Need for National Tax Institute   

Huzaima Bukhari & Dr. Ikramul Haq

To be the premier body providing effective institutional support to members and promoting convergence of interests with government, using taxation as a tool for the nation’s economic advancement; and to attain the highest standard of technical and professional competency in revenue law and practice supported by an effective secretariat—Mission statement of Chartered Tax Institute of Malaysia.

History of tax reforms in Pakistan, funded by foreign agencies or the successive governments, has been a failure. It has remained largely a bureaucratic exercise behind closed doors inducting a few hand-picked experts and avoiding any meaningful consultation with stakeholders, academicians and public at large. This attitude, blatantly undemocratic and undesirable, finds its worst manifestation in keeping “secret” the final report of 2016 of Tax Reform Commission, established on September 25, 2014. This is the way we debate and carry out “reforms” in Pakistan. It is high time that the new economic and tax team of Tehreek-i-Insaf (PTI) made it public and open for debate.     

While the Federal Board of Revenue (FBR) in the name of “tax reforms” has been playing havoc with the tax system, recent years witnessed closure of a number of industrial units, stagnation and rising inflation. During the government of Pakistan Muslim League (Nawaz), there was a continuous decline in exports and unprecedented rise in import of luxury items. The then Finance Minister, Ishaq Dar, used to take great delight in imposing 30 to 50 percent taxes on various POL products to show “extraordinary tax collection” at the cost of destroying industries by adding to their cost, rendering them uncompetitive. Besides, inefficiency, corruption and incompetence of FBR, oppressive, inconsistent, illogical, burdensome, complicated and expropriatory tax policies posed impediments for business growth and the same situation prevails under PTI till today. Expectations of local and foreign investments cannot be met unless we concentrate on: 

1. removing irritants in our tax system
2. providing level playing field for all
3. ensuring ease of doing business
4. training Pakistani talent for skills and innovations

At the moment, there is not a single institute, exclusively engaged in fiscal research and teaching taxation. We do not have a chartered institute of taxation—asin United Kingdom, Australia, Malaysia, Nigeria, Ghana and elsewhere. The business and law schools in universities, institutes like Pakistan Institute of Development Economics (PIDE), Institute of Chartered Accountants of Pakistan (ICAP), Institute of Cost management Accountants (ICMA), tax bars, Federation of Pakistan Chambers of Commerce and Industry (FPCCI) or Overseas Investors Chamber of Commerce & Industry (OICCI) etc cannot show even one comprehensive research study suggesting a pragmatic, workable tax policy to achieve the above cited goals. Present tax system discourages capital formation and investment and is the real cause of retarded economic growth, burgeoning fiscal deficit and insurmountable debt burden. But our economic managers are unable to fix them. They are not ready to accept that tax is a byproduct of growth. Rapid and sustainable growth can bring more taxes, but they are least concerned. For them tax collection numbers matter, but growth does not!

Economic challenges faced by Pakistan are multiple and grim—we are trapped in a deadly debt trap, but there is no solid programme available with any political party or the incumbent government to come out of it. They are least pushed to accelerate growth, induce investment, stop wastage of resources and make the tax administration fair and efficient. Pakistan faces the herculean task of providing jobs to millions—on an average we need to create 2 million jobs annually for young people alone. For achieving this task we will have to ensure that economy grows at the rate of more than 7% per annum over a long period of time—for this we need at least investment of 20% of GDP. This challenge is also our great opportunity for rapid economic progress. Majority of job seekers are young people, who are our greatest asset—imparting education and skills to them and creating matching jobs are the real challenges. These can be met successfully by assignment of taxes for productive investment leading to value added exports and employment generation in all fields—the real engines of growth.

Pakistan is amongst those fortunate countries of the world that enjoy abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to flawed agenda of overemphasis on retrogressive taxation and incompetence of our economic managers, Pakistan’s dependence on imported products has increased manifold, whereas value-added exports are not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and future is for those people who can develop them as quickly as possible.

For technological transfers, rapid industrial growth and employment generation, foreign direct investment (FDI) is desirable. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our economic managers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.

Companies are the worst affectees of FBR’s desired laws, mechanically passed by parliamentarians. Top management of FBR has been demonstrating a very myopic outlook as evident from over-emphasis on withholding taxes. This policy has further accentuated in the Finance Act, 2019. With low tax rates and a much less complicated procedure, we could have promoted investment, especially corporate growth. On the contrary, FBR in 2015 imposed ‘Tax on undistributed reserves’ [section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another wrong move.  In 2014, FBR imposed ‘Alternative Corporate Tax’ [section 113C of Income Tax Ordinance, 2001]. Such erratic, arbitrary and expropriatory taxation, as expected, retarded corporate sector and discouraged investment and growth.

We need to incentivize corporatization of business. At present there are only about 98,000 companies registered with SECP out of which less than fifty percent are active and file tax returns. There are numerous anti-corporate provisions in the tax codes. Companies are maltreated by FBR—after collecting billions as ‘withholding tax agents’ of the state without any compensation; they are penalised for small lapses that may neither be intentional nor willful. 

Devising an efficient tax model for rapid economic growth in Pakistan requires an analytical study of all the irritants prevailing in tax codes, procedures and implementation processes. The main irritant is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses—both at federal and provincial levels. We need research and public debate for suggesting solutions to remedy the situation and to promote taxation and business growth attracting domestic and foreign investment and ensuring much-needed jobs. For this we must establish National Tax Institute where academicians, tax officials, practitioners, businessmen, and all other stakeholders contribute for devising holistic tax reforms aimed at incentivizing rapid growth. It can also provide a platform for earning degrees/diplomas by young Pakistanis, who want to adopt tax practice as career.  

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)