deliver. The problems faced by taxpayers in appeals/references speak volumes of the ineffectiveness of various judicial forums that have been assigned the statutory obligations to safeguard them against unjust imposition of taxes. The revenue authorities are also unhappy with the tax appellate system as litigations take years for the settlement of tax disputes. Therefore, in order to make the appellate system more responsive, the existing tax tribunals dealing with direct and indirect taxes to be restructured.

Our studies[7] propose a two-tier tax appellate system where first appeal goes to National Tax Tribunal with the right of another appeal in the form of intra court appeal. Subsequently, if any substantial question of law needs consideration, it can be referred to the Supreme Court by way of leave to appeal. This will help in achieving uniformity of decisions since at present High Courts in different provinces sometimes differ on identical questions of law and it takes years for final authoritative pronouncement by the Supreme Court. The two-tier tax justice system can ensure expeditious settlement of tax disputes, preferably within a year’s time of first order.

Income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum taxes have been added to distort the entire concept of personal income taxation. This paper suggests simple and flat rate taxation of 10 percent for all entities other than companies, for which a flat rate of 20 percent is proposed.

The right to levy sales tax on goods rests with the federal government and that on services lies with the provincial governments. Presently, federal sales tax on goods is fraught with exemptions, multiple rates (from 17% standard rate to about 70% on high diesel oil at some point of time prior to 2018, under the previous regime from 2013-2018) and complicated procedures for various kinds of goods. The same position prevails with the provincial tax codes where telecommunication services are taxed at 19.5 percent in addition to 12.5 percent [earlier it was 14% till tax year 2017] advance income tax paid by the subscribers. This kind of harmful taxation, especially collecting 12.5% advance tax from millions of mobile and internet users having no income or income below taxable limit is unjustified, anti-growth and anti-investment.

We have proposed single-stage, single-digit sales tax on goods by federal government at the rate of 5 percent across the board with no exemption, albeit exporters shall have zero-rated regime. The only exemption shall be on food, life-saving drugs, books, children’s garments and educational equipment. Provinces can also consider imposing harmonised sales tax (HST) at the same rate on services, details of which requires a separate study. Alternately, we should move towards a unified sales tax on goods and services through national consensus whereby provinces give right under Article 144 to the National Assembly.

Under the current Customs Act, 1969, exemptions/concessions are granted to goods in three categories under Pakistan Tariff: (i) Fifth Schedule of the Customs Act and Statutory Regulatory Orders (SROs), (ii) Chapter 99 of Pakistan Customs Tariff and (iii) export promotion schemes announced time to time.

There are over 5,000 effectively traded tariff lines and 2448 tariff lines (33% are under 20% slab). In fiscal year, 2019-20, on 5521-tariff lines additional customs duty (ACD) and on 2075 tariff lines regulatory duty (RD) was charged. The heavy taxation at import stage (50% of FBR revenue is collected at import stage) provides incentive for smuggling, undervaluation, misreporting, misdeclarations and tax evasion. The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various “conditions and requirements” are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and misdeclarations for evading duties. Recognizing these problems, this paper proposes that there should be a single slab of for all imports to end these undesirable practices.

The crux of our studies[8] is this: lower, predictable and broad-based taxes, administered through efficient tax apparatus enabling Pakistan to achieve fairness in taxation system. It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society.

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[1] 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 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.

[2] ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/)

[3] Ibid

[4] https://tribune.com.pk/story/2264308/punjab-to-borrow-304m-from-world-bank

[5] Punjab: tax reforms with foreign loan!, Daily Times, September 20, 2020.

[6] ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/)

[7] ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/)

Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE) (available  free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf

[8] ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/)

Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE) (available  free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf

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[i] Ms. Huzaima Bukhari, Advocate High Court and Visiting Faculty at Lahore University of Management Sciences (LUMS), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram, a leading law firm of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals. She has to her credit over 1500 articles on issues of public importance, printed in various journals, magazines and newspapers at home and abroad.

She has coauthored with Dr. Ikramul Haq many books that include  Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

She regularly writes columns for Pakistani newspapers and has contributed over 1500 articles on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation andVisiting Faculty at Lahore University of Management Sciences (LUMS).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.