Huzaima Bukhari & Dr. Ikramul Haq
Why has Pakistan failed to enforce voluntary tax compliance? In democratic countries people can feel and even measure tangible benefits of taxes paid by them. They get facilities of health, education, transport, housing, income support when unemployed, social security allowance and pension benefits, just to mention a few. In Pakistan they get nothing. The answer is thus obvious. The citizens find it futile to pay to the government, though Pakistanis are among the leading philanthropists of the world.
When anybody pleads for paying taxes diligently, the people ask: “do you know how ruling elites play havoc with the taxpayers’ money”? They ask for calculating cost to national exchequer in providing tax-free perks and perquisites 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. They argue that you first stop this colossal wastage of funds and then debate the issue of low tax-to-GDP ratio.
In social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden and benefits of public expenditure while maintaining vertical and horizontal equity. Taxing the rich for the benefit of the poor is at the core of social democracy. It encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society e.g. women and children, minorities, the disabled and unemployed. All these elements are missing in our polity and tax policy. In Pakistan, the poor are subjected to heavy and cruel taxation to finance the luxuries of Riasti Ashrafiya—militro-judicial-civil complex and public office holders who enjoy free perquisites, benefits, including getting valuable state-owned plots in prime locations at throw-away prices or free as awards and rewards. The way they waste and plunder taxpayers’ money is no secret.
The country is surviving on bailouts from IMF due to perpetual failure of the ruling elite to tax the rich and mighty that matter in the Land of Pure. Revenues worth trillions of rupees have been sacrificed by governments–civil and military alike—since 1977 extending unprecedented exemptions and concessions to the privileged classes. Gradually, the federal and provincial governments since then have abolished all progressive taxes e.g. Wealth Tax, Estate Duty, Gift Tax, Capital Gain Tax etc.
The historic decision of taxing “agricultural income”, passed by the Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” as obtaining in section 2(1) of then Income Tax Act, 1922 to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan, but ruthlessly foiled by a military dictator.
During Zia’s rule of 11 years and that of General Musharraf for nearly 9 years, absentee land owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax. Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have laws to this effect, but total collection in 2018-2019 was less than Rs. 2 billion (share of agriculture in GDP was about 22 per cent).
No one has calculated how much tax loss Pakistan has suffered perpetually since 1977 on account of non-taxation of agricultural income alone as suggested under Finance Act, 1977. If we add total loss of revenue through various exemptions, non-taxation of benefits given to State Oligarchy (Riasti Ashrafiya) and through Statutory Regulatory Orders (SROs) issued during the last four decades, the number comes to over Rs100 trillion—this explains how unprecedented concessions to the rich has made the state poorer rendering every citizen of this country to enormous indebtedness. We would not have required any borrowing at all, if tax losses were historically not incurred.
In a nutshell, the main goal of tax reforms should be aligned to economic policy that is how to unshackle the constituent elements of economic growth by letting market forces play their respective roles. The Tax Reforms Commission in its final report submitted in 2016 stressed upon the government to transfer the benefits of economic growth to enhance social wellbeing and cohesion through transparent and well-designed taxation. Unfortunately, this report was marked secret by now fugitive Ishaq Dar, then Finance Minister of Nawaz Sharif.
The reality behind annual growth of 16-20% in revenue collection of FBR from 2013 to 2018 under Ishaq Dar remains untold. The facts reveal that behind the “extraordinary” (claimed and acclaimed) revenue growth lies not only blocking of refunds of billions of rupees, advances from big corporate taxpayers, but also substantial increase in number of withholding tax provisions and enhancement in their rates, exorbitant sales tax on petroleum products, and not by increasing the number of filers. Once de facto Prime Minister-cum-Finance Minister, now fugitive, Muhammad Ishaq Dar, was not only hiding these facts, but was also brazenly and blatantly hoodwinking members of the Parliament, international lenders/donors and the public at large.
For the last many years on instructions from top bosses of FBR, field officers have been denying adjustments of determined refunds against demands. They have been raising illegal demands and blocking genuine refunds. Unfortunately this practice continues under Shabbar Zaidi, Chairman FBR taken from outside and Dr. Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs. Field officers are saying that they have the same “instructions” from their bosses as were in the days of Ishaq Dar and Haroon Akhtar to squeeze the existing taxpayers as much as they can. It is high time that an audit by the Auditor General of Pakistan is commissioned by Parliament to ascertain the quantum of refunds unlawfully withheld and how much advances, not due, were taken to show higher tax collection.
Devising a rational and innovative revenue mobilisation strategy is never considered by politicians or self-styled wizards sitting in FBR. All agree that we need to adopt economic policies aimed at rapid growth and investment. In the last many columns, it was emphasised that our top most priority should be sustainable growth and prosperity for all—taxes will automatically increase but collecting oppressive taxes in an ailing economy can lead to further deterioration. Every political party promises rapid industrial growth as its main agenda on paper, but when in power fails to do so. The same is the case with PTI. The biggest challenge before PTI is to dismantle the elitist structures that fleece the poor and benefit the rich. The culture of VIPs/plots/perks/benefits needs to end along with all waivers, concessions, exemptions, amnesties and immunities for the rich and mighty.
Only through sustainable growth rate of 7% for at least a decade we can generate required employments of two million per year. Without this growth rate we cannot overcome our fiscal deficit and enhance tax-to-GDP ratio. We need radical changes, namely, more tax from the rich, reduction in the exorbitant sales tax rate (it should be 8-10% across the board), bringing corporate tax rate to 20%, and introducing equitable tax base, simpler and fairer tax procedures—‘Towards Flat, Low-rate, Broad and Predictable Taxes’ [PRIME Institute (April (2016)].
We are all aware about massive sales tax evasion coupled with under-reporting and non-reporting of incomes in Pakistan. The challenge is how to bridge the tax gap of billions of rupees—it is 70% according to an official study whereas independent analysts say it is more than 100%. The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System (TIS), which is capable of recording, storing and cross-matching all inflows and outflows.
The viable solution to counter tax evasion at the importation stage is installing of radiographic scanners that use x-rays or gamma rays to provide an image of the internal contents of containers. This not only increases detection rate of contraband hidden in containers but they also help to detect any secret compartments within containers. These scanners are working successfully at the two busiest ports of the world, Rotterdam and Singapore—we must install the same without wasting any further time. Many companies can be contacted to provide this service and they can recover the cost/profit from our revenue. The plea by FBR that it requires huge investment in buying equipment and training personnel is nothing but a flimsy excuse (in fact motivated by ulterior motives as it would end their notorious era of corruption). The use of radiographic scanners is necessary to counter precious revenue leakages. One hopes that Shabbar Zaidi will take up this matter on priority basis.
For checking massive leakage in revenues, all in-bound and out-bound containers should be scanned/x-rayed. At big retail outlets cash registers with sealed memory should be provided as state property with surveillance with CCTV network and any tampering should be punishable by summary trial. CCTV monitoring should be made mandatory at big factories, restaurants, waiting rooms of leading doctors, lawyers and other professionals.
There should be tax incentives for reporting purchase to FBR—at least 5% as refund of the amount paid as sales tax. The procedure for claiming refund should be simple, i.e. payer should email evidence to the Central Tax and Refund Depository, which authorises refund directly to the credit card/bank account used after verification of genuineness of the invoice (by checking sellers’ registration number). In this scheme, the people may choose not to claim full credit of sales tax paid since they might not be able to justify the sources of their expenses. For broadening of tax base, the government can announce immunity for 3 years from scrutiny of expenses declared through sales tax invoices alone—it would go a long way to document the economy yielding more and more revenues in the coming years under income tax regime.
The above scheme would encourage people to obtain sales invoice for each and every transaction, which is presently not being insisted upon. If buyers are given incentive, they will insist on invoice and the government without expending any money or making extra efforts would be able to substantially expand the tax net. Such schemes were successfully implemented in Taiwan, Turkey and Venezuela.
In Pakistan’s peculiar milieu, innovative measures would have to be employed to restructure the tax system and restore public confidence in tax officials. A State that has miserably failed to protect the life and property of the citizens lacks moral authority to collect taxes. Thus, even a good tax system will not work unless the prevalent situation—apathy of the elites in ignoring the masses—is not changed.
The Parliament, first of all, should introduce Taxpayers’ Bill of Rights assuring that money collected from citizens would be spent prudently on their welfare and not for the benefit of a few. Secondly, there should be taxation of all incomes irrespective of their source (agricultural or non-agricultural). Thirdly, broad-based and harmonised sales tax (HST), covering all goods and services, at a low rate of 8% should be introduced and implemented.
FBR should be made an autonomous and efficient body insulated from external political, financial and administrative pressures. The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts in the field and implement it after securing consensus in the Parliament. This alone can help in raising the much-needed revenues of at least Rs. 8 trillion at the federal and Rs. 2 trillion at provincial levels.
Paying taxes, people say, is unjustified when State is indifferent and elites openly show apathy towards their fundamental needs. Our rulers live lavishly while Pakistan ranks 146 out of 187 countries in the latest Human Development Index (HDI). Not less than 25 million children out of school in Pakistan in violation of Article 25A of the Constitution—see detailed judgement of Supreme Court 2014 SCMR 396 re Petition regarding miserable conditions of schools. World Bank report, World Development Indicators (WDI) 2015, shows that 12.7 percent of Pakistan’s population lives below $1.25 per day, which is categorised as extreme poverty, people are dying of hunger and diseases, deprived of basic facilities of life.
Rich and mighty, with the help of crafty tax advisers, easily avoid taxes exploiting weak enforcement and lacunas in laws. Admittedly, non-reporting and under-reporting of incomes and evasion of sales tax/customs/federal excise duty is rampant in Pakistan but it must be seen in the context of giving unprecedented tax concessions, immunities and amnesties by the successive governments, military and civilian alike. They never bothered to crack down on untaxed money. On the contrary, the ruling elites have been appeasing tax cheats by extending generous tax amnesties and whitening schemes and through provisions like section 111(4) of the Income Tax Ordinance, 2001. In the face of these realities, people ask why we should pay taxes. The State must ponder about it before reforming the tax system that for them and donors means more taxes!
The men in power say that problems persisting for the last more than 60 years cannot be solved in a few months or even in 5 years’ term for which they are elected. They claim that their main problem is how to deal with powerful bureaucrats who are inefficient and corrupt. The same rulers, who express helplessness before bureaucracy, openly commit tax evasion and seek protection behind laws and amnesty schemes. There exists an unholy alliance between the politicians and bureaucrats. Bureaucrats please their political masters and in return get favours. If elected representatives are sincere, they should pass asset-seizure legislation and confiscate all the ill-gotten money and untaxed assets. This step will not only ensure accountability and transparency but solve the most pressing issue of eliminating fiscal deficit and debt burden.
As soon as political elite starts paying taxes, bureaucrats or businessmen will be left with no excuse but to follow the suit. If the present government brings 15 million ultra-rich into the tax net asking them to pay low-rate flat-tax, imposes single-stage 5% sales tax across the board, there will be no fiscal deficit. This goal can only be achieved if the government simultaneously brings much-needed reforms in civil services, tackles tax evasion through asset-seizure legislation and counters rampant corruption in the tax machinery by not throwing some officers out of job but making the system workable—the staff should be paid justly with strong accountability.
Pakistan is capable of substantially reducing or even eliminating its fiscal deficit and debt burden in a couple of years provided that a comprehensive and well-designed work plan based on multi-dimensional strategy is prepared and implemented for resource mobilisation and debt retirement coupled with ending all tax-free perks and benefits to militro-judicial-civil complex by monetizing the same. The huge and expensive properties occupied by them should be converted into income-yielding assets or sold in market through public auction. They should get composite pay package, based on market wages, as is the case in private sector e.g. banks and arrange their own residences and conveyance. They must live among the masses and not in fortified areas called GORs. Their alienation from masses, which they are supposed to serve, and quest to preserve elitist structures are the root cause of dissatisfaction of citizens with the system.
Unfortunately in Pakistan, successive rulers, both military and civilian, used taxes as a tool to extort from the masses as much as possible for their own comforts and luxuries. By resorting to repressive tax laws, they make the rich, richer and the poor, poorer. Our financial managers are caught up in a dilemma. On the one hand there is a mounting pressure to reduce fiscal deficit through improved collections and on the other, they are not ready to abolish innumerable tax exemptions and concessions available to the rich and mighty. They have no will to plug revenue leakages.
There cannot be two opinions about the need for major information technology and human resource improvements in FBR as well as effective audit operations, but first of all a transparent tax policy and development-oriented tax reform agenda should be made public. Tax reforms without an effective tax administration and rational tax policy are meaningless. The Government of Pakistan Tehreek-i-Insaf (PTI) has already retreated from its decision to implement the recommendation of Tax Reforms Commission of establishment of National Tax Agency by June 2020 for achieving the goal of a functional, efficient and integrated tax administration.
Pakistan cannot improve tax collections unless fundamental tax administrative reforms are taken and the same should be done under the banners of Council of Common Interest and National Economic Council. A fully automated, professional and efficient National Tax Agency manned by members of All Pakistan Unified Service would alone be in a position to improve capacity by detecting tax avoidance and evasion through tax intelligence system—see details in Case for All Pakistan Unified Tax Service, Business Recorder, August 31, 2018.
Presently, FBR is collecting 95 per cent of taxes by imposing more and more tax obligations on organisations and individuals in the form of irrational withholding tax provisions and/or advance tax and payments with returns. Our politicians lack willingness or vision to achieve a sensible balance between income, capital and consumption taxes. They serve bureaucrats who conveniently go for ill-designed social programmes convincing politicians that these would attract more votes. The country actually needs more investments in creating human capital (e.g. education, vocational training and health), and necessary public infrastructure to increase productivity of the economy.
The federal government is not allowing education expenses incurred by parents as deductibles in computing taxable income, on the contrary withholding is provided if fee exceeds Rs.200,000. It is not even ready to exempt the income of writers who contribute towards promotion of science, literature and other fields. In fact, has imposed 10% withholding on their royalty!!
The existing complex tax system is anti-business, anti-people and anti-growth. It protects the interests of the rich who can obtain “services” of crafty tax advisors knowing how to beat the system. Those who cannot do it have to grease the palms of tax officials to survive. There are at present about 95 million unique mobile users who pay both income tax and sales tax but only 5 million have taxable incomes. Federal Government wants returns from those who do not earn taxable income though they are already burdened with undue liability to pay income tax in advance. More returns mean more exploitation by tax officials as these people demand refunds, but who will give them refunds?
Since long, Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental projects, meeting trade deficits, fiscal deficits and balance of payments, in addition to numerous others. One of the factors responsible for the present situation is mafia-like operations in tax administrations as well as exemptions and immunities trough the infamous system of SROs, amnesties and asset whitening schemes—all meant for the rich and mighty.
If we want to correct the situation, we need a simple system where return filing is not a hassle. We must promote SMEs and big businesses that generate employment and are engines of growth. Excessive and regressive taxation prevent individuals and businesses from taking full advantage of the opportunities of the new knowledge-based economies. Taxpayers should share the burden of protecting those who are less privileged in society, either through well-designed social protection but not through excessively rigid job protection measures and inflexible labour regimes that penalise productivity. That is why a fair and transparent tax system is so essential for maximising economic growth.
In a nutshell, the main goal of tax policy and administrative reforms should be aligned to economic policy that is how to unshackle the constituent elements of economic growth by letting market forces play their respective roles. For achieving this goal, simplifying tax system and eliminating fiscal deficit, a detailed study is available, Towards Flat, Low-rate, Broad and Predictable Taxes, published by PRIME Institute in 2016. The vested interests do not want to simplify the tax system and facilitate businesses so they never discuss it, open it for public debate and adopt after input from all stakeholders. Unless we revamp the entire tax system, our economic mess will continue to persist.
The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS)