Huzaima Bukhari & Dr. Ikramul Haq
There is hardly any doubt about the huge tax gap in Pakistan that is about 70% of the actual collection if not more. It is not only because of weaknesses in enforcement of Federal Board of Revenue (FBR) and provincial tax agencies, but is also attributed to bad tax policy. 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 are 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% from 16 January 2022, increased from 10%. It was reduced from 12.5% from July 1, 2021 and remained effective only for 6 months and 15 days).
The Chairman of FBR, while speaking at a seminar in Islamabad on November 17, 2021, arranged by Prime Institute, said,“besides the challenge of over 4 million people remaining outside the tax net, there is also the issue of reduction in the average tax paid by a return filer”. In 2015, he said, “the average tax paid by the return filer stood at Rs. 23,640, which fell to just Rs. 10,914 in 2019”. He added:“However, the trend has started reversing and the figure crossed Rs. 17,000 by tax year 2020”. It was pointed out by us in the seminar that at present, the entire taxable population and even those having no income or income below taxable limit were paying advance and adjustable income tax at source as mobile users. If all file income tax returns, there will be refund payable to at least 80 million having no income or income below taxable limit though cost to claim will be much higher than what is withheld at source by telecom companies.
FBR must collect taxes where due and not in advance or from those not chargeable to tax. Sadly 75 paisas (One Pak rupees contains 100 paisas) federal excise duty on cell call exceeding 5-minute was levied in the Finance Act 2021 in utter apathy towards the poor. It was also in violation of the Constitution of Pakistan as held by Sindh High Court in its judgement in the case of certain telecoms [C.P. No. D-4778 to 4780 of 2021] endorsing Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.). The FBR has decided to challenge it in the Supreme Court. Apart from the issue of constitutionality, it was a bad tax policy measure—impractical to implement for operators, anti-poor, and inconsequential to the efforts of FBR to raise the desired revenue through already oppressive indict taxes.
The coalition government of Pakistan Tehreek-i-Insaf (PTI) must stop taxing the less-privileged and downtrodden. Why were the poor subjected to oppressive taxes like 75 paisas for cell call exceeding 5-minute and 10% advance income on mobile and/or internet use from July 1, 2021? The rich and mighty are still enjoying free perks and benefits. Heavy taxation on electricity bills and a number of food items and items of daily use by the citizens is totally unjustified when tax expenditure was above Rs. 1.5 billion in financial year 2020-21.
Tax credits for senior citizens and special people that were available before the enhancement of tax rates by Finance Act, 2019 should be restored after the higher tax rates were reverted to soon after coming into power by the PTI Government.
While the exporters of services from tax year 2022 are to be taxed at 1%, a laudable amendment to bring them at par with export of goods, it is not mentioned how much credit would be taken in books and why should they follow cumbersome procedures. The definition of “imputable income” is available in the Income Tax Ordinance, 2001 and must be applied in the case of exporter of services provided that if they claim higher credit than the same, the actual working must be given. In case of wrong claim, punitive measures should be available.
Many self-acclaimed professionals, selected for committees announced by the government to remove anomalies and technical issues (sector-wise etc.) have failed to even remove these obvious lacunas, what to speak of suggesting a pro-growth and investment-friendly tax policy helping in creating jobs from agriculture to high tech knowledge-based initiatives, rather than emphasising on bricks and mortars. They must be reminded of the couplet of great poet and thinker, Dr. Allama Muhammad Iqbal:
Jahan-e-Taza Ki Afkar-e-Taza Se Hai Namood
Ke Sang-o-Khisht Se Hote Nahin Jahan Paida
New worlds derive their pomp from ideas fresh and new
The world was neither built nor grew from stones and bricks.
The federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the ineffective, outmoded, colonial era institutions, including the country’s tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are the main factors for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer. In these columns we have been repeatedly discussing and pleading for radical revamping and restructuring of the entire tax system, through low-rate, broad-based and predictable taxes, single national tax agency and national tax court.
Tax policy reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing causes.
The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), also failed to encourage people towards voluntary tax compliance. In 2020, the Federal Government obtained loan of US $ 400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of PRR Project was estimated at US $ 1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$ 400 million. Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US $ 304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020. Like earlier programmes, these are also bound to fail. The Chairman FBR in a seminar held in Islamabad on November 17, 2021 [Famous economist Dr. Arthur B. Laffer was key speaker] said: “[FBR] is “better off” without a $400 million World Bank loan”.
The government must lower the rate of taxes and allow capital formation to accelerate high and sustainable growth by investing in productive sectors and heavily tax unproductive investment in open plots etc. It is possible only through simple tax model as elaborated in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, December 2020) and Tax Reforms in Pakistan: Historic & Critical Review (PIDE, Islamabad). It was also emphasised by Dr. Arthur B. Laffer in his keynote address on November 17, 2021 at PRIME’s 1st Prosperity Forum 2021. The relief given to small and medium enterprises (SMEs) as manufacturers up to turnover of Rs. 250 million in the Finance Act, 2021, should have been for retailers and other taxpayers as well, without any discrimination. Low-rate tax on broad base with simple compliance procedure is needed to collect Rs. 10 trillion as highlighted in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, December 2020).
The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. It is time that government and all political parties should consider it seriously if we have to make Pakistan a prosperous country and egalitarian state—an economic power with 220 million people to have its say in global matters for a safer, just and peaceful place for the humanity at large, especially in the wake of US and its allies complete retreat from Afghanistan and leaving the region in turmoil. It must forge alliance with Golden Ring countries to protect its national interests and progress rapidly in all areas.
Ms. Huzaima Bukhari, MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram and Huzaima Ikram & Ijaz, leading law firms of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, ML/CFT related laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals.
She has coauthored with Dr. Ikramul Haq many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions
She regularly writes columns/articles/papers for Pakistani newspapers and international journals. She has contributed over 1500 articles and research papers on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions
He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax.
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.