Restructuring the tax system

Huzaima Bukhari & Dr. Ikramul Haq

“If we realise that the FBR cannot be fixed, we will create a new FBR. This is because Pakistan’s survival is linked to it. It’s not about our liking or disliking: if our tax collection authority does not function properly, it could lead to a security risk. No nation that relies on loans can maintain its pride and independence“—address of Prime Minister to the 11th All-Pakistan Chambers President Conference, held in Islamabad on March 7, 2019

“The FBR contributes around 80% of the total revenues of the federal government; therefore, any miscalculation or misstargeting can severely cripple the budget, not just of the federal but the provincial governments as well”—Budget 2020-21: Highlights & Commentary, Pakistan Institute of Development Economic (PIDE)

For implementing meaningful tax reforms, the PTI Government must concentrate on fundamental structural reforms as discussed in recent studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economyand Growth inclusive tax policy: A reform proposal.

The results of prescriptions by World Bank(WB) and International Monetary Fund (IMF) to fix the ailing economy and anti-growth tax system are discussed in detail in Tax Reforms in Pakistan: Historic & Critical View, recently published by PIDE (available  free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf.

There cannot be two opinions about a paradigm shift in our tax policy and administration. We need to end the VIP culture, tax-free perks and perquisites and tax expenditure of around 25% of total collection. Low-rate taxes on broad-base with effective enforcement system are suggested in Towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020). It is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/. It needs nation-wide debate and considered as “proposal” sought by FBR. This alone can help in inducing investment, growth, productivity, efficiency and job creation. The main cause of our pathetic situation in all areas of governance is existence of inefficient, outdated and apathetic State institutions that deny with impunity the legitimate rights of people and treat them as subjects as in raj days.

After over 22 months of the above statement by Prime Minister, Imran Khan, telling the nation that that “reforming FBR is essential and until that is done, we [the state] will not be able to meet our expenses“, the things have changed for the worse. The government after removing the fourth head of FBR since coming in power on August 13, 2018, gave additional charge of Chairman and Secretary Revenue Division to Member Customs Policy, Mr. Muhammad Javed Ghani (grade-22 officer). He assumed the additional charge on July 7, 2020. It took over 6 months for the competent authority to make him full-time Chairman of FBR. He took charge of Chairman FBR on January 4, 2021 according to official gazette notification.  

According to a Press report: “….the decision to bring the chairman for hardly four months shows a lack of consistency in economic policymaking. The prime minister has changed five chairpersons of the FBR after assuming office”. Is this a desirable way to run FBR, what to speak of reforming or restructuring it? Many people keep on asking: How long will FBR remain a house in disorder just because of inaction on the part of government? In the wake of difficult days due to Covid-19 endemic, the officers of FBR, especially in the field, are working without required facilities, resources and even full strength of staff. For this state of affairs, the sole responsibility lies with the government. The officers working in FBR headquarter and in field formations deserve appreciation that despite all constraints and difficulties, they have given satisfactory results. It is strange that those performing well are deprived of what they deserve. On the other hand the inefficient, deadwood and black sheep within the organisation are not purged. This issue was raised in A detailed anatomy of FBR—I, Business Recorder, November 16, 2018 but till today no action has been taken. There is a long list of officers who have managed to enter into the mainstream Internal Revenue Service (IRS) seniority list through back door entries either by exploiting rules or through ill-interpreted court judgments. The IRS seniority list of officers can be divided into two broad categories: the Central Superior Service (CSS) officers, and the non-CSS officers. The non-CSS officers can be further divided into four sub-categories: the Inland Revenue Officers (IRO), the defunct Assistant Collectors directly hired by the Peoples Party Prime Minister in the 1990s, the auditors and the inspectors. It was highlighted in the above article:

“FBR’s IRS is perhaps the only bizarre organization that is said to have unjustly inducted non-CSS officers into the mainstream IRS officers’ seniority list. These non-CSS officers were inducted into FBR in BS-16 as Income Tax Officers (ITOs), later named as IROs. The IROs batch was promoted to BS-17 as Assistant Commissioners in just three years and their seniority was fixed between 29th Common Training Program (CTP) and 30th CTP officers. As a result they were promoted to next grades with the same speed as the CSS officers. Now the entire batch of IROs has been promoted to the senior positions of Additional Commissioners (BS-19) working all over the field formations in Pakistan. Now the entire IRO batch is part of mainstream IRS merit list ready for promotions to BS-20 in about two years. It is widely believed that between 2023 and 2030, most Chief Commissioners, Members and even Chairman could be from the non-CSS IRO cadre. This is the biggest compromise that the FBR has made as an organization towards human capital development”.  

