Taxing the poor

November 26, 2010 was rightly termed as 'Black Day' in the history of upper house of Pakistan by political parties, opposing the General Sales Tax Bill 2010 as Senate Chairman Farooq H Naek rejected their demand for count of votes. They claimed that members, opposing the recommendations, were in majority. However, the Senate Chairman, without counting the number of votes at either side, ruled that "recommendations stand adopted".
One cannot understand why the Chairman acted in such a manner when there were repeated demands by opposing parties for counting of votes-this was undoubtedly a lamentable act violative of all democratic norms.
Senator Raza Rabbani of Pakistan People's Party (PPP) opposed the bill which, according to him, was against the explicit provisions of the Constitution of Pakistan. He argued that National Parliament was not competent to legislate sales tax on services as this was exclusive right of the provinces. In the presence of this undisputed constitutional command, the action on the part of PPP, ANP, some Senators from FATA and small parties from Balochistan to approve the recommendations of the Senate Standing Committee on Finance and Revenue, vis-a-vis General Sales Tax Bill 2010 was unconstitutional as well.
Dejected by the act of the Senate Chairman, senators belonging to Muttahida Quami Movement, Jamiat Ulma-e-Islam-F, Pakistan Muslim League-Nawaz and Jamaat-e-Islami pledged before the media that their parties would strongly oppose the bill in the National Assembly and would reject it unequivocally. The PML-N legislators also criticised walk-out by senators belonging to PML-Q, saying it marooned the majority of members opposed to bill in the house.
Majority of the legislators, including some belonging to ruling coalition government, during the heated debate on General Sales Tax Bill 2010-which is verbatim reproduction of VAT Bill 2010 prepared by the IMF-experts (sic)-in the upper house opposed it on various constitutional grounds as well as from standpoint of its adverse effects on economy and unbearable increase of tax incidence on the poor. However, none of them mentioned the most irritating and oppressive aspect of the proposed Reformed General Sales Tax (RGST)-15% imposition on medicines (except a few life-saving ones). This was done earlier as well by a dictator through a presidential ordinance promulgated on March 21, 2002. We opposed it tooth and nail and managed to muster substantial support of media and civil society for its withdrawal.
At the time of imposition of sales tax on medicines in 2002, it was openly admitted by the Musharraf government, "We are imposing it as conditionality of the IMF's three-year Poverty Reduction and Growth Facility (PRGF)". This time, the civilian government is in the mood of perpetual denial and insisting "it is in the best interest of country and there is no pressure from foreign donors".
The IMF's three-year Poverty Reduction and Growth Facility (PRGF) programme was presumably aimed at reducing growing poverty in Pakistan. But the condition to impose sales tax on medicines at an exorbitant rate of 15% was a most novel way making basic health facilities beyond the reach of the poor. The same situation prevails in 2010. The IMF and their local lackeys want to overburden the economically-deprived people with taxes, but there is no condition imposed by the IMF and other donors to tax the absentee landlords, rich and mighty property owners and persons having enormous assets in and outside the country. The IMF, World Bank, ADP and other agencies keep on saying that they want to improve the economy of Pakistan-a stable Pakistan is in the interest of everybody is off-repeated slogan of all and sundry. But the most lamentable anti-people move like retrogressive taxes leave no doubt in anybody's mind that their actual intentions are to destroy our already fragile economy and social fabric-their actions are diametrically opposite to their tall claims.
Nowhere in the world, essential food items, books, garments for children, school items, and medicines are taxed under the GST or VAT (value-added tax) regime and if at all in the name of meaningful documentation of economy, the rate is very nominal at 1% to 3%. In Pakistan, our most obedient servants of the IMF have decided to tax many sectors relating to the fundamental needs of the people, at an exorbitant rate of 15%.
The health facilities in Pakistan are already inadequate, of poor quality and expensive. The state has never bothered to provide basic health facilities, the allocations in Federal and provincial budgets to health and education sectors are pathetically low. If we impose unbearable burden of sales tax of 15% on medicines, it will inflict another fatal blow to people below the poverty line, who are forced to buy medicines-they are vulnerable to more diseases due to malnourishment and poor living conditions. Instead of providing free medical facilities to the poor, extending meaningful incentives to the health and education sectors, it is strange that the government under the IMF dictates has conceded to a condition that is not justifiable on any ground- economic, moral and social.
The revenue collection of disastrous move of imposing RGST, as admitted by the government, would be meagre, whereas progressive taxes like wealth tax and capital value tax on transfer of expensive immovable property-incidence of which will be on wealthy classes alone-could fetch not less than Rs 400 billion. Wealth tax was criminally abolished in 2003. The rich and mighty in this country are increasing tax burden on the poor and helpless masses, but are not ready to pay wealth tax/income tax on their collosal wealth/incomes. It is high time that Federal Board of Revenue (FBR) publishes a complete directory of taxpayers and amounts paid by them during the last 20 years. Those who have failed to pay the taxes should be barred from taking part in any election or hold a government post. This will be a major change in election laws, paving way for reforms in democratic representation.
The unholy anti-people alliance of civil-military bureaucracy, corrupt politicians and greedy businessmen-most of them are related through matrimonial connections of their sons and daughters-is the main stumbling block for establishment of a true democratic polity in Pakistan. This ruling trio should also remember that if their activities continue, the day is not very far when the country faces a civil disobedience movement motivated by a tax revolt. On the one hand, all the policies are [apparently] aimed at reducing (sic) poverty in Pakistan, and on the other, a disastrous move has been initiated to push the most needy people of the society towards a situation where they will not have any means to obtain essential drugs and eatables, although the state keeps on claiming that it is committed to providing health and education facilities to every citizen. This self-contradictory move unveils the real intentions of the IMF and their local lackeys. They are not interested in alleviating poverty but only bent on promoting consumerism and collecting more revenue for self-aggrandisement.
The question of eliminating all kinds of exemptions available under the existing Sales Tax Act of 1990, under the conditionality of the IMF loan, has never been discussed or brought to the public's knowledge simply because of the reason that we do not have any democratic culture where such issues are openly debated, endorsed or rejected.
Previously, the military regime of Pervez Musharraf, after capturing power in October 1999, was blindly following the international donors in formulating economic and tax regulations resulting into awesome burden for the general people whose economic conditions since then are worsening and their purchasing power, fast eroding. Now, the same policy is being pursued by an elected government, which is more painful. It confirms that debt enslavement has hampered even our capability to move towards real democratisation of Pakistan.
The move to enforce VAT-now renamed as RGST-can still be made acceptable by adopting a middle path. As it is unavoidable under the IMF programme, the right course will be to impose it at a reasonable rate [between 3 to 5 percent]. It will fulfil contractual obligation with donors, bring more revenues and, at the same time, avoid unbearable tax burden on the poor and middle class population. The claims of the Finance Minister and other spokesmen of the government that 15% tax on essential items would be bearable for the poor is simply a blatant lie. The more and more people are being pushed below poverty line, economy is in deep recession, people have no jobs and yet our economic wizards are justifying more taxes, instead of giving tax breaks.
We all know that taxes collected are not spent on providing even basic education and health facilities to the masses-these are spent on the luxuries of the rulers and for the benefits of the rich and mighty. This is the most irritating aspect of governance-rather mis(governance). People would never pay their taxes diligently and voluntarily unless they are convinced that these are spent for their welfare. A government, not capable of representing the people, lacks any right to impose the taxes-it is an established rule of law that there can be no taxation without representation.
The poor living in this Land of the Pure have no representation in Parliament-they vote for the rich and mighty who cheat them, act against them, protect their own interests and loot the national wealth. The masses will have to topple the ruling clique through votes and elect their true representatives if democracy has to flourish in the real sense leading way to establish an egalitarian state free of all exploitations-fully conforming to Article 3 of the Constitution saying, "The State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability to each according to his work".
All the gentlemen, defending the RGST, must be aware of command ordained in Article 3 of the Constitution-government cannot levy any tax beyond the ability of a person. The persons living below the poverty line-unfortunate over 55 million now-cannot be asked to pay sales tax at an exorbitant rate of 15%. The rich and mighty will pass on this tax to the end users but will deposit only a fraction of it in the government treasury with the connivance of corrupt tax machinery-this modus operandi is already depriving the national kitty to the tune of Rs 400-500 billion annually. We need to plug this loophole first. The RGST will open new floodgates of corruption and tax evasion in Pakistan.
Dr Hafeez Sheikh and his team is certainly aware of the fact that taxes collected are wasted ruthlessly by the irresponsible rulers and government officials. If it is just a matter of collecting few extra billion rupees, it can easily be done by reintroducing wealth tax that was abolished with effect from 1st July 2003. It can bring to national kitty much larger amount than what the government is expecting from RGST-it can be postponed with assurance to the IMF that loans will be paid from wealth tax collections. There is no doubt that wealth tax is a tax on the rich.
In Pakistan, it is necessary because one major source of income, which is agriculture, is not taxed by provinces where feudal lords dominate the politics-especially in Punjab and Sindh. As a substitute tax base, levy on net wealth is, thus, fully justifiable as accumulation of wealth per se confirms that a person has the capacity to save even though his income remains outside the ambit of chargeability under the Income Tax Ordinance, 2001. For example, he has earned enormous capital gain from real estate, which cannot be taxed by the federal government under Federal Legislative List to the Constitution. Thus in the days when the wealth tax was leviable, even the big absentee landlords were paying some amount of personal tax. Proper wealth taxation can be a good source to provide health and education facilities to the poor, serving the purpose of redistribution of wealth-the most essential objective of taxes in any civilised society.
Our successive regimes-military and civilian alike-eliminated progressive taxes like Estate Duty, Gift Tax, Capital Gain and Wealth Tax, which were essentially taxes on the rich. They have since been imposing regressive indirect taxes-like RGST-which take meagre portion of the collossal income of the rich and a big slice of paltry income of the poor. What a tragedy that progressive taxes like estate duty, agricultural income tax and wealth tax are not collected by the provincial and central government and these are being replaced by anti-people taxes like RGST. The ruling elite is robbing the poor, but is not at all willing to contribute a single penny from its colossal (ill-gotten in many cases) wealth for the welfare of the needy.
Undisputedly, imposition of GST/VAT on all consumption is a good way to document the economy and raise income tax revenues ultimately. However, in our milieu where corruption is rampant in tax machinery and businessmen are unscrupulous, it will open new vistas of tax evasion. The crooked businessmen would collect GST from the masses, but would not deposit it all in the government treasury to avoid actual quantification of their turnover/income-the large portion of GST would go in the pockets of dishonest tax collectors and their friends in business and industry.
GST/VAT, being a consumption tax can be used effectively to check wasteful consumption [taxing luxury items at higher rate at impost stage] by collecting more tax from the rich who are more prone to higher consumption. However, all over the world there is a consensus that essential food items, educational tools/equipment/accessories and medicines are not wasted even if distributed free and that's why they are not subjected to GST/VAT. In principle, these items are not subjected to any consumption tax as their use is considered an essential human need. Every civilised government provides education and health to its citizens and keeps the prices of essential eatables within the reach of the less privileged sections of the society, but in Pakistan we are doing exactly the opposite-people have to pay heavily for health and education to private sector and eatables are now the most expensive in the entire region. Over the period of time, successive governments have raised the prices of essential items beyond one's imagination and today's Pakistan is one of the most expensive places to live keeping in view the ratio of expenses on utilities, food items, education and medicines to per capita income.
Only 2% rich and mighty of the Pakistani society, who own 80% of the wealth of the nation, would remain unaffected by the onerous tax measures such as 15% GST on medicines, rise in petroleum products and other utilities. Their wasteful consumption on luxury goods has never been taxed beyond the standard rate of 15% under the GST/VAT regime to dissuade them from such indulgence or to utilise funds from luxury tax for the benefit of the poor. On the contrary, the common man is continuously being over-burdened with exorbitant indirect taxes. This is extremely cruel and unjust-also violative of Article 3 of Constitution-in a society where the poor have to pay more than their capacity, while the rich are not paying any personal taxes or paying too less compared to their ability.
(The writers, tax lawyers, are Adjunct Professor at Lahore University of Management Sciences.)