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Taxes and social democracy

Huzaima Bukhari & Dr. Ikramul Haq

The perks culture has also held real estate development hostage for decades as officials seek to reward themselves through plots. Government sponsored developers such as the DHA and Coop societies dominate the real estate market, creating a plot culture and holding private real estate development hostage.”—Take Tax Policy Back from Economic Hitman, Dr. Nadeem Ul Haque, Vice Chancellor, Pakistan Institute of Development Economic (PIDE)

Our successive governments—military and civilian alike—have failed to convince the people that payment of taxes is their collective responsibility—failure to fulfill it leads to debt enslavement and political subjugation. The major reason for tax defiant behaviour is lack of trust in government—abuse of taxpayers’ money for luxuries of the ruling elites. The State has failed to protect the life and property of the people, what to talk of providing them free and compulsory quality education as fundamental right under Article 25A of the Constitution of Islamic Republic of Pakistan [“the Constitution”], healthcare and civic amenities.

The populist argument against paying taxes is, ‘why we should pay, when in return we get nothing’, is elaborated by Idrees Khawaja in https://pide.org.pk/blog/pakistans-happy-taxpayers/ and many a times by us in these columns.

The government’s yearning for “more and more taxes” has become a point of irritation for the citizens who argue that more taxes alone is not an answer to existing fiscal maladies. In a write-up, ‘Growth Amidst Debt?’, Mohammad Shaaf Najib pointed out: “The federal government debt and liabilities have increased to over PKR 3.7 trillion by end April 2021, compared to just over PKR 3.5 trillion in June 2020. As a result, the government has allocated PKR 3,060 billion for interest payments in the budget. This means, 41% of the federal government’s current expenditure, which also makes up 36% of the total budget expenditure, is to be spent on interest payments.

Dr. Nadeem Ul Haq in these circumstances rightly says: “Donor-advocacy” suggests that good policy is to leave expenditures and the structure of the economy alone and rely on imposing arbitrary taxes on milk, SMSs and the internet is good policy. It is not! Besides why would you want to give wasteful setup more money without reforming it?”

According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on June 30, 2021 was 184 million (84.16% teledensity), out of which 100 million are 3G/4G subscribers (45.61% penetration), 2 million basic telephony users (1.13 teledensity) and 103 million broadband subscribers (46.90% penetration). Not less than 100 million cell users (many have more than one number) were paying advance/adjustable income tax of 12.5 (reduced to 10% from July 1, 2021). The Federal Board of Revenue (FBR) in its Press release of July 1, 2021 claimed receiving income tax returns of 3.01 million. FBR should register all persons paying substantial advance income tax but not filing tax returns to bridge the huge gap as suggested in Restructuring of tax system: a blueprint, Business Recorder, May 7, 2021. Legislature must stop taking 10% income tax from all mobile users who pay 19.5% sales tax on services in their respective provinces (for users in Islamabad Capital Territory, 16% federal excise duty (earlier 17%) whereas there should be free internet service at public places.

The internal and external debt will keep on rising unless the government goes for all-out reforms. Voicing this concern, Dr. Nadeem in ‘Reform or face fundamental ascendency’, emphasized, “the state must first provide the social contract i.e. good law and order and security of life. It must dismantle the rent seeking that protects the rich….. Rent seeking relies on three main components: state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system that allows the poor man’s land to be acquired for the elite especially the army and civil service”.

A landlocked country like Uzbekistan with GDP of US$58 billion is spending 6% of it in social security.  “One of the policy tools designed to help address the challenges was the establishment of a Single Registry for Social Protection (SRSP), a system that integrates all information management functions along the delivery chain, principally focused on social assistance schemes”, notes a blog. We suggested the same in Simplification of taxes for growth—III, Business Recorder, April 2, 2021. 

Remarkably, “in October 2019, the development of the SRSP modules was completed, and the SRSP was launched in the Syrdarya region of Uzbekistan as a pilot project and covered three means-tested social benefits for low-income families: (i) childcare benefit for children up to 2 years (ii) benefit for families with children up to 14 years and (iii) material support for low-income families. Following the successful pilot of the SRSP, the MoF in May 2020 developed a plan to rollout the SRSP across the country in a phased manner. The national rollout was implemented in a phased manner between September and December 2020”. It is time that all those involved in various programmes under Ehsaas should study it: https://www.developmentpathways.co.uk/blog/reflections-from-a-double-landlocked-country-on-the-establishment-of-a-digital-and-integrated-information-system-for-social-protection/

An equitable tax system is one under which tax payments are based on the amount of benefits received from government services. In social democracies, this is called “benefit principle” that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. Is taxing over 80 million mobile users having no taxable income a good tax policy? Of course not when there is negligible spending on SRSP. This is also against Article 4 of the Constitution which says: “The State shall ensure the elimination of all forms of exploitation and the gradual fulfillment of the fundamental principle, from each according to his ability to each according to his work”.

Tax policy should be aligned with above command of Constitution and as done by a small country like Uzbekistan. Once people see the tangible benefits of the taxes paid, tax compliance improves as shown in Restructuring of tax system: a blueprint, Business Recorder, May 7, 2021.

Even the World Bank-IMF funding and “guidance” has failed to bring desired results—debt burden is increasing monstrously, fiscal deficit is still beyond control, inflation is crushing the poor, taxes are evaded and avoided at massive scale and whatsoever is collected is mercilessly wasted by those who matter in the land.

The rich and the mighty not only evade taxes but also get unprecedented amnesties and thrive at taxpayers’ expense as beneficiaries of all the State’s resources. The government’s kitty is empty because of unwillingness of the rich to pay taxes, collossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural resources and improving human capital. In these circumstances, we cannot collect even what Uzbekistan achieved: 15% of tax-to-GDP collection in 2019 and 6% spending on social security.

We cannot increase tax-to-GDP ratio to a respectable level of 25% keeping the size of population unless we achieve inclusive growth of 7 to 9 percent for a decade. It is possible only if under 10th National Finance Commission (NFC) Award the federation and federation units agree on single national tax agency and tax absentee landlords (total contribution of agricultural income tax (AIT) was 0.06% of GDP in 2019-20).

The National Assembly enjoys exclusive power to levy AIT in Islamabad Capital Territory (ICT) under Article 142(d) of the Constitution but it still has per acre tax under Tax on Agricultural Land Ordinance, 1996. The rates are ridiculous: on land exceeding five acres if used for fruit orchard or for growing vegetable/flowers (Rs. 300 per acre). For irrigated land, exceeding five acres (Rs. 50 per acre) and for unirrigated (Rs. 25 per acre). However, the National Assembly inserted the following proviso to section 111(1) of the Income Tax Ordinance, 2001:

 “Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law”.

[Emphases supplied]

Why is FBR not enforcing income tax to judges, generals and political parties? For tax year 2019 and 2020 tax directories are not published. The agricultural income must also be shown  in a separate column in tax directories so that it can be seen whether they are paying tax to provincial authorities and if not FBR has invoked Proviso to section 111(1) of the Income Tax Ordinance, 2001 or not. It will expose many and the inefficiency of provincial governments to collect this tax from those declaring it in the income tax return.

Taxation of huge capital gains arising from immovable property at normal rate and immediate withdrawal of all exemptions and tax amnesty schemes, abolishing section 111(4) of the Income Tax Ordinance, 2001], reintroduce wealth tax, gift tax, estate duty and asset-seizure law to counter money laundering, terrorist financing, tax evasion and rent-seeking.


The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)

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