Dr. Ikramul Haq
“The Laffer Curve, by the way, was not invented by me; it has its origins way back in time. For example, the Muslim philosopher Ibn Khaldun wrote in his fourteenth-century work The Muqaddimah: It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessment”—Dr. Arthur B. Laffer, known to have invented Laffer Curve, has made this observation in his book, Return to Prosperity,coauthored with Stephen Moore, senior economics writer for the Wall Street Journal
The Prime Minister Imran Khan and his economic team are clearly disillusioned with the Federal Board of Revenue (FBR) that is bent upon to let down the Government of Pakistan Tahreek-i-Insaf. FBR has history of failure to meet many a time downward revised targets, hampering business growth, creating arbitrary demands, blocking refunds and committing mega frauds in connivance with unscrupulous businessmen.
Pakistan has one of the lowest tax-to-GDP ratios in the world. 90% tax collection is through withholding agents or voluntary payments as advance tax or payments with returns or at import stage. Sadly, Revenuecracy wants to levy more taxes, demands more funds to run the monstrous machinery, but have no plan, or even a desire, to bridge the huge tax gap. They are keen to retain higher rate of taxes on narrowed tax base rather than imposing lower taxes on broader base. In this scenario, the frustration of Prime Minister and Finance Minister with FBR is fully justified. We need an autonomous National Tax Authority (NTA) that is efficient and free from any outside pressures (Reconstructing FBR, Daily Times, September 2, 2018).
According to FBR’s Year Book 2017-18, total direct tax collection in last fiscal year [2017-18] was 1536.6 billion, out of which income tax was Rs.1528.5 billion—Rs. 1047 billion from WHT(68.5%), Rs.335.79 billion came as advance tax (21.9%), Rs. 41.64 billion with returns (2.7%) and Rs.1.31 billion under ‘Tax Arrears Settlement Incentive Scheme (TASIS) 2008’ (.08%). FBR’s own efforts (collection on demand) yielded only Rs. 102.82 billion (6.7%)—from arrears Rs. 17.69 billion (1.2%) and from current demand Rs. 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns. This is the real dilemma faced by Pakistan. Elites and the rich are not sharing the burden of taxes due from them.
The collection under income tax head also shows that it is not tax on total income base, but includes indirect tax on many items that include amongst others on consumption, expenditure, investment, and in many cases just transactions that are devoid of any income-yielding activity. For example, a person sells a house of his brother who lives abroad and on withdrawing cash on his instruction has to pay tax under section 236P of the Income Tax Ordinance, 2001. A salaried person, after paying tax under section 149, is compelled to pay tax on cash withdrawal (section 231A). In 2017-18, collection under section 231A (cash withdrawal) was Rs. 34 billion. On commercial/industrial electricity bills advance tax collection was Rs. 33.8 billion and from mobile/telephone users it was Rs.47.4 billion.
It is an irrefutable fact that about five percent of the country’s workforce, approximately 3 million, earns taxable income. However, tax returns received by FBR for tax year 2018 were only 1,596,340 (figure for tax year 2017 was 1.81 million). Out of these, 90% filers paid income tax less than Rs 10,000! The issue is not only that of low return filers but also total non-reporting by the rich and mighty and underreporting by the majority of the filers.
Tax base under indirect taxes (sales tax and excise) is also extremely narrow. About 82 percent of entire sales tax and federal excise duty comes from the top 100 companies. In fiscal year 2017-18, total collection of sales tax (import) was Rs. 814.6 billion, out of which share of petroleum products alone was Rs. 264 billion (32.4%). In sales tax (domestic) total collection was Rs. 676.6 billion out of which share of petroleum products was Rs. 283 billion (41.8%).
We need a simple, fair and predictable tax system: 10% tax on individuals (with alternate minimum of 2.5% on net wealth), 20% on companies and other entities, and 8% sales tax on all local supplies (for exporters 0% tax). This will fetch us tax of Rs. 7 trillion (Rs. 4 trillion income tax and Rs. 3 trillion as sales tax). We can get Rs. one trillion by levying 2% customs duty on all items (exporters importing raw material to get refund once export proceeds are realised by State Bank).
Failure to harness the actual tax potential (Raising Rs. 8 trillion, Daily Times, September 20, 2018) is the real dilemma of Pakistan. The existing tax structure is not only detrimental for economic growth but also not yielding required revenues for the State. The economic managers must realise that excessive taxation on savings does not increase government revenues. Once income has been taxed then savings and transactions should not be taxed. Is there any country in the world where banking transactions and withdrawal of cash are being taxed like it is done in Pakistan?
The donors and lenders (IMF, ADB, World Bank and DFID etc) never mention the oppressive side of our tax system and non-availability of public services. They are fond of discussing “low-tax-to-GDP ratio” in isolation. Initiatives like Research and Advocacy for the Advancement of Allied Reforms (Raftaar), funded by Britain’s Department for International Development (DFID), keep on emphasising need for more revenues, without pointing out where the taxpayers’ money goes to.
Our rulers live lavishly while Pakistan ranks at 146 out of 187 countries in the latest Human Development Index (HDI). Not less than 25 million children out of school in Pakistan in gross violation of Article 25A of the Constitution—see detailed judgement of Supreme Court 2014 SCMR 396. Raftaar and other initiatives like, Make Tax Fair, Pakistan Tax Justice Network, Tax Justice Coalition etc, must campaign for a just tax system—details available in two research studies, Abolish Pro-rich Tax Regime [Huzaima & Ikram, Oxfam, 2014]and Towards Flat, Low-rate, Broad and Predictable Taxes [ Huzaima & Ikram, PRIME, 2016].
We need to establish NTA to collect all taxes imposed at all tiers and National Tax Court, having registries in all major cities, to decide tax disputes within six months. If these measures, as elaborated in above-cited papers, are implemented, there can be collection of over Rs. 10 trillion at federal and provincial levels, making Pakistan prosperous and self-reliant.
The writer is Advocate Supreme Court and Adjunct Faculty at Lahore University of Management Sciences (LUMS).