The above needs immediate attention of Chairman FBR and cell of Prime Minister Office dealing with human resource management and reforming of FBR. The changing of chairman or other officers is not the solution. The real challenge is how to restructure and reconstruct the existing outdated and anti-growth tax system. It imposes undue incidence on the poor and middle-class people e.g. about 60 withholding provisions under income tax law alone! 17% sales tax (in fact 30% to 70% on many finished imported goods after levy of various taxes at source). It takes away larger portion of low-income groups compared to high-income groups. On the contrary, the rich and mighty enjoy tax-free perks and perquisites, exemptions and concessions on their colossal income/assets and are also offered generous asset-whitening and tax amnesties frequently.

On January 13, 2021, the FBR vide Letter C.No.4(72)IT-Budget/2015-6255-R, FBR said it is “currently engaged in the formulation of proposals for the Finance Bill 2021”. It further added: “In order to benefit from the collective wisdom of all the stake-holders for improvement of tax policy, proposals are invited for the upcoming Budget 2021-22”.

The remaining part of letter says as under:

2. Your input/suggestions in the following policy areas shall be highly appreciated:-

• Broadening of tax base for a wider participation in revenue generation efforts;
• Taxation of real Income on progressive basis;
• Phasing out of tax concessions and exemptions;
• Removal of tax distortions and anomalies;
• Facilitation of taxpayers and ease of doing business;
• Promoting equity in taxation by introducing measures where incidence of tax is higher on affluent classes. The areas identified above are just illustrative and not exhaustive.

The areas identified above are just illustrative and not exhaustive.

3.   It is requested that the proposals may be provided by 15^th February, 2021. The proposals may also be emailed in MS Word/Excel format on the following e-mail addresses and preferably on the format given below:

1. chief.itp@fbr.gov.pk
2. secv.itb(Wbr.qov.pk

Section/Clause/Rule	Proposed Amendment	Rationale	Revenue Impact
(1)	(2)	(3)	(4)

The above is a ritualistic exercise in futility. Every year after receiving proposals from officers, trade/professional bodies, tax bars, and other stakeholders, the Finance Bill only contains meaningless amendments in tax codes, imposing further obligations on citizens as withholding tax agents, with no policy shift and administrative reforms. For it, blame cannot be attributed to FBR. The successive governments have miserably failed to reform FBR to make it an efficient and people-friendly organisation.

The fundamental element of tax reforms is providing a simple tax system that is manned by an efficient and competent administration, which is nowhere visible in Pakistan. Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely altering tax laws or suggesting cosmetic changes here and there. Reforms can be successful only if comprehensive analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers’ behaviour, revenue needs of the country and many other allied aspects.

The PTI Government showed lack of political will to reduce exemptions, concessions, waivers and immunities to the State Oligarchy. Total tax expenditure was of Rs. 1.5 trillion in the just ended FY 2019-2020 as per own admission of FBR in Annex-II appended to Economic Survey 2019-20 [detail in Analysing ‘tax expenditure’, Business Recorder, June 26, 2020]. In fact, more exemptions and benefits have been given to the influential, whereas proudly claiming “no new tax” levied showing total apathy towards the weaker sections of society and small and medium enterprises (SMEs) facing the unbearable economic toll of Covid-19 outbreak/lockdown by reducing the incidence of exorbitant sales tax, withholding taxes and high cost of utilities and other oppressive levies like 12.5% advance income tax from all mobile subscribers. The latest data available on the website of Pakistan Telecommunication Authority (PTA) shows the total cellular subscribers as on December 31, 2020, 176 million, out of which 91 million are 3G/4G subscribers, 3 million basic telephony users and 93 million broadband subscribers. In the presence of such confiscatory taxes, Parliament gives tax amnesties, immunities and waivers to the rich, tax evaders and looters of national wealth or Presidential Ordinances of extending tax benefits are issued for the mighty developers and constructors. This practice should end now when all the businesses, big or small, are struggling to survive the disastrous consequences of second deadly wave of coronavirus endemic.

The Government of the Pakistan Tehreek-i-Insaf (PTI) for the current fiscal year (FY) 2020-21 fixed target of Rs. 4963 billion for FBR, amid continuous economic toll of Covid-19 endemic. Even according to then Adviser to Prime Minister on Finance and Revenue, Dr. Abdul Hafeez Shaikh (now Minister for six months for these portfolios), said “it is not achievable”! In a statement, he “advised the provinces not to make their budgets on the basis of proposed Rs. 4.963 trillion tax collection target fixed for FBR for fiscal year 2020-21” and added: “The provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and difference between performance, projections and reality”.

 The Annual Budget Statement containing estimated receipts and expenditure laid before the National Assembly of Pakistan for FY 2020-21 in terms of Article 80(1) of the Constitution gives revised estimate of FBR’s collection for the FY 2019-20 at Rs. 3908 billion against the original target of Rs. 5555 billion. Prior to Covid-19 outbreak, FBR was far behind the revised target of Rs. 5238 billion after first review of International Monetary Fund [IMF] under $6 billion Extended Fund Facility (EFF) programme. It was later revised to Rs. 4803 billion on the eve of incomplete second IMF review, held prior to Covid-19 pandemic, and after coronavirus outbreak, finally reduced to Rs. 3908 billion.

In Year Book for 2019-20 FBR exceeded the third-time revised target of Rs. 3908 billion by Rs. 88.7 billion, collecting net amount of Rs. 3997 billion—direct taxes (1523 billion), sales tax (Rs. 1597 billion), Federal Excise (250 billion) and Customs: 626 billion). The refunds paid were: direct taxes (68.6 billion), sales tax (92.6 billion), federal excise (nil) and customs (12.2 billion). FBR officials on September 2, 2020, before the National Assembly Standing Committee on Finance confessed that actual liability of income tax and sales tax refunds as on June 30, 2020 was Rs. 710 billion (sales tax Rs. 142 billion and income tax Rs. 568 billion). The international Monetary Fund (IMF) after its first review seeing that FBR was far behind the original target of Rs. 5555 billion, agreed to revise it to Rs. 5238 billion, then to Rs. 4803 billion on the eve of incomplete second review, held prior to Covid-19 endemic, and after coronavirus outbreak, finally to Rs. 3908 billion. If the admitted refunds payable are deducted from the total tax collection of FBR for fiscal year 2019-20, the net figure comes to Rs. 3287 billion or just 7.7% of GDP.

The blame for unpaid refunds cannot be attributed entirely to the coalition government of Pakistan Tehreek-i-Insaf (PTI). In FY 2019-20, FBR paid total refunds of Rs. 173 billion as against the previous year’s figure of 122 billion. An amount of Rs. 70 billion was paid in respect of long-outstanding refunds through technical supplementary grant (TSG). The government of Pakistan Muslim League (Nawaz) [PMLN] blocked/consumed bulk of these refunds. This confirms showing of inflated figures by PMLN. Interestingly, this non-disclosure took place when Pakistan was under US$ 6.4 billion Extended Fund Facility (EFF) programme of IMF and they never detected it, rather appreciated the then Finance Minister, Ishaq Dar, now a fugitive, of showing remarkable growth in FBR’s collection. The IMF gave 13 waivers to PMLN since the signing of programme in September 2013 and ending in August 2016 with IMF failing or ignoring over-reporting of FBR’s collection by blocking bona fide refunds and taking advances of billions. It is heartening to know that the present team of FBR is not resorting to such tactics.     

According to a Press release of FBR issued on January 10, 2021:

“Prime Minister Imran Khan was told Sunday that tax receipts had surpassed Rs 2205 billion during first six months of current fiscal, manifesting the fruition of government’s taxation reforms. Chairing a meeting to review the tax reforms, the Prime Minister was briefed that owing to tax reforms, a growth in number of taxpayers had been witnessed. Federal Minister Abdul Hafeez Shaikh, Shibli Faraz and Hammad Azhar, Advisor to PM Dr Ishrat Hussain, Special Assistant on Revenue Dr Waqar Masood, Chairman of Federal Board of Revenue Javed Ghani and relevant senior officers attended the meeting, a PM Office press release said.

It was told that the tax collection was being automated and taxpayers were being given incentives. The automation of the taxation system would enhance transparency and reduce corruption and tax evasion. The meeting was told that tax form had been made far easier for the small and medium enterprises by reducing its pages from five to one and entries from 200 to just 24. The Prime Minister was told that owing to the introduction of direct link between FBR’s system and company through Point of Sale (POS) System, the receipt of Sales Tax had also increased.

The Prime Minister appreciated the Federal Ministers, SAPM on Revenue and FBR Chairman for bringing about taxation reforms. He viewed that the taxpayers were in fact the benefactors for the country who deserved applause. Moreover, he also called for measures to introduce measures for encouragement of the taxpayers.

Earlier in a Press release issued on the first day of 2021, FBR claimed:

“Federal Board of Revenue (FBR) has released the provisional revenue collection figures for the first six months of current year. According to the provisional information, FBR has collected a net revenue of Rs.2204 billion, which is 99.7% of its six-monthly target of Rs.2210 for the current Fiscal Year from July to December and which showed a growth of 5% over Rs. 2101 billion which was collected during the same period last year. Income Tax collection for July to December stood at Rs. 816 billion. Similarly, collection of Sales Tax, Federal Excise Duty, Customs Duty remained at Rs. 915 billion, Rs. 127 billion and Rs. 336 billion respectively. Moreover, an additional Rs.10 billion has been collected from book adjustment. It is expected that revenue to be collected from book adjustment will increase in coming days.

For the month of December only, the total collected revenue stood at Rs. 508 billion, which was 97.7% of the target of Rs.520 billion and showed a growth of 8.3% against 469 billion collected in last December. There is an increase of Rs. 39 billion in the revenue collection of December 2019. This is the highest monthly growth during Jul-Dec period.

In the first six months of current Fiscal Year, refunds to the tune of Rs.102 billion have been issued compared to Rs.53 billion for the same period the last year. This represents an increase of 90 percent in the issuance of refunds. Moreover, under the Prime Minister’s Corona Relief Package, refunds of Rs. 42 billion have also been issued this year. Despite excessive issuance of refunds this year, FBR has managed to collect significantly more revenue in comparison to last year when COVID had not disrupted economic life. Increased refunds have greatly helped boost the economic activity in the country. FBR’s appreciable performance demonstrates that despite the second wave of COVID, government policies have insulated the economy which is showing growing signs of economic revival across the broad-spectrum business activities. 

During the first six months of current Fiscal Year, smuggled goods worth Rs.30 billion have been seized as compared to seizures of Rs. 22 billion during the corresponding months of 2019.

After many years, FBR has restored the sanctity of last date of filing of income tax return. This has been welcomed by taxpayers who have filed 2.3 million returns till 31st December compared to 2.17 million last year. Income Tax paid during filing of returns stood at Rs. 43.5 billion compared to only Rs.28 billion deposited last. This shows an increased in tax deposit with returns of 55%.

FBR is fully geared towards automation, e-audit, and simplification of procedures, e-payment of duty draw back so as to add to Ease of Doing Business (EoDB). FBR has launched a single page simplified Income Tax Return for SME manufacturers. FBR has upgraded Iris system for issuing SMS and e-mails whenever any notice is issued or any assignment is created by Tax Officer. FBR has launched a system Maloomat-TaxRay wherein taxpayers’ can access all information available with the FBR by logging through a secure mechanism. For further facilitation, this feature has been launched in mobile app, Tax Assan, so that taxpayers’ can easily access all such information.

FBR has established special committees to urgently resolve the complaints of the taxpayers. Now, the taxpayers’ can file complaints through Helpline, Email, Complaint Portal and registered post”.

While the FBR under the present team has performed excellently under the adverse condition and despite heavy financial toll of Covid-19, especially the deadly second waive, it is a fact that the coalition Government of PTI in Finance Act, 2020  failed to give tax relief to the salaried class, especially with no raise in the pay and pension of government employees, substantial reduction in income tax and sales tax rates for businesses, removing and/or deferment of withholding and advance taxes so that they can survive and revive in difficult times.

FBR in Finance Bill 2020 proposed luxury tax on the rich owners of farmhouses and palatial bungalows in Islamabad Capital Territory (ICT) but it was withdrawn in the Finance Act, 2020 after the rich legislators and their financiers opposed it. The PTI Government by withdrawing Tax on luxury houses in Islamabad Capital Territory, proposed in the Finance Bill 2020 conceded that it does not want to tax the privileged segments of society. The Senate also recommended its withdrawal without assigning any reason.

The PTI Government, while appeasing the rich, is bent upon extracting exorbitant sales tax, the incidence of which takes away a larger slice of the people with meagre incomes while the rich, mainly the unscrupulous traders and manufacturers, make more money by not only passing on the burden of it to the end consumers but also not depositing it honestly in the treasury—this results into their illegal enrichment. Had the PTI imposed ‘Tax on luxury houses in Islamabad Capital Territory’, it would have earned appreciation of masses, but it failed to do so as was done in 2014 by the PMLN by withdrawing Income Support Levy Act, 2013 levied to help the economically distressed classes but repealing it the very next year. For historical record, let us reproduce the salient features of the withdrawn ‘Tax on luxury houses in Islamabad Capital Territory’:

On residential buildings:

1. In case of two kanal to four kanal with covered area of more than 6000 square feet: Rs.100,000 per kanal
2. In case of five kanal or above with covered area of more than 8, 000 square feet: Rs.200,000 per kanal.

On farm houses having four kanal including area under farming

1. A farm house with covered area between 5000 to 7000 square feet: Rs.25 per square foot of the covered area per annum.
2. A farm house with covered area between 7001 to 10,000 square feet:Rs.40 per square foot of the covered area per annum.
3. A farm house with covered area of more than 10,000 square feet: Rs.50 per square foot of the covered area per annum.

   On farm houses having more than four kanal including area under farming

1. A farm house with covered area between 5000 to 7000 square feet: Rs. 60 per square foot of the covered area per annum.
2.  A farm house with covered area between 7001 to 10,000 square feet: Rs. 70 per square foot of the covered area per annum.
3. A farm house with covered area of more than 10,000 square feet: Rs. 80 per square foot of the covered area per annum.

The above tax was not applicable in the case one self-occupied house of widows. It was to be collected by the Ministry of Interior through its attached departments and deposited in the Federal Consolidated Fund. It could have fetched substantial funds for helping the needy. It must be imposed through Finance Supplementary (Amendment) Bill or Presidential Ordinance extending amnesty for the rich developers and builders. FBR authorities deserve appreciation for proposing a progressive tax, but powerful vested interest both in the Senate and National Assembly and the rich financing them has proved that the PTI Government like its predecessors would not tax the rich for the benefit of the poor! It exposes the claim of PTI that its aim and agenda to come into power was to ensure socio-economic justice and establishment of an egalitarian society!

Compliance cost was increased in Finance Act, 2020 by reverting to quarterly withholding statements instead of half-yearly. Shockingly, the power of real-time data access or otherwise is given to FBR under Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 through Finance Act, 2020 in the absence of Personal Data Protection Law in the country and no safeguards against hacking and leakages as well as abuse for self-aggrandizement though this issue was raised in Finance Bill and data privacy, The News, June 21, 2020.

In the Finance Act, 2020 if only 40% of taxes waived/forgone in fiscal year 2019-20 were reduced, there would have been fiscal space of Rs. 600 billion for reducing rates of income tax and sales taxes hurting the lower-income groups, rather than continuing with high taxes and levying/enhancing existing ones, when economy, in deep recession, needs impetus for survival and revival absorbing tsunami of Covid-19 outbreak/lockdown. This is the true reality of the “no new tax” budget of the PTI Government!

The PTI Government could have done a number of positive things for resource mobilisation—tax and non-tax—as well as reducing cost of doing business in Budget for fiscal year 2020-21 as suggested above, but it decided to substantially increase prices of petroleum products on June 26, 2020 with disastrous consequences (Unconstitutional levy, The News, June 30, 2020 and The POL bomb, Business Recorder, April 5, 2019).

We have a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes. The Prime Minister, if really sincere to reform tax system, must convert FBR into a modern National Tax Agency. The issue of fragmentation of taxes and multiple collection agencies needs to be resolved as a first priority to provide ease of doing business and reducing cost of doing business otherwise we will never progress and come out of devastating economic effects of Covid-19 endemic.

Pakistan needs a new National Tax Agency [NTA] as explained in detail in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged it in any of its papers/reports related to US$ 400 Pakistan Raise Revenue Project, while presenting the same concept. For example, it may be noted that the idea of NTA was given way back in 2013 in Need for National Tax Agency, Business Recorder, November 1, 2013 and then in Revamping tax system,The News, December 7, 2014. It was not only elaborated in Tax proposals—VII: Need for NTA, Business Recorder, May 22, 2015 and Case for “NTA”, Business Recorder, November 27, 2015 but its draft law was given in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, April 2016]. It was also included by the Tax Reforms Commission in its final report submitted to the government in February 2016 [which was marked confidential by PMLN and till today is not made public even by the PTI Government despite repeated requests].

It was suggested that the NTA must be run by an independent and competent Board and its members should be selected by Joint Committee of Senate and national Assembly. The NTA should not only collect taxes at all tiers of government but also disburse benefits like social security, food stamps, universal pension, healthcare coverage and income support etc. The linkage of database of various bodies with NTA (complete digitisation) has been emphasised time and again as a great step towards e-government model for the country that is presently non-existent. The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth studying/adopting after debate and suggesting modifications suiting our peculiar requirements [details in Tax reforms strategy, The News, December 3, 2017and Comprehensive Tax reforms, The News, September 9, 2018].

The issues faced on fiscal front and how to deal with them have been discussed in detail in a number of papers and articles such as: ‘Avant-garde budget proposals’, Business Recorder,May 10, 17, 24 & 31, 2019, Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018,  PTI and tax reforms, Business Recorder, August 17, 2018 and Wither tax reforms, Business Recorder, August 2, 2019. Unfortunately, till today, these are not considered by PTI Government and never discussed or quoted by IMF or World Bank.

Surprisingly, the World Bank, IMF and FBR ignored the proposals presented in various articles mentioned above for generating revenue of Rs. 8 trillion at federal level alone [Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019 and ‘Raising Rs. 8 trillion’, Daily Times, November 12, 2017] enabling Pakistan to overcome monstrous fiscal deficit, get rid of loans, achieve rapid economic growth and provide social services to all citizens.

The IMF in its first review of December 19, 2019 [Country Report No. 19/380] has admitted that “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”. This fact of oppressive and narrow-based taxation was highlighted repeatedly by us in various articles and viable solutions were offered to make it fair and broad-based, but FBR and IMF paid no heed to these. The World Bank in 400-million Pakistan Raises Revenue Project has also made no reference of these, though many proposals have been endorsed without any acknowledgement of published work by local writers.

Principle of reciprocity

 It is time that the Prime Minister must concentrate on the principle of reciprocity—in return for taxes he must establish a system to provide the citizens facilities of quality education, health, housing, transport, clean drinking water, sewerage etc by implementing Article 140A of the Constitution.

Our existing tax 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 pushed to become what Franz Fanon called, ‘The Wretched of the Earth’. Due to pro-rich policies, wealth is concentrated in a few hands and there is no devolution of administrative, political and fiscal powers as ordained in Article 140A of the Constitution to ensure delivery of social services at grass root level.

The successive civil and military governments cannot absolve themselves from failure on fiscal front by shifting blame on WB/IMF alone. They never bothered to undertake fundamental reforms to improve productivity for higher and sustainable growth, instead kept on imposing regressive taxes as discussed in our book, Tax Reforms in Pakistan: Historic & Critical View. (available free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf.

The recently launched ‘Tax Payers Alliance Pakistan’ (TPAP), a voluntary network of Pakistani tax payers to act as a pressure group of professionals, business owners and individuals, in a pre-budget maiden Press release, reminded the Government that Pakistan needs a low-rate, broad-based and equitable tax system as well as the federal and provincial governments must demonstrate transparency and end undue and wasteful expenditures—details at https://primeinstitute.org/tax-payers-alliance-pakistan-tpap/.

We need a simple, fair and predictable tax system: 10% tax on individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 10 million), 20% on companies and other entities, 5% sales tax (for exporters 0% tax). Low-rate customs duty (One Chapter, One Rate, say 2%) on all items and federal excise duties on luxury items and on health-hazard products like cigarettes, beverages etc. This will fetch us tax of Rs. 8 trillion [working available in Towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020).

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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)    

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