A country's tax gap is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology', a joint study of Federal Board of Revenue (FBR), Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail, tax gaps by type of tax and describes the methodologies and data used for such estimates.
The report released in December 2008 under the name of Rubina Ather Ahmad of FBR and Mark Rider of Andrew School, warns that views expressed "are of the authors and not of the Government of Pakistan". It is shocking that the FBR on the dictates of World Bank initiated this study and when the final report was released it disassociated itself. This is typical of our government, always non-committal and hesitant to take any responsibility. After disowning this report, the FBR is still struggling to bridge the large tax gaps, which are the direct result of its persistent inefficiency, incompetence and rampant corruption.
For the fiscal year 2004-05, according to this report, Pakistan's federal tax gap was Rs 409.5 billion or approximately 69% of actual tax receipts of Rs 590.4 billion. Terming this as a "conservative estimate", the report claims a direct tax gap at Rs 262.8 billion (around 143% of actual collection of Rs 183.1 billion) and an indirect tax gap at 146.7 billion (36% of actual tax collection of Rs 407 billion).
In 2008, the data selected was for the fiscal year 2004-05 and the tax gap was estimated at 45%. Since then the tax gap has increased significantly and it can safely be concluded that it is not less than 70% of the actual tax collection. This report and many others do not take into account the real tax potential of Pakistan and therefore estimates of tax gaps are underestimated.
The real tax potential of Pakistan, by a very conservative estimate, is Rs 3,500-4,000 billion. However, the target for the current fiscal year at the time of budget announcement was fixed at Rs 1660 billion, which is now revised downward to Rs 1608 billion. The FBR, an inefficient arm of the government, is facing difficulties even in achieving Rs 1550 billion mark.
Who is responsible for the prevailing pathetic state of affairs? Our debