In recent months, the World Bank and International Monetary Fund (IMF) have suggested a number of changes in our tax statutes that are highly controversial and debatable. Under their pressure, the Finance (Amendment) Ordinance, 2009 was promulgated by the President on 28-10-2009, while the National Assembly was to meet in just a few days ahead - the Ordinance was patently unconstitutional.
The changes on the dictates of the IMF/World Bank intend to burden the less-privileged segments of society, whereas the rich will remain unaffected. Implementation of these proposals, without any public debate and assessing their impact on the poorer segments of society, will have ramifications - destroying the cherished goals of self-reliance, social justice and equitable distribution of income and wealth.
The prescriptions of the IMF and World Bank for our ills are not based on the correct diagnosis. Their sole stress is on enhancing regressive taxes that are bound to destroy economic growth, as well as further widen the poor-rich divide. In none of its studies prepared for Pakistan, the World Bank and/or IMF has bothered to assess the incidence of the Value Added Tax (VAT) on various income groups of society.
No critical evaluation has been made about what impact the VAT will have on our ailing economy. The only point highlighted is that the VAT - levied across the board - will generate extra revenue of Rs 400 billion. The so-called experts of the IMF and World Bank have no idea about our real tax potential, which is not less than Rs 4000 billion.
Instead of suggesting the restoration of progressive taxes-wealth tax, capital gain tax, estate duty, gift tax etc-that were once in existence in Pakistan, these institutions are supporting the continuance of a pro-rich tax policy. By levying fair and equitable taxes and withdrawing exemptions given to the rich, we can easily generate Rs 4000 billion per annum. But our ruling trio - crooked civil-military bureaucracy, shady politicians and greedy businessmen - resist any such move, for obvious vested interests.
Sadly, though understandably, the IMF and World Bank have also been working to further their cause. The World Bank-funded tax reform programme (sic) has failed to yield any positive results. This is evident from the fact that after five years of the Tax Administration Tax Reform Project (TARP), the basic ideas (eg introduction of VAT and the formation of Inland Revenue Service) are still controversial.
It is strange that things that had to be done in 2004, when the 5-year TARP (it is in fact "TRAP") was started, at discussion stage, at the end of 2009. It confirms that from 2004 to 2009, borrowed funds of millions of dollars have been wasted. This is the sordid story of tax reforms in Pakistan. Now with the establishment of the Inland Revenue Service, they think wonders will be achieved. This is just a change of nomenclature - a cosmetic change.
Unless the mindsets of officers change, nothing will change. The process of change requires a change of minds and hearts, something which is missing in the FBR. The officers are incompetent, inefficient and corrupt, both financially and intellectually. Now the Customs and Excise Group is at war with the Income Tax Group. Taking their infighting to courts shows the utter failure of the FBR stalwarts as well as a lack of indiscipline in revenue service.
In this milieu, the IMF and World Bank are insisting for the enforcement of VAT that requires a sincere, competent and dedicated administration. VAT is a specific turnover tax, levied at each stage in the production and distribution process. Although the VAT ultimately bears on the individual consumption of goods and services, liability for VAT is on the supplier of goods or services. VAT utilises a system of tax credits to place the ultimate and real burden of tax on the final consumer and to relieve the intermediaries of any final tax cost.
VAT is calculated by applying the applicable rate at a taxable stage to the appropriate taxable base of goods or services; it is then reduced by the VAT (as indicated on the invoices delivered to the purchaser), which direct affects the cost of the various elements constituting the price of goods or services.
We wrote in these columns in 2000, "in Pakistan there are substantial deviations from the pure form of VAT (as in vogue in Europe and some other developed industrial societies), because of the exercise of various tax rates, exemptions and concessions for certain goods and services and specific provisions governing imports and exports.
It is therefore not VAT but a VAT-type tax in Pakistan". In 2009, the World Bank has just reiterated this in its "research study" - this is the height of complacency. In its "research study" (sic), the World Bank did not tackle the most important issue: how VAT will be enforced in Pakistan where more than 50 per cent of economy is undocumented. The IMF-World Bank experts say that it will take us five years to enhance the tax-to-GDP ratio to 15% [presently it is just 8.8%].
They are oblivious of the size of the existing monstrous black economy, which if taxed at current rates, will enhance our tax-to-GDP ratio to 19 percent in just one year! Such taxation will expose the ruling trio that is the real owners and beneficiaries of this black economy. Why do the IMF and World Bank not suggest asset-seizure legislation to bring the entire undocumented economy in the tax net? They know it will end their control over our affairs - resource mobilisation, these steps will make us self-reliant and end debt enslavement.
The issue in Pakistan is not that of lack of revenue resources, as wrongly portrayed by IMF and World Bank, but the documentation of the economy - ending the culture of tax evasion and fiscal frauds. The forces representing the bazaar [different associations of traders], unscrupulous industrialists, absentee landlords and corrupt civil-military bureaucrats are the impediment.
These segments are not ready to pay personal taxes on their colossal wealth and income - in most cases created from undeclared sources. They are not worried about the VAT, knowing that they can pass its burden to the consumers. As the under sales tax regime, they will not record, honestly, each and every transaction under VAT. If they will do so, their personal incomes in the process will get documented.
Resultantly, they would have to pay income tax from their own "pockets"-incidence of direct taxes cannot be passed on. There has been a perpetual policy of appeasement towards these forces by successive governments - military and civilian alike. The IMF and World Bank want a continuation of this policy. They have not suggested any measures to increase the share of direct taxes - presently dismally low at 23% in our total tax collection. In fact, they want that through the VAT, the poor keep on paying taxes to fund the luxuries of the rulers.
They have not forced the government to publish a tax directory of the rich and mighty, so that people can see how much tax is paid by the privileged classes. The prescriptions given by the IMF and World Bank will not solve our problems, rather further compound them.
The rich and mighty segments, identified above, will pass on the burden of VAT on to the poor people and will still avoid personal taxation. In the 1990s, the IMF and World Bank caused a crushing deathblow to our industry, when on their advice, we introduced an exorbitant sales tax rate of 21 percent - within a short span of 2 years we had hundreds of sick industrial units.
Later on, the rate was reduced to 18%, then 15% - again raised to 16% in 2009 - but the fact remains that heavy indirect taxation has pushed 45 million Pakistanis below the poverty line. The IMF and World Bank, fully aware of this fact, are still insisting on VAT.
Their agenda is obvious: destroy our industry and push more and more people below the poverty line. VAT will be a death pill for our economy in general, and for the poor people in special. We can generate extra revenue of Rs 800 billion by just taxing speculative transactions in shares, real estate and the colossal income of absentee landlords.
This taxation will also not involve any complicated enforcement issues that is the case with the VAT, due to constitutional distribution of taxation rights between the Centre and provinces. The right of levying indirect taxes on goods and services should be given exclusively to the provinces, within their respective geographical areas, as is the case in all the major federations - Canada, India and USA.
(The writers, tax lawyers, are visiting professors at Lahore University of Management Sciences)
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