Reciprocity of taxes

Dr. Ikramul Haq

People of Pakistan, especially with low and fixed incomes, have once again been burdened with exorbitant indirect taxes amidst hyperinflation and rising unemployment through mini-budget presented before the Parliament on February 15, 2023 by the alliance government of Pakistan Democratic Movement (PDM) as part of preconditions imposed for finalization of delayed Ninth Review by International Monetary Fund (IMF).

It is highly lamentable that when economically marginalized segments of society are facing extreme hardships and finding it even difficult to meet both ends, through a notification by the Federal Board of Revenue (FBR), rate of sales tax has been increased from 17% to 18% with effect from February 14, 2023. It is in utter violation of dictum laid down by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) that taxation through executive orders is unconstitutional in view of Article 77 read with Article 162 of the Constitution.

The country is surviving on bailouts from IMF due to perpetual failure of the ruling elites that pay negligible taxes and squander billions as wasteful expenditures. Our successive governments—civil and military alike—have failed to acknowledge the principle of reciprocity of taxes—how to provide citizens with better facilities of education, health, housing, transport, clean drinking water, sewerage etc in return for taxes collected from them. 

People say that paying taxes is unjustified when the State is indifferent and elites openly show apathy towards their fundamental needs. Not less than 25 million children are out of school in Pakistan in violation of Article 25A of the Constitution—see detailed judgement of Supreme Court 2014 SCMR 396 re Petition regarding miserable conditions of schools.

Rich and mighty, with the help of crafty tax advisers, easily avoid taxes exploiting weak enforcement and lacunas in laws. Admittedly, non-reporting and under-reporting of incomes and evasion of sales tax/customs/federal excise duty is rampant in Pakistan but it must be seen in the context of giving unprecedented tax concessions, immunities and amnesties by successive governments, military and civilian alike.

The governments never bother to crack down on untaxed money. On the contrary, the ruling elites have been appeasing tax cheats by extending generous tax amnesties and whitening schemes from time to time. All political parties must ponder about it before reforming the tax system that for them and donors merely means more taxes!

If we bring even five million ultra-rich into the tax net forcing them to pay 10% tax on their colossal incomes, impose 8% sales tax across the board, there will be no fiscal deficit. Simultaneously we must bring much-needed reforms in civil services, tackle tax evasion through asset-seizure legislation and counter rampant corruption in public sector by not throwing some officials out of job but making the system workable—the staff should be paid justly with strong accountability.

The government officials should get composite pay package, based on market wages, as is the case in private sector like banks, arranging their own residences and conveyance. They must live among the masses and not in fortified areas. Their alienation from the common people, whom they are supposed to serve, and quest to preserve elitist structures are the root causes of dissatisfaction of citizens with the system.

Pakistan is capable of substantially reducing or even eliminating its fiscal deficit and debt burden in a couple of years provided that a comprehensive and well-designed work plan based on multi-dimensional strategy is prepared and implemented for resource mobilisation and debt retirement coupled with ending all tax-free benefits to militro-judicial-civil complex by monetizing the same. The huge and expensive properties occupied by them should be converted into income-yielding assets by leasing them out through public auction.

Our system extends extraordinary tax-free perquisites/benefits to the powerful segments of society, while derisory allocations are made for health, education and other social services to mitigate sufferings of the poor that are increasing day by day. Millions are being pushed to become what Franz Fanon called, ‘The Wretched of the Earth’, courtesy pro-rich policies leading to wealth accumulation in a few hands.

Pakistan’s dilemma is cronyism, greed and corruption on the part of predatory 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 revenues of Rs. 16 trillion, construct dams, improve infrastructure as well as provide social services to the needy from this pool.

For collecting Rs. 16 trillion, we need to restructure the existing tax machinery, withdraw concessions/immunities and crackdown on tax evaders and plunderers of national wealth. The biggest challenge before any government is to dismantle the elitist structures that fleece the poor only to 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.

For optimizing revenues, we need one autonomous and efficient tax agency, insulated from external 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. 12 trillion at the federal and Rs. 4 trillion at provincial levels.

The following two measures alone can generate extra revenue of Rs.800 billion at federal level in the next four months:

1. Excess profit tax of 30%on sectors having windfall gains would generate extra tax of Rs. 500 billion. All persons having income exceeding Rs. 150 million should also be asked to pay 10% extra surcharge for helping the poor. It can generate Rs. 200 billion.
2. One-time de-logging litigation scheme: Taxpayers be incentivised to pay 30% tax arrears between March 1, 2023 to June 30, 2023 with pending cases before appellate authorities and demands 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. Such a scheme with time limitation up to 30 June 2023 would not only generate enormous revenues, not less than Rs. 100 billion, but would also help in reducing workload of Tribunals and High Courts.

The above two measures alone can bring extra funds of Rs. 800 billion that the federal government urgently requires to keep fiscal deficit within safe limits. These measures will not burden the common people, as incidence of tax would not fall on them. The enhancement of sales tax, as done by the government, becomes beneficial for those not registered with FBR—they collect it from people but do not deposit the same in the government treasury. The federal government should stop looking for more indirect taxes, borrowed money and take immediate steps for resource mobilisation to overcome fiscal deficit—mother of all ills.

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)