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Illegal, ill-advised and unconstitutional
Dr. Ikramul Haq[*]
The Central Board of Revenue (CBR), apex administrative authority responsible for collection of federal taxes, has come up with an innovative way to realise its targets fixed for sales tax by penalizing the manufacturing sector forcing it not to sell “raw material” to non-registered persons. It can be called CBR’s most ill-advised action, proving that policymakers sitting there and in Finance Ministry are bent upon to destroy country’s economy in the name of “better” tax collections. This new move through a Presidential Ordinance amending some provisions of the Sales Tax Act, 1990 is not only ill-advised, but also unconstitutional. The Federation has a right to levy tax on sale of goods, but has no authority under the law to debar somebody not to sell these to somebody, whom the State does not like or cannot force to get tax registration. The proper course is to make registration compulsory for every user of “raw material”, rather than forcing the manufacturers not to sell it to non-registered persons. Why the manufacturer should be penalized for something which results from the lapse of the Government itself?
The sufferings of Pakistani masses are increasing day by day as the present regime is vigorously following the agenda of tax reform prescribed by the IMF, whose plans and agenda have now a better chance to succeed, as no representation is possible against the taxation measures of the present military regime.
The implementation of Rule of Law determines the failure or success of a society, no matter whether it has democratic or undemocratic form of government. In the tax context, it means that taxes shall be imposed through a proper consultation method, preferably through parliamentary process, rather than through administrative discretion. The regime has been forcing the President to keep on issuing badly drafted Ordinances (Sales Tax Amendment Ordinance 20001 is the worst example of such an exercise of administrative discretion) which have been prepared by incompetent people in the CBR without any contribution of the Cabinet let alone to elicit public opinion or expert professional advice.
The recession in business prevailing in Pakistan these days is the direct result of retrogressive fiscal laws. This kind of taxation has eroded the very basis of progressive taxation to check concentration of wealth in a few hands in the society. The very philosophy of income taxation i.e. using it as a tool for achieving the cherished human goal of redistribution of wealth, has been altered at the persistent wish of IMF to confirm the meeting of BIG TAERGETS. Two things strike the students of Pakistani fiscal laws with trepidation and amazement–the precipitate and mindless tinkering with the law by bureaucrats, who are the de facto legislators of Pakistan, and the anaesthetised patience of the Pakistani public. The Pakistanis have been forced to endure injustice and unfairness with feudalistic servility and fatalistic pessimism. The poor of Pakistan endure inhuman conditions, which would lead to a bloody revolution in many parts of the world. The rich endure foolish laws and sickening amendments that benefit none except the legal and accountancy professions, and they instinctively prefer to circumvent the law than to fight for its repeal.
Karachi Chamber of commerce has strongly resented ban on raw material supply to unregistered taxpayers. President of Karachi Chamber of Commerce and Industry (KCCI), has urged the government that no notification by the Central Board of Revenue (CBR) under the Sales Tax (Amendment) Ordinance 2001, banning supply of raw-materials to unregistered tax-payers, be issued without prior consultation with the representatives of trade concerned
The KCCI chief argued that the end-users of plastic granules, steel/iron scrap and yarn proposed to be the first target, formed a large group and holding back supply to them suddenly would pose a threat to the survival of a large number of small and cottage industries, which make notable contribution to the economy and provides employment to a large number of people.” This would also have an upsetting effect on the efforts that are being made both by the government and the private sector for the economic revival”, he noted
The KCCI chief said that such unregistered persons were already paying 1.5 percent extra tax on purchases of such raw materials. He stressed that such large unorganised sectors have their own problems, which must be taken into consideration, while initiating further action under the new ordinance. He said, “It will be recalled that initially such unregistered tax payers were required to pay three percent further tax, which was reduced to 1.5 percent in the last budget. This indeed served as an incentive for the non-registered. Now all of a sudden, they are being subjected to a still harsh punishment of denying the supply of raw-materials”.
Tariq Sayeed, a former President of the Federation of Pakistan Chambers of Commerce and Industry, in a press statement, termed the CBR amendments another piece of “ad hoc measures”, which has set in uncertainty and total confusion in the business. Tariq Sayeed was bitter on the arrogance of the tax officials, as they “never bother to discuss or take business into confidence” on the issues, that directly affects the business. Instead of making abrupt changes or taking unilateral decisions, he said, the government should first allay business fears and apprehensions by inviting their comments and suggestions as well as taking them into confidence. He cautioned that if the amendments made in Sales Tax Act were not withdrawn, it would encourage unorganized sector to expand and also promote smuggling. He further said that no economy could flourish under fears and intimidation from the regulators or for those matter even governments. “You have to give free breathing space for the trade and industry to operate and attain maturity as had been done elsewhere in the world,” he asserted.
The Chairman APTMA (SB zone) Mushtaq Ahmed Vohra though appreciated the concept of the Ordinance, which would encourage documentation but was highly critical about the mode of its implementation and allowing free hand to the collectors of revenue.’ Instead of taking such actions which demands from the industry to stop selling its products,’ he said, ‘the government should itself stop giving power and gas connections to non-registered persons.’ Vohra said it would be more advisable to restrict utility services to non-registered persons. This would automatically encourage sales tax registration, he added. He explained that a finished product of an industry could be the raw material for the next buyer/industry; therefore, restriction should only be on non-registered persons and not on sale of raw material. Citing an example, he said the yarn manufactured by a spinning industry was a raw material for the weaving industry and the fabric is a raw material for garment industry etc.
Similar views were also expressed at FPCCI meeting, convened on 12 February 2001, by the Chairman Standing Committee on Sales Tax, Shaikh Shakeel Ahmed Dhingra. The business community has urged the government not to issue any notification regarding amendments in the Sales Tax Ordinance until the stakeholders and the FPCCI are not taken into confidence. Various associations, under the chairmanship of Shaikh Shakeel Ahmed, Chairman Standing Committee on Sales Tax were of the view the amendments would badly affect the trade and industry as most of the small units are unregistered. They said that the responsibility for registration has to be taken by the government and the trade and industry cannot be penalized for this purpose.
The Lahore Chamber of Commerce & Industry (LCCI) Chief said that the bulk of manufacturing activity takes place in the cottage industry. The ordinance, he said, had come at a time when the GDP growth forecast for the country was just revised downwards, which reflected the current state of the economy. This move would also have a serious impact on the production of the registered units, he said. Previously, these registered units/importers were paying on behalf of the cottage industry/unregistered traders one and half percent extra sales tax on the purchase of these raw materials, but this facility has now been withdrawn. “While we agree that documentation is a prerequisite for the smooth progress of the economy, but this Ordinance that has empowered the CBR to stop the sale of raw material to these unregistered units/traders will seriously curtail economic activity and result in closure of the large majority of cottage industry units with the resultant negative fall out on the large industry. Furthermore, the ban would also result in a substantial loss of revenue for the government both under sales tax on domestic sales of industrial raw material and the lowered import duty collection”, he observed. It will cause the loss of several hundred thousands jobs that will create a serious socio-economic problem in the country.
Pakistan is caught in a dilemma; on the one hand there is a pressing need for revenue mobilisation to reduce fiscal deficit and on the other the ailing economy is becoming worse because of new taxes or due to enhancement of rates of existing taxes”. The role of sales tax in this scenario is becoming highly controversial as to whether it will help in documenting the economy (thus leading to more revenue) or will further destroy the already sick industrial units, which are overburdened with taxes at source that create a serious liquidity crunch for them. The high cost of taxes for the industry is the main issue in the present debate to determine the emerging role of sales tax in Pakistan economy. The CBR is playing havoc with exporters as well, thus destroying our indigenous industry. In order to please the IMF it is showing high figures of Sales Tax Collection by withholding genuine refunds of Rs. 10-15 billion of exporters alone
The Government is forcing the manufacturing units to follow VAT but has adopted a policy of appeasement towards traders, wholesalers and retailers. They have been allowed to remain outside the record-keeping regime and just pay turnover tax on self-determined sales! The Sales Tax Amendment Ordinance of 2001 that forces the manufacturing units not sell raw material to unregistered persons is a direct admission on the part of the Government that it has failed to widen the tax base of VAT by brining into its net the mighty traders. However, the Government again decided to penalize the manufacturing sector through this amendment, whereas the real culprits, persons not willing to come into registration and record keeping regime, have been left untouched. This is a strange strategy that one who is complying law is being punished and those who openly defy it are left unpunished.
The 2001 Ordinance amending Sales Tax Act, 1990 has to be seen in the perspective of recent IMF conditionalities. Their latest team in Islamabad made it a point that the Government should issue this Ordinance to bring a large segment of business into the VAT net (one may call it “web” in Pakistani context). On the one hand Pakistani Government is destroying the available capital, industry and human resource and on the other for economic growth it has also placed, like it predecessors, heavy reliance on external loans and credits. The International Monetary Fund, (IMF) is nowadays imposing tougher and even contradictory conditionalities for Pakistan, which is a victim of international “financial terrorism”. The donor countries have their own political strings attached to the loan facility. The IMF is certainly advocating an unjust ‘global trading system’, as a chosen instrument for imposing imperialistic financial discipline upon poor countries. They are destroying the industrial base of Pakistan and forcing its markets to open up for goods from the developed countries. The IMF is creating a form of international ‘peon age’ or debt-slavery in which the balance of payment problems of developing countries are not resolved but rather perpetuated. Pakistan represents a good experimental ground for testing the success of these policies.
It is an undisputed fact that IMF conditionalities have aggravated the inequalities of income and wealth in Pakistan and resulted in more unemployment. The IMF conditionalities have caused more harm to us than doing anything real good. It is therefore, painful to note that every government in Pakistan, including the present one, continues to take loans by accepting and complying harsh IMF conditionalities. This new amendment in Sales Tax Act, 1990 is another step in direction of destroying our manufacturing potential, so that we can be open for all kind of trash goods produced by the IMF-favourite transnational companies (TNCs).
The IMF is forcing Pakistan to raise cost of utilities and POL prices unnecessarily; the hidden agenda is to make local industry incompetitive in export markets. In the process, Pakistani people are not only economically subjugated, but are suffering immensely due to these policies inflicted by undemocratic rulers and the official economists, who are the lackeys of foreign donor countries. All of them, after serving many years in the World Bank and the IMF, have been sent here for the implementation of their agenda. It looks very pertinent to quote here from former chief economist at the World Bank, Joseph Stiglitz, “In theory, the Fund supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies. Officially, of course, the IMF doesn’t ‘impose’ anything. It ‘negotiates’ the conditions for receiving aid. But all the power in the negotiations is on one side – the IMF’s – and the fund rarely allows sufficient time for broad consensus-building or even widespread consultations with either parliaments or civil society. Sometimes the IMF dispenses with the pretence of openness altogether and negotiates secret covenants.”
[*]Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.