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Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Author Yuval Noah Harari in his book ‘Homo Deus’ writes, “Many thinkers and prophets concluded that famine, plague, and war must be an integral part of God’s cosmic plan or of our imperfect nature, and nothing short of the end of time would free us from them”. However, for people living in third-world countries like Pakistan, it seems that exuberant and regressive taxation is also a permanent feature that gets worse with the passage of time.
The incompetence and administrative collapse fails to generate sufficient revenue for the state but instead of adding new sectors and potential taxpayers, the government has found an easy solution to burden the existing taxpayers with a tsunami of taxes and duties. Inflation is already on the rise with people finding it difficult to make ends meet. For its requirements, the government is heavily dependent on local and global lenders. Though lender facilitates the government for its financial needs in return, they make sure that their agreed programmes are implemented inviting more taxes. Though they secure their part of loans, however, burden the people with heavy taxes and inflation. In this entire process, no one seems concerned about the less-privileged, and the policymakers chain-saw them with a new flurry of taxes to appease and comply with lenders’ demands.
The most lamentable amendment under the Income Tax Ordinance, 2001 through the Finance (Supplementary) Act, 2022 is the enhancement of advance/adjustable income tax on prepaid and post-paid mobiles and broadband services. According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on December 31, 2021 was 189 million (85.94% teledensity). Out of these, 108 million were 3G/4G subscribers (49.04% penetration), 2 million basic telephony users (1.13 teledensity), and 110 million broadband subscribers (49.94% penetration). Not less than 100 million unique mobile users (many have more than one SIMs) are paying advance/adjustable income tax of 15 percent with effect from January 16, 2022. It was reduced from 12.5 percent to 10 percent with effect from July 1, 2021, remaining effective only for 6 months and 15 days. The promise was to reduce to 8 percent in the tax year 2022 for internet services.
The above shows that the entire taxable population and even those having no income or income below the taxable limit are paying advance and adjustable income tax at source as mobile users. If all file income tax returns, there will be a refund payable to at least 80 million having no income or income below the taxable limit though the cost to claim would be much higher than what is withheld at source by telecom companies. In the face of this reality, Pakistanis are called tax cheat by the lenders/donors as well as media persons.
The concluding statement of the Sixth Review under the Extended Fund Facility by IMF confirms that in agreeing to lender’s conditions, the interests of a common man are always ignored. The coalition government of Pakistan Tehreek-i-Insaf (PTI) agreed with International Monetary Fund (IMF) to introduce a package of fiscal measures to reduce the primary deficit through high-quality revenue measures to make the tax system simpler and fairer including the adoption of reforms to the General Sales Tax (GST) system. Their indecisiveness to implicate evaders and to incentivise taxpayers has landed them in a constant struggle to find a coherent and settled policy to deal with taxation challenges.
Revenue collection has never been easy, a story marked by shorter sprints of growth followed by failures and deteriorating tax-to-GDP ratio. Now recently, in response to strict conditions laid down by IMF and to get hold of the balance tranche from the US$ 6 billion IMF Extended Fund Facility (EFF), the Finance (Supplementary) Act, 2022, passed by the National Assembly on January 13, 2022, received accent of the President on January 15, 2022. To address challenges associated with a critical and fragile economy, the newly introduced law focuses on the withdrawal of many exemptions, especially in the Sales Tax Act, 1990. Through these amendments, the government estimates additional revenue generation of approximately Rs.343 billion. This figure was presented by Finance Minister after admitting that IMF demanded imposition of around Rs. 700 billion, however, the government turned it down by half. This open confession about making policies on the behest of global lenders is unfortunate leading to compromising our sovereignty.
Although the technological landscape of the world is evolving at a rapid pace as a regressive measure, the advance tax applicable for subscribers of internet, mobile telephone, and prepaid internet or telephone card has been increased from 10 percent to 15 percent while import of personal computers, laptops, and notebooks would be chargeable to sales tax at the rate of 5 percent. On the one hand, the government is working to facilitate environment-friendly initiatives, however, import and local supply of hybrid electric vehicles up to 1800cc was earlier chargeable at the rate of 8.5 percent and 1801cc to 2500cc 12.75 percent now the same is enhanced to 12.5 percent and 17 percent respectively.
As a desperate revenue-generating measure, the government has slapped 17 percent sales tax on goods supplied to or even donated to hospitals run by the federal or provincial governments. The raw material for the pharma industry, import of plant, machinery, and equipment for power projects including renewable energy projects, machinery for manufacturing local mobile phones, import of all goods received, in the event of a natural disaster are also now subject to 17 percent general sales tax rate. The Finance (Supplementary) Act, 2022 will badly impact the living standards of the middle class.
Ironically, The PTI in its Election Manifesto promised healthcare for all but has imposed higher taxes on supplies of goods to hospitals and pharmaceutical raw material that will make access to healthcare facilities difficult for the common man. Though the government is offering health facilities through Sehat Sahulat Card [Health Facilitation Card], but it does not cover all diseases, therefore taxing supplies of the hospitals will negatively impact the ranking of social indicators in the country.
PTI also claimed in its Election Manifesto that it would encourage value-added exports in the agriculture sector. However, due to their ill-directed policies over the last three years, Pakistan being an agricultural country has failed to produce enough wheat and sugar to meet our needs. However, the PTI Government allowed the import of wheat, which the media reported as the most expensive wheat import in the history of Pakistan. To overcome this issue, the government was supposed to offer relief to this sector. However, the government in the current mini-budget imposed a 17 percent tax on agricultural implements which will adversely affect the growth of this sector. Similarly, the issue of fertilizer is badly impacting farmers. On one hand, the fertilizers are beyond access for small farmers because of increased prices, and on the other, they are not easily available. This will further deteriorate the situation and we might end up importing wheat, sugar, cotton, and other agricultural products.
According to recently released statistics by the State Bank of Pakistan for the first half of this financial year, the current account deficit has amounted to US$ 9 billion and there is a risk that if global commodity prices maintained the current momentum, the deficit can further widen, and cracks can emerge to cast doubt on the financial soundness of the economy. It seems that the government and its functionaries are disconnected from ground realities. They are not even aware of what the common man is going through with the curse of inflation taking a heavy toll. False promises made by this government on assuming office are falling like a house of cards. From individuals to business entrepreneurs, all are adversely impacted by the mini-budget.
In its Election Manifesto, PTI also made tall claims about economic growth promising to make Pakistan business-friendly. It also claimed to revive manufacturing and facilitate the rapid growth of small and medium enterprises (SMEs). However, since it took over the power in August 2018, Pakistan’s GDP growth has declined from US$ 315 billion to US$ 280 billion. Moreover, there is no clear policy of the current government regarding the China-Pakistan Economic Corridor (CPEC). An interesting fact is that the government notified Special Economic Zones (SEZs) but these are yet to become operational. It was an ideal time for the government to offer incentives for SMEs to attract investment in those SEZs so that targets of growth could be achieved organically. However, withdrawing exemption on machinery and equipment for SEZs will enhance the cost of setting up new industries creating hurdles in reviving the manufacturing sector.
The inefficiency and incompetence of the PTI Government are visible everywhere. Instead of improving governance and focusing on broadening the tax base through new avenues, it preferred to opt for easier ways of collecting revenue by revising tax brackets twice or thrice a year, shaking the confidence of investors and creating survival challenges for existing stakeholders. Rather than burdening the already suppressed sectors and taxpayers, the PTI Government in its remaining two budgets needs to get its act together and should focus on exploring new taxation avenues so that the burden of indirect taxes on the common man can be lowered.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members of Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions