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Tax system for growth & prosperity

Dr. Ikramul Haq

The real dilemma of our tax system is that it is highly inequitable. The burden of taxes is less on the rich and more on the middle-class and the poor. In the face of this stark reality, successive governments since 1991 have been resorting to regressive taxation, favouring  the rich and mighty, who are hooked to amnesties and asset-whitening schemes, a permanent feature of our failed tax system and surrendering of government’s writ by all rulers—military and civilian alike. The Income Tax Ordinance, 2001 as the name suggests should tax “incomes” but it contains more provisions that are in the nature of indirect taxes, like presumptive, minimum and withholding taxes on transactions in the nature of consumption or expenditure or even investment! Since tax incidence is known even before computing income tax on real income at the end of tax year, the burden is passed on—it defeats the very purpose of direct taxation. This is the real dilemma of the existing tax system as it benefits the rich and overburdening the common citizens.

Over the period of time, especially since 1991 when presumptive taxation was introduced, our tax system has become oppressive, unjust and target-oriented. There is a dire need to discuss philosophical framework, principles of equity and justice that should be the main concernstone of a good tax system—strangely there exists no tax policy based on these principles—none of the governments has ever tried to formulate a national tax policy having short, medium and long term objectives, plans and strategies. These are left to foreign lenders/donors and all their efforts to reform our tax system after spending millions of dollars have utterly failed! Our successive governments, including the incumbent one, have been toeing the tax reform agenda (sic) of the foreign/lender/donors—the crux of which is more taxes, less growth and no concern for equity!

Our economic wizards and tax managers during the Decade of Democracy [2008-18] and now under the coalition Government of Pakistan Tehreek-i-Insaf (PTI) have been preoccupied with meeting budget targets through oppressive taxes instead of promoting and accelerating investment for higher growth that could have produced natural fruit of more revenues without hampering economic progress and denying prosperity for masses. Our regimes laid sole stress on taxes and then wasted large part of it on unproductive expenses like debt servicing and running large and inefficient government machinery. Even within the tax system, the biggest distortion was indirect taxes under the direct tax legislation, thus, shifting incidence on consumers (hurting the common citizens belonging to lower income brackets) rather than the actual income earners (mostly rich businesspersons, big landowners and cartels within certain industrial sectors).

The oppressive, pro-rich and imprudent tax policies coupled with huge spending for the luxuries of the militro-judicial civil complex and political elite and denying fundamental needs to the deprived, has created a great divide between the poor and the rich, which is further expanding as the PTI Government is not at all showing any inclination to dismantle elitist structures and empower the have-nots. It is concentrating like its predecessors on ‘charity model’ rather than ‘social mobility model’ making them self-reliant through skill-based education and providing equal opportunities.

Time and again in these columns, the characteristics of ruthless pro-rich tax system have been highlighted. The prevailing system provides privileges to a select group and places a disproportionate burden on the majority of people. Anti-people and anti-growth policies are not only creating hardship for the masses but not solving the daunting task of overcoming fiscal deficit, rising cost of debt servicing and accumulation of monstrous debt burden (total debt/liabilities of Rs. 40.99 trillion at the end of second quarter of the current fiscal year as per latest report of State Bank of Pakistan). This year we will be pushed to fiscal deficit setting a new record of over Rs. 3.5 trillion, debt servicing above Rs. 3 trillion, besides adding more persons below the poverty line. The rich-poor divide is widening, not just confined to urban-rural but everywhere in terms of incomes/wealth disparities. While enormous wealth is confined to a few, the main burden of taxes—70% collected from indirect taxes—is on the less-privileged.

The International Monetary Fund (IMF), Asian Development Bank, World Bank and Department for International Development in grants/aids/loans seldom mention in their papers/studies the oppressive nature of our tax system and apathy of federal/provincial governments to ensure universal pensions and social services. While enormous benefits and luxuries enjoyed by elites are tax-free, the exorbitant sales tax burden is on the common citizens with meagre earnings even on items of daily use.

Presently both the provincial and federal governments are collecting sales tax from restaurants that are not only exorbitant accumulatively (above 20%) but also massively evaded. No serious effort is made to quantify the real cost of taxpayers’ money in providing free perks/benefits to militro-judicial-civil-complex and public office holders in the form of palatial residences, army of servants, expensive cars, golf courses, rest houses, foreign tours, banquets, etc. The system is increasing inequalities yet about 75 types of withholding taxes are imposed, many full or final or minimum, allowing the shifting of the incidence of so-called direct taxes to the weaker segments of society, and further enriching the rich.

Oppressive and higher taxes temporarily register higher growth in collection figures, but are ultimately detrimental for growth and sharpening income/wealth disparities—it is anti-thesis of direct tax helping socio-economic justice. On the one hand, we are not collecting taxes according to capacity to pay and on the other, annual targets are fixed to further squeeze the already dried tax base. We can collect much more taxes if the present tax laws are rationalised and incompetent, inefficient and corrupt tax machinery is overhauled. We should liberate ourselves from the number game of the World Bank and other foreign donors. The tax policies implemented by us on the dictates of donors/lenders have led to abject poverty for vast majority of people. These policies are not making us self-reliant but on the contrary are destroying our industry and business.

The present tax system is destroying our economy. Those who possess more (income and wealth) should contribute more. Our system completely deviates from this principle which is violation of Article 3 of the Constitution. We can formulate a rational tax policy through public debate and parliamentary process and implement simple tax laws/regulations, reducing cost of compliance and ending coercive collection measures. Through lower rate, broad-bases and simple laws, we can get rid of dependence on internal/external loans. Though many authors have presented suggestions for reforming the existing tax system and raising taxes to the level of Rs. 8 trillion at federal and Rs. 2 trillion at the provincial levels—Towards Flat, Low-Rate, Broad & Predictable Taxes [Prime Institute, 2016]—our more-loyal-than-the-king stalwarts sitting in Ministry of Finance taking advice/assistance from IMF/World Bank and other foreign lenders/donors that miserably failed in the past.

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

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