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Reciprocity of taxes

Dr. Ikramul Haq

Time and again, not only the ordinary Pakistanis but politicians as well complain that prevalent tax system is unjust and that the governments—federal and provincial—are not collecting the due taxes. Since assuming the office of Prime Minister, Imran Khan has been stressing that our survival as viable state depends on accelerating economic development and collecting taxes fairly and justly. On April 18, 2019, the star player of Imran Khan, Asad Umar, was asked to leave finance and take over portfolio of energy, which he declined. In past eight months, the Government of Pakistan Tehreek-i-Insaf (PTI) has failed to acknowledge the principle of reciprocity—how it is going to give the citizens better facilities of education, health, housing, transport, clean drinking water, sewerage etc in return for taxes. 

Our system extends 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 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.

The dilemma of Pakistan 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 either raise revenues of Rs. 8 trillion or make dams, improve infra structure and also provide social services to the needy from this pool.

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. However, the PTI Government following in the footsteps of its predecessors is offering an amnesty scheme—the mother of all U-turns. The important questions are: Will after amnesty, importers stop under-invoicing and mis-declarations? Will there be correct reporting of sales and due payment of sales tax? Will people start declaring correct incomes and not avoid/evade income tax through under-reporting and/or non-reporting and claiming inflated expenses?

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 former finance minister, Asad Umar, in the Finance Supplementary (Second Amendment) Bill 2019 and earlier in the Finance Supplementary (Amendment) Bill 2018 did not take any such step. Rather, he followed the traditional approach, and failed to fulfill PTI’s election promises of fair taxation.  

The PTI Government till today has not given any 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. PTI is ready to take the bitter prescriptions of IMF, slowing growth and making the lives of ordinary Pakistanis miserable through oppressive taxes and costly utilities, but not inclined to undertake reforms suggested in the above paper.

Reciprocity demands that PTI must table in Parliament 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 uniform taxation of all incomes irrespective of their source (agricultural or non-agricultural).

The provincial governments should also enhance revenues by levying taxes on the rich absentee landlords. They should also impose transactional tax 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 at federal level and Rs 2 trillion at provincial level. If we manage to collect tax revenue of even Rs. 10 trillion, our reliance on domestic and foreign loans will decrease significantly and diminish after few years provided we achieve sustainable growth rate of at least 7%.

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. 8 trillion at the federal and Rs. 2 trillion at provincial levels.

It is high time that PTI Government imposes 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 not been prudently utilising funds received as share from National Finance Commission (NFC) Award. They have also shown apathy to generate necessary funds by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich people.

The following two measures alone can generate extra revenue of Rs.500 billion at federal level—out of which provinces will receive 57.5% as per existing NFC Award:

  1. Excess profit tax on cement, sugar, flour mills, banking and telecom sectors would generate extra tax of Rs. 500-600 billion. All persons having income exceeding Rs. 5 million should also be asked to pay 10% extra surcharge for helping the poor. It could generate Rs. 100-120 billion.
  2. One-time de-logging litigation scheme: Taxpayers be asked to pay 20% 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. 800 billion that the federal government urgently 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—mother of all ills.


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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