Dr. Ikramul Haq
Undoubtedly, Pakistan is presently facing the worst multidimensional economic crisis of its history. From serious dollar crunch to monstrous debt burden, historic high inflation to exorbitant discount rate, widening fiscal deficit to unsustainable debt servicing, vulnerabilities on external payment front to unjust import restrictions, rising unemployment and poverty to growth retardation—all micro and macro indicators in red suggest the urgent need for a crisis management to come out of the prevailing mess. The key area for salvation remains prudent fiscal management.
For years, Pakistan has become a target of severe criticism at home and abroad, by donors and lenders, for not collecting taxes due, especially from the rich and mighty. It is an incontrovertible reality that both the Centre and provinces are not collecting taxes diligently. The contribution of provinces in overall tax collection is pathetically low.
During the current fiscal year (2022-23), the Federal Board of Revenue (FBR) in the first seven months collected Rs. 3965 billion against the assigned annual target of Rs. 7470 billion—there is a fear of shortfall of at least Rs.250 billion.
FBR is under pressure from the International Monetary Fund (IMF) to levy more oppressive, indirect taxes to meet the agreed ratio after inflated GDP due to massive devaluation of rupee—a recipe for disaster and for further accentuating stagflation.
Pakistan’s tax potential at federal level is not less than Rs. 12 trillion and at national level Rs. 16 trillion. There are 10 million individuals having annual taxable income of Rs 1.5 million (http://data.worldbank.org/country/pakistan), total income tax collection from them alone at the prevalent tax rates comes to Rs. 3750 billion. Income tax collection can be Rs. 7 trillion provided all exemptions are withdrawn and the entire undocumented economy is brought into tax net.
Harmonized sales tax (HST) at 10% has potential of Rs. 6 trillion provided all kinds of taxes on goods and services, presently levied through federal and provincial assemblies, are merged and collected through an efficient national tax agency.
Customs and federal excise have potential of Rs. 3 trillion.
Provinces can collect Rs. 4 trillion if agricultural income tax alone is properly collected.
The existing tax system encourages parallel economy. Thus, reforming it is nothing but a fallacy. Patchwork is an exercise in futility—no matter how many tax reform commissions or committees are formed; the result would be curing the incurable. The remedy lies in a paradigm shift in tax policy and dismantling of the existing tax apparatus, and its replacement with a lean and automated agency manned by professionals.
The following measures at federal and provincial levels can increase the tax-to-GDP ratio from the present 9.5 percent to 16 percent:
- Bridging of tax gap through effective enforcement & voluntary compliance
- Withdrawal of all concessionary Statutory Regulatory Orders (SROs)
- Substantial property tax on the rich
- Presumptive agricultural income tax of Rs. 25,000 per acre on irrigated agricultural holdings above 25 acres and Rs. 12,000 per acre on unirrigated holdings above 50 acres
- A capital gains tax at normal rate on transfer of all moveable and immovable assets.
- Imposition of sales tax on all kinds of goods and services.
Prudent and effective fiscal management and accountability alone can help Pakistan to effectively overcome fiscal deficit. Once fiscal space is created by good governance, the government can focus on providing basic amenities like clean and safe drinking water, health and education, transport and housing to the people.
Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.
Amending of tax codes each year through Finance Acts and in between, by way of statutory regulation orders (SROs) is not serving any useful purpose—these are not solutions for improving tax administration. In fact, taxation through executive orders is unconstitutional in view of Article 77 read with Article 162 of the Constitution of Pakistan. Through these SROs, the government bypasses the Parliament and commits open violation of the dictum of Supreme Court in the case ofEngineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak)that says:
“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18, Para 20]
An effective fiscal management lies in converting FBR into an autonomous body run by an independent Board of Directors comprising professionals not answerable to the headquarters of the ruling party.
FBR must be insulated from all kinds of political influences. Enforcement of tax laws without any fear or favour should be the first and top most priority of the government if it wants to rescue the country from the present economic mess coupled with expending taxes for the benefit of masses and desisting from wasting funds on white elephants—monstrous public sector enterprises sleazing with inefficiency and corruption—so that public can see that the elected government is a responsible one and cares for them. This would promote tax culture and restore people’s faith in the tax system. Voluntary tax compliance can be improved only through a strong deterrent system where the compliant taxpayers are respected and rewarded, while evaders are exposed and punished under the law.
The writer, Advocate Supreme Court, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), a member Advisory Board and Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE)