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Dr. Ikramul Haq
“Simplify taxes, reduce the cost of excessive documentation, open the economy for higher growth and employment, taxes will then increase….Not only is our tax policy not based on conceptual clarity, it is also being changed continuously to meet unrealistic targets. The tax rates are high and keep changing several times a year through exemptions and SROs…The uncertainty due to continuous tax changes are a huge drag on investment which as a percentage of GDP is already among the lowest in the world”—PIDE Policy Viewpoint [16:2020], Doing Taxes Better: Simplify, Open & Grow Economy
Pakistan Institute of Development Economic (PIDE) in above-cited Policy Paper, prepared by Muhammad Nasir, Nasreen Faraz and Saba Anwar, has highlighted various negative aspects of our tax policy based on research papers and presentations discussed at a high-level conference, ‘Doing Taxes Better: Shifting the Paradigm of Tax Policy and Administration’. The focus of conference was “on issues in tax and tariff policies, along with examining the role of automation and documentation in promoting growth and competitiveness”. It was attended by taxpayers, tax practitioners, administrators, academicians, researchers, and representatives of International Monetary Fund and World Bank.
The recording of conference, papers/presentations read/made can be seen at the website of PIDE at: https://pide.org.pk/index.php?option=com_content&view=article&id=690.
The Policy Paper is published at very appropriate time when the challenges faced in the wake of economic toll arising from Covid-19 pandemic, offer an opportunity to the government to correct the direction of its tax policy in the forthcoming budget for fiscal year 2020-21, in the light of PIDE’s recommendations, and a study, Towards Flat, Low-rate, Broad and Predictable Taxes [Policy Research Institute of Market Economy (PRIME), 2016].
The Policy Paper aptly notes: “Taxes have been a cornerstone of IMF-led adjustment programs for Pakistan for over four decades. During this period, long term growth and productivity have declined while tax policy has become more contentious and fragmented ….”
The tax policies of federal and provincial governments for decades have been fleecing the citizens by imposing exorbitant taxes/duties and resorting to ever-increasing withholding provisions imposing burden even on those not chargeable to tax. Successive federal governments have been extending frequent amnesties, asset-whitening schemes, waivers, immunities and exemptions to tax evaders and the mighty sections of society.
Policy Paper pertinently mentions: “Not only is the tax system complex, the cost of compliance is high. Taxpayers are also discriminated on the basis of being filer and non-filer. Higher taxes, narrow base, differential treatments, and exemptions become hurdles in achieving growth and employment and block flow of revenue”. Despite these, a narrative is built by the government, foreign lenders/donors and TV anchors that Pakistanis are tax cheats. It was refuted with facts and figures in Covid-19, the poor and tax extortion, Daily Times, April 26, 2020, and in many earlier columns. FBR was asked frequently by sane voices, e.g. Nadeem Ul Haq, ‘Take policy back from the ‘Economic Hitman’, February 13, 2017, to stop malicious propaganda against the people that they are tax cheat. Policy Paper has raised this issue:
“The gathering challenged the prevailing official narrative of tax-cheating nation. In the current withholding tax regime, every mobile phone user (i.e. 90% of population) is paying income tax in withholding form. This narrative appears to be unique to Pakistan. Countries such as Indonesia with a lower tax-to-GDP ratio do not accuse its citizens of tax cheating. It is strange indeed that even as FATF and international community are breathing down our neck, our officials are claiming that their policy and administration is not at fault; it is the people who are cheats”.
It is FBR’s failure to force those chargeable to tax to file income tax returns or get registered under sales tax, for which remedy is not penalising those falling outside the ambit of chargeability, as pertinently observed in Policy Paper: “…Withholding taxes may provide an easy source of collection…they make the tax system incredibly complex for the taxpayers… This also questions the role of FBR as a tax collecting authority”.
FBR should be restructured/automated to become efficient, rather than overburdening the already over-taxed people of Pakistan. It must be remembered by all that non-collection of tax where due is as detestable as its collection, where it is not due, and this is what FBR has been doing since decades through numerous withholding tax provisions. “There are 66 withholding taxes which furnish almost 3/4th of direct tax revenues… 70% of tax revenue is collected through withholding tax agents such as banks, utilities, telecom etc. placing the burden of collection on these businesses and increasing their costs” [Shahid Kardar & Hafeez Pasha, “Tax reform agenda” (2020)].
Existing tax policy is unproductive: higher taxes yielding low revenues and compliance operationally time-consuming and complex. It is not taxing the people according to their ability to pay. 70% collection is from indirect taxes taking a much larger portion of meagre income of low-income-earners but negligible part of income of ultra-rich. It is not following established good principles, highlighted by Policy Paper:
“Transactions must be allowed to grow while collecting taxes. All taxes will create dead weight losses and market distortions. Good policy must seek to minimize these.
A tax effort that kills transactions is self-defeating. More transactions mean higher economic growth and employment, which in turn will generate sustainable streams of revenues.
Fairness: No one group should be seen to be bearing more taxes than others. This does not mean redistribution cannot be achieved through tax policy, but it must have an explicit and well thought out plan.
Certainty: Since taxes distort prices and market activity, there must be certainty in policy for people to build businesses. Frequent and arbitrary taxes are harmful for growth.
Efficiency: The process of collection should not involve further losses and transaction costs on economic agents. One inefficient manner in which government taxes people is through the use of excessive regulation such as curbing economic activity or state ownership of market resources and activities.
Convenience: Excessive documentation requirements also add to the tax burden to hurt growth and employment.Taxes and their administration should not be onerous especially in the daily activities of people where the bulk of the economy lies”.
Devising an efficient tax policy for revival of economy badly hit by Covid-19 pandemic/lockdown as well as world over recession/depression, and moving towards growth requires an analytical study of all the irritants in our tax policy, codes, procedures and implementation processes. The main irritants—both at federal and provincial levels—have been highlighted in PIDE’s Policy Paper and Budget 2020 amid Covid-19 Crisis: Need for Paradigm Shift [PRIME Institute, 2020]. It is time that the government adopts recommendations given by PIDE and PRIME. We need to end the anti-business, anti-growth and anti-people tax policy and safeguard businesses from closure in the existing exceptional circumstances. PIDE & PRIME have done a remarkable job and the government in the coming budget must remove all the maladies identified and undertake holistic reforms aimed at incentivising businesses to survive/revive and ultimately achieve growth that alone can enhance taxes.
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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).