Dr. Ikramul Haq
The outdated and oppressive tax structures at federal and provincial levels have created further fiscal mess and how come out of it is discussed in Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, published in December 2020, available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/). A webinar on this book was held on July 10, 2021 hosted jointly by publisher (PRIME Institute) and Pakistan Social Science Forum, created in March 2021 by Pakistani young research scholars with the aim to facilitate and engage Pakistani origin academicians and researchers across different disciplines. The 2-hour session (originally scheduled for one hour) provided interactive discussion between the emerging scholars and Pakistani researchers who have produced research in any field of taxation.
The website of PRIME Institute reads: “The study titled Towards Flat, Low-rate, Broad and Predictable Taxes by Huzaima Bukhari & Dr. Ikramul Haq analyses the structural and operational weaknesses of the existing tax system at federal level and suggests alternate solutions in the areas that require fundamental reforms. This study argues that taxpayers have to deal with multiple tax agencies adding to their cost of doing business and the non-existence of tax-related benefits is the most neglected area of our discourse on reforms. It highlights the existing four-tier tax appellate system, how it has failed to deliver and the alternate system which can be adopted”.
According to information provided in brochure: “Pakistan Social Science Forum was created in March 2021 by Pakistani young research scholars aimed to facilitate and engage Pakistani origin academicians and researchers across different disciplines. The main objective includes highlighting cross-disciplinary scholarship in Social Sciences (economics, political science, international relations, history, literature, and law, etc.). The platform organizes fortnightly research presentations meets via zoom. We host renowned academicians, practitioners, and experts of different fields to briefly present and discuss a pre-circulated paper/book followed by an interactive session with an audience from diverse backgrounds. We aim to learn and produce constructive and original research through joint deliberations and discussions on ideas and solutions to develop a healthy academic environment in Pakistan. We also aim to bring academic research in social sciences to the general public in an easy-to-understand format”.
The event on July 10, 2021 was sixth session of Pakistan Social Sciences Forum. The flyer says: “This session is arranged with collaboration of PRIME Institute Islamabad. In this session, we discuss the book “Towards Flat-Low Rate, Broad and Predictable Taxes” by Huzaima Bukhari and Dr Ikram ul Haq. This book presents a new tax system for Pakistan. The writers suggest that Pakistan should abolish current tax system which consists of so many complex indirect and direct taxes and instead move towards Flat and Low rate tax system which consists of only two direct (income tax and corporate tax) and two indirect taxes (sales tax and custom duty). Authors claim that opting to Flat and low tax rate will make it easy for persons and corporations to calculate and pay due taxes, reduce cost and enhance ease of doing business. Therefore, this will not only ensure higher tax collection but will also boost up economic activity”.
The Zoom session scheduled for one hour (exceeded by one hour) was divided into three parts. In the first 25 minutes presenter (this writer) shared brief analysis of research work coauthored with Huzaima Bukhari. In the second part (10-15 minutes), the team member, Muhammad Nadeem Sarwar of Pakistan Social Science Forum, presented his review of the book. The last part of the session was an interactive Q&A session where participants actively engaged and contribute to the discussion.
The nook presents a ‘Pilot Project’ of low and flat rate taxation of retail sector has potential of US$ 5 billion whereas Federal Board of Revenue (FBR) in fiscal years 2019-20 and 2019-20 collected total tax of Rs. 4732 billion and Rs. 3998 billion, respectively, that includes total sales tax collection of Rs. Rs. 2189 billion and Rs. 1596 billion (after retaining accumulated refunds of over Rs. 500 billion as past legacy) respectively. 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) and this remained unpaid and only fiscal year 2020-21 refunds of Rs. 251 billion were paid.
According to a report in fiscal year 2020-21, the FBR “had paid Rs. 251 billion in refunds, which were 85% higher than the preceding year. These include Rs. 209 billion sales tax refunds. The report further reveals that: “FBR has successfully achieved the assigned revenue collection target of Rs 4691 billion for 2020-21.” The third revised revenue target as mentioned in the above report of Rs. 4691 billion is correct. The second revised was Rs. 4717 billion and FBR exceeded it by Rs. 14 billion.
According to Finance Minister, Shaukat Fayaz Ahmed Tarin, and Special Assistant to the Prime Minister (Minister of State) on Finance & Revenue, Dr. Waqar Masood, “around 7.4 million potential tax evaders have been identified and will be criminally prosecuted”. The reality as shown in the above book is that gap in income tax is 19 million and in sales tax around 2.5 million. Presently, the income tax filers on Active Taxpayers List (ATL) are 2,792,446 as on July 12, 2021 and majority filed nil or below taxable return. The fact is concealed in the Press release of the FBR. According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on May 31, 2021 was 183 million (84.68% teledensity), out of which 99 million are 3G/4G subscribers (45.09% penetration), 2 million basic telephony users (1.13 teledensity) and 101 million broadband subscribers (46.4% penetration). Not less than 100 million cell users (many have more than one number) are paying advance/adjustable income tax of 10% reduced from 12.5% from July 1, 2021) FBR in its Press release of July 1, 2021 claimed receiving income tax returns of 3.01 million. FBR should register all taxable persons to bridge the tax gap as 97% paying advance income tax are not filing tax returns. Legislature must stop taking 10% income tax. Additionally, all mobile users pay 19.5% sales tax on services in their respective provinces (for users in Islamabad Capital Territory, 16% (earlier 17%) federal excise duty) whereas there should be free internet service at public places. 10% activation charges, leviable, were also abolished by Finance Act, 2021.
At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users (if all file returns there will be refund payable to at least 80 million having no oncome or income below taxable limit). In the face of these facts the FBR calls the nation as “tax cheat—a deplorable act that is also blindly believed by many so-called tax experts appearing as anchors or guests at TV talk shows and lenders and donors take their words as Gospel Truth. Out of 100 million mobile users, about 80 million have no taxable income. Had this not been the case, how did FBR collect so much tax at source (about 44% of total collection at import stage alone) that is highly anti-growth as concluded in the webinar.
Pakistan must collect taxes where due and not in advance or from those not chargeable to tax. Sadly 75 paisa tax on cell call exceeding 5-minute is inconsiderate towards the poor, impractical to implement for operators, and inconsequential to the efforts of FBR. The State must allow the people to pay low taxes and have larger capital formation that will accelerate high and sustainable growth of 7-9%. It is possible only through simple taxation as elaborated in the book. The relief given to small and medium enterprises (SME) as manufacturers up to turnover of Rs. 250 million in the Finance Act, 2021 Finance Act, 2021 should have been for retailers and others as well, without any discrimination. Low-rate tax on broad base with simple compliance procedure is needed to collect Rs. 8 trillion till 2023.
On our query about turnover tax, Dr. Ehtisham Ahmad, renowned economist and having rich experience of restructuring tax systems of various countries commented: “It may also create incentives for larger firms to masquerade as SMEs, or hide value chains by transacting with untraceable SMEs. Much depends on how the GST/VAT is applied. The Mexicans solved the problem by effectively dropping the VAT registration threshold to zero, bringing in complete value chains without the possibility of manipulation by the SMEs or the larger firms using the SMEs (important in textiles for example)”. He further conveyed to us:
“The Michael Best proposal to introduce a turnover tax for bats-case countries like Pakistan might raise revenues, but is absurd. (Best has been strongly pushed by Ijaz Nabi to chair the Revenue Sub-Committee of the EAC). While it might raise revenue in the short run, it would destroy the productive base much more completely than the stupid capacity tax measures in place from time to time for meeting stop-gap revenue targets. The third-best proposal also requires a reversion to the tax inspector model (old excise approach) as it is necessary to verify quantities produced and is the opposite of the arms’ length information based administration model that minimizes contact between the tax administration and taxpayers!! So this is likely to send the country back to the Stone Age—perhaps that’s the secret agenda of foreigners like Michael Best!!”
This is the continuous sordid story of our tax reforms and faulty tax policy till today under the all the successive governments and the coalition Government of Pakistan Tehreek-i-Insaf (PTI) is no exception—courtesy the agenda of International Monetary Fund (IMF), World Bank and their imposed officials and consultants—all fully exposed in the Finance Act, 2021. According to the Opposition [divided and at draggers drawn, especially Pakistan People Party and Pakistan Muslim League (Nawaz)] allegedly passed fraudulently. This allegation may be political, but the fact remains that they have also miserably failed to present their agenda of accelerated, higher and sustainable growth of 7 to 9 percent or adopt after debate the one presented by Pakistan Institute of Development Economics (PIDE) available at their website: PIDE Reform Agenda for Accelerated and Sustained Growth. However, none of the members of National Assemble mentioned it in the budget debate.
The PTI Government has also not even considered the proposals by Federation of Pakistan Chambers of Commerce & Industries (FPCCI) of adopting the model presented in Towards Flat, Low-rate, Broad and Predictable Taxes that could have boosted rapid, higher and sustainable and inclusive development benefitting all segments of society, leading to new investment in all sectors, prosperity and self-reliance and as a consequence, total revenue collection at federal level alone of Rs. 8 trillion in two years.
The conclusion is simple as already mentioned in: FBR: FATF challenges, Daily Times, March 14, 2021: It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan despite section 114 of the Income Tax Ordinance, 2001 makes it mandatory. How can we expect rule of law in Pakistan, when 125 political parties are committing flagrant violation of Article 5(2) of the Constitution? They keep on bashing FBR but fail to fulfill the command that “Obedience to the Constitution and law is the inviolable obligation of every citizen wherever he may be and of every other person for the time being within Pakistan.
The result of above article was withdrawal of proposed exemption for political parties as it could have been a blatant violation of Article 17(3) of the Constitution, rule of law and further tarnishing of image of Pakistan when we are already in grey list since 2018. It is now for the FBR to enforce all political parties to file returns for tax year 2020 and past five years and must be audited and levied penalties after giving proper hearings. However, when one party after confronting the above article tried to do this online, it was even denied the registration what to speak of facilitating to file returns on the basis of audited accounts already submitted to the Election Commission of Pakistan. It received aut0-generated reply from FBR: “Madam, there is no any online option available for registration for registration except individuals. Registration of Company, NGO, AOP etc need to visit Regional Tax Office with required documentation. Thanks”. It is now for Finance Minister, Shaukat Fayaz Ahmed Tarin, and Special Assistant to the Prime Minister (Minister of State) on Finance & Revenue, Dr. Waqar Masood, to inform the Prime Minister, Imran Khan, the real hurdle are politicians or Revenuecracy!
The FBR, as data presented above and mentioned in the webinar, still needs to bridge the huge tax gap by use of technology discussed in Towards Flat, Low-rate, Broad and Predictable Taxes but it is not possible unless all the parties resort to introspection for internal reforms and compliance of all laws applicable to them in letter and spirit. The judiciary must also improve its functioning in dispensation of justice and to enforce fundamental rights of the citizens, rather than favouring the rich as explained in Regularisation for the rich, demolition for the poor, Daily Times, January 13, 2019.
The PTI Government must forge national consensus on issues on national interest and engage all political parties and together ensure that all the institution perform their functions efficiently within the limits provided in the Constitution. The Opposition must demonstrate that it respects the mandate of people and conform to democratic norms as indicated in a recent article by a respectable member of second largest party in an op-Ed. The PTI Government must stop exploiting all less-privileged and downtrodden citizens who have been subjected to oppressive taxes like 75 paisa for cell call exceeding 5-minute and ten percent on mobile and/or internet use from July 1, 2021 and heavy taxation on many food items, energy and items of daily use by the citizens. The tax credits for senior citizens and special people should be restored—see details in Budget 2021-22 and erratic taxation, Daily Times, June 13, 2021.
Even the wizard draftsmen of FBR failed to provide that exporters of services taxed at 1% (laudable amendment to bring it at par with exports of goods) will take the credit in their books of imputable income. The self-acclaimed professional becoming part of committees to remove anomalies and technical issues (sector-wise etc.) have failed to even remove these obvious lacunas, what to speak of suggesting a pro-growth and investment-friendly tax policy helping in creating jobs from agriculture to high tech knowledge-bases initiatives, rather than emphasising on bricks and mortars. They must all be reminded of couplet of great poet and thinker, Dr. Allama Mohammad Iqbal:
Jahan-e-Taza Ki Afkar-e-Taza Se Hai Namood
Ke Sang-o-Khisht Se Hote Nahin Jahan Paida
New worlds derive their pomp from thoughts quite fresh and new
From stones and bricks a world was neither built nor grew.
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. The research study and webinar discussed and pleaded for radical revamping and restructuring of the entire tax system, through low-rate, broad-based and predictable taxes, single national tax agency and national tax court.
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. Like earlier programmes, these are also bound to fail. 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. This s the time that government and all political parties should consider it seriously if we have to make Pakistan a prosperous country and egalitarian state—an economic power with 220 million people to have its say in global matters for a safer, just and peaceful place for the humanity at large, especially in the wake of US and its allies complete retreat from Afghanistan after humiliating defeat and leaving the region in turmoil.
It was originally published on 11 June 2021 and updated on 12 June 2021.
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, IT, intellectual property, arbitration and international 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. He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
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 (revised/enlarged edition of December 2020), 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.