Huzaima Bukhari & Dr. Ikramul Haq
The dismal share of income tax in overall collection of taxes during the last many decades testifies to the lack of judicious balance between direct and indirect taxes, resulting in declining tax-to-GDP ratio, huge budgetary gap, unsustainable debt burden resulting into rising debt servicing, and above all pushing millions of Pakistanis below the poverty line. The non-collection of income tax from the rich is the root cause of many distortions in our tax system. Nearly 75% share of indirect taxes in overall collection of Federal Board of Revenue (FBR) proves beyond any doubt that the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified.
The figures provided in FBR Year Book 2019-20 confirm, overwhelming reliance on indirect taxation [even under the garb of income taxation through presumptive tax regime on a number of transactions] without evaluating its impact on economy and life of the poor masses. It should be a serious cause for concern for the Prime Minister who has been talking about the Chinese model for alleviation of poverty. It is well-established that indirect taxation under different withholding tax provisions is totally ignored. The actual share of direct taxes in total tax collection for the last 10 years is not more than 25%, contrary to claim of 38% by FBR in fiscal year (FY) 2019-20 and for the two immediately preceding years. In FY 2013-14, it was 40%—the same was the case for FY 2015-16 and 2016-17.
The above figures show stagnation in direct tax to GDP ratio during the three years of the coalition government of the Pakistan Tehreek-i-Insaf (PTI) though it came into power on the promise of providing justice that in the tax context means more direct tax collection from the rich and lower rate of indirect taxes to stabilise prices, especially in case of eatables. Food inflation remains high and prices of imported wheat and sugar are beyond the reach of the majority of 60 million chronic poor. Amid these realities, the PTI government, especially the Prime Minister and Finance Minister are jubilant over exceeding of target by FBR, without analysing the composition of direct and indirect taxes.
Due to extraordinary surge in imports, contribution of POL products alone stood at more than 40%, resulting in higher tax collection. Adding insult to injury, taxes collected at source on goods, contracts and supplies and making them minimum (in fact final discharge) is unconstitutional as this can be levied in lieu of and not in addition to income taxation as held by Supreme Court of Pakistan in Elahi Cotton Mills Ltd. and others v. Federation of Pakistan through Secretary Finance, Islamabad [(1997) 76 TAX 5 (S.C. Pak)]. In substance, these are indirect levies and to the extent of taxation of services on gross receipt basis amounts to encroachment on the rights of provinces as decided in Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.)].
Not only is there an acute imbalance in direct and indirect taxes having pro-rich and anti-poor bias, there is a huge gap in collection of income tax. According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on June 30, 2021 was 184 million (84.16% teledensity), out of which 100 million were 3G/4G subscribers (45.61% penetration), 2 million basic telephony users (1.13 teledensity) and 103 million broadband subscribers (46.90% penetration). Not less than 103 million cell users (many having more than one number) paid advance/adjustable income tax of 12.5% (reduced to 10% from July 1, 2021). About 80 million poorest of the poor having none or below taxable income, were subjected to income taxation. The gap in income tax filers alone is over 10 million. Income tax filers appearing on Active Taxpayers List (ATL) were 2,792,446 as on July 12, 2021 whereas majority filed nil or below taxable return.
In FY 2020-21 FBR collected only Rs 1732 billion as income tax showing a shrinking share of direct taxes in total collection of Rs 4764 billion that is merely 3.6% of GDP. It could have been 7% of GDP alone if agricultural income tax from the rich and mighty absentee landlords was collected on their actual incomes and collection by FBR was exclusive of monstrous tax expenditure of Rs. 2.3 trillion in FY 2018-19 and 2019-20. The present Chairman FBR has rightly asked provinces to join hands to plug evasion of agricultural income tax by the rich landlords and his efforts must be supported.
Similarly, in sales tax, federal excise and custom duties, due to rampant corruption and inefficiencies, the total collection is much below the actual potential. In FY 2020-21, FBR collected Rs.1990 billion under the head sales tax, Rs 277 billion under federal excise duty and Rs. 765 billion under custom duties. Total indirect collection of Rs 3032 billion was pathetically low.
It should have been at least Rs 5000 billion. The total tax collection at national level in FY 2020-21 was Rs. 5272 billion whereas all the provinces together contributed only 1.1 percent of the GDP and share of agricultural income tax was as low as 0.06 percent of GDP. The total current expenditures (both federal and provincial consolidated) were Rs. 10400 billion that is 22% of GDP. A country having tax-to-GDP ratio of 11% incurred cost of debt servicing of 12% GDP alone in FY 2021. This exposes its national security vulnerability and even bulk of defence expenditure was through borrowed funds. In these circumstances, can we continue with huge tax expenditure for the miltro-judicial-civil complex and their pensions met from further borrowing—both internal and external?
If existing tax gap is bridged, our revenue collection can reach Rs. 10 trillion (direct taxes Rs. 7 trillion and indirect Rs. 3 trillion) which would change the entire fiscal scene. We would have enough money for current expenditure, development and public welfare outlays—government would be able to retire debts in just a few years and we can easily become a self-reliant economy. However, this dream for Pakistan can never be realised unless the mighty sections of society are taxed according to their actual ability to pay and tax policy is used as a tool for rapid industrialization and creation of job opportunities.
The present tax policies are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The ability-to-pay principle is regarded as the most equitable and just method of taxation and emphasized upon primarily for its redistributive role. In Pakistan, our rulers have completely deviated from this principle, which is in fact, a constitutional obligation of the government. The existing tax system protects the rich and exploitative elements that have complete monopoly over economic resources. There is no political will at national level to tax the privileged classes. There is need to tax all judiciously and ensure that direct taxes are increased to help the country to come out of fiscal mess and elitism.
The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE).