Optimizing tax collection

Huzaima Bukhari & Dr. Ikramul Haq

“If we realise that the FBR cannot be fixed, we will create a new FBR. This is because Pakistan’s survival is linked to it. It’s not about our liking or disliking: if our tax collection authority does not function properly, it could lead to a security risk. No nation that relies on loans can maintain its pride and independence“—Prime Minister Imran Khan

Prime Minister Imran Khan has time and again complained that our tax system is unjust and that the governments—federal and provincial—are lax in collecting the tax from the rich and mighty. He has correctly highlighted that our survival as viable state depends on accelerating economic development and collecting taxes fairly and justly. The Prime Minister must concentrate of reciprocity—in return for taxes give the citizens better facilities of education, health, housing, transport, clean drinking water, sewerage etc.   Our tax laws, on the contrary, extend extraordinary tax-free perks and perquisites to the powerful segments of society, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are pushed to become what Franz Fanon called, ‘The Wretched of the Earth’. Due to pro-rich policies, wealth has concentrated in a few hands.

The dilemma of Pakistan is cronyism, greed and corruption on the part of the elites. They are parasites and not growth catalysts or innovators. By improving compliance and broadening tax base, it is not at all difficult to raise funds of Rs. 8 trillion and from this pool to make dams, improve infra structure and also provide social services to the needy. For collecting Rs. 8 trillion, we need to restructure the existing tax machinery, withdraw concessions/immunities and crackdown on tax evaders and plunderers of national wealth.

We need a simple, fair and predictable tax system: 10% tax on individuals (with alternate minimum of 2.5% on net wealth), 20% on companies and other entities, and 8% sales tax on all local supplies (for exporters 0% tax). This will fetch us tax of Rs. 7 trillion (Rs. 4 trillion income tax and Rs. 3 trillion as sales tax). We can get Rs. one trillion by levying 2% customs duty on all items (exporters importing raw material to get refund once export proceeds are realised by State Bank).

The Finance Minister, Asad Umar. In the Finance Supplementary (Second Amendment) Bill 2019 and earlier in the Finance Supplementary (Amendment) Bill 2018 followed the traditional approach of balancing the books. He failed to fulfill the election promise of Pakistan Tehreek-i-Insaf (PTI) of collecting Rs. 8 trillion—in fact the target of Federal Board of Revenue (FBR) was reduced by Rs.169 billion to Rs. 4.72 trillion–a reduction of 3.5% over this year’s original budget! The PTI Government has not so faar given serious consideration to a research-based proposal,  Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016) that gives detailed roadmap and step-wise action plan for raising revenues of Rs. 8 at federal level alone.

The question is whether the PTI government following its predecessors will keep on borrowing more from local and foreign sources or collect revenues of Rs. 8 trillion? Our debt-to-GDP ratio has already crossed the danger mark. It is heartening to note that the PTI government has taken measures to levy taxes on importation of luxury items and expensive cars. But it has yet not decided to impose surcharge on wealthy classes and levy excess profit tax on cartels in different sectors that have earned extraordinary profits e.g. sugar, cement, flour mills, telecom and the banking sector. Financial managers, instead of doing any work on new emergent tax measures are reportedly begging for more funds from abroad to meet fiscal and trade gaps.

The federal government must impose excess profit tax on cartels that earned billions by manipulating prices—they were fined by Competition Commission with evidence that was irrefutable. If this is done, the government can easily raise additional funds of Rs. 400 billion. The provincial governments should also levy progressive taxes e.g. wealth tax on the rich and must collect agricultural income tax from the rich absentee landlords—this alone can generate revenue of over Rs. 200 billion. Provincial governments have been wasting funds received as share from divisible pool, but have shown no inclination to generate funds themselves by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich people and on unproductive transactions. The following two measures alone can generate extra revenue of Rs.500 billion at federal level—out of which provinces will receive 56% as per existing NFC Award:

1. Excess profit tax on cement, sugar, flour mills, and banking and telecom sectors would generate extra tax of Rs. 300-350 billion. All persons having income exceeding Rs. 2 million should also be asked to pay 10% extra surcharge for helping the poor, it will generate Rs. 100-130 billion. This amount should be deducted from taxable income to avoid double taxation.
2. One-time de-logging litigation scheme: Taxpayers be asked to pay 25% tax arrears between April 2019 to 30 June 2019 with pending cases before appellate authorities and courts deemed to be settled. In 1998, India through a similar scheme [Kar Vivad Samadhan] generated revenue of over Rs. 900 billion, while disposing huge backlog of cases in the country. Such a scheme with time limitation up to 30 June 2019 would not only generate immense revenue but would also help drastically in reducing workload of Tribunals and High Courts.

The above two measures alone can generate extra funds of Rs. 500 billion that the federal government requires to keep the fiscal deficit in safe limit. These measures will not burden the common people as incidence of tax would fall on the rich. Any enhancement in indirect levy becomes beneficial for those not on the rolls of FBR—they collect it from people but do not deposit the same in the government treasury. The federal government should stop looking for more borrowed money and take immediate steps for resource mobilisation to overcome fiscal deficit—the mother of all ills.

Devising a rational and innovative revenue mobilisation strategy is never considered by politicians or self-styled wizards sitting in FBR. All agree that we need to adopt economic policies aimed at rapid growth and investment. In the last many columns, it was emphasised that our top most priority should be sustainable growth and prosperity for all—taxes will automatically increase but collecting oppressive taxes in an ailing economy can lead to further deterioration. Every political party promises rapid industrial growth as its main agenda on paper, but when in power fails to do so. Many say the same is the case with PTI. It is too early to say as PTI has yet not even completed 365 days in power. 

The biggest challenge before PTI government is 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 waivers, concessions, exemptions, amnesties and immunities for the rich and mighty.

The provincial governments can also raise substantial revenues by levying taxes on the rich absentee landlords. They should also impose transactional taxes on speculative dealings in real estate—look at the quantum of transfer fee earned by DHA alone—and expenditure tax on luxury consumption (people are paying millions to five star hotels for social events). They can generate adequate funds if these tax measures are introduced. The real tax potential of Pakistan—a cursory look at undeclared income/wealth would prove it—is not less than Rs. 8 trillion. If we manage to collect tax revenue of even Rs. 8 trillion, our reliance on domestic and foreign loans can decrease significantly and diminish after few years provided we achieve growth rate of at least 7% for 10 years.

Only through sustainable growth rate of 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. We need radical changes, namely, more tax from the rich, reduction in the exorbitant sales tax rate (it should be 8% across the board), bringing corporate tax rate to 20%, and introducing equitable tax base, simpler and fairer tax procedures.

We are all aware about massive sales tax evasion coupled with under-reporting and non-reporting of incomes in Pakistan. The challenge is how to bridge the tax gap of billions of rupees—it is 80% according to an official study whereas independent analysts say it is more than 100%. The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System (TIS), which is capable of recording, storing and cross-matching all inflows and outflows.

For checking massive leakage in revenues, all in-bound and out-bound containers should be scanned/x-rayed. At big retail outlets cash registers with sealed memory should be provided as state property with surveillance with CCTV network and any tempering should be punishable by summary trial. CCTV monitoring should be made mandatory at big factories, restaurants, waiting rooms of leading doctors, lawyers and other professionals.

There should be tax incentives for reporting purchase to FBR—at least 5% as refund of the amount paid as sales tax. The procedure for claiming refund should be simple, i.e. payer should email evidence to the Central Tax and Refund Depository, which authorises refund directly to the credit card/bank account used after verification of genuineness of the invoice (by checking sellers’ registration number). In this scheme, the people may choose not to claim full credit of sales tax paid since they might not be able to justify the sources of their expenses. For broadening of tax base, the government can announce immunity for 3 years from scrutiny of expenses declared through sales tax invoices alone—it would go a long way to document the economy yielding more and more revenues in the coming years under income tax regime.

The above scheme would encourage people to obtain sales invoice for each and every transaction, which is presently not being insisted upon. If buyers are given incentive, they will insist on invoice and the government without expending any money or making extra efforts would be able to substantially expand the tax net. Such schemes were successfully implemented in Taiwan, Turkey and Venezuela.

In Pakistan’s peculiar milieu, innovative measures would have to be employed to restructure the tax system and restore public confidence in tax officials. A State that has miserably failed to protect the life and property of the citizens lacks moral authority to collect taxes. Thus, even a good tax system will not work unless the prevalent situation—apathy of the elites in ignoring the masses—is not changed.

The Parliament, first of all, should introduce Taxpayers’ Bill of Rights assuring that money collected from citizens would be spent prudently on their welfare and not for the benefit of a few. Secondly, there should be taxation of all incomes irrespective of their source (agricultural or non-agricultural). Thirdly, broad-based and harmonised sales tax (HST), covering all goods and services, at a low rate of 8% should be introduced and implemented.

FBR should be made an autonomous and efficient body insulated from external political, financial and administrative pressures. The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts in the field and implement it after securing consensus in the Parliament. 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.

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The writers, Advocates and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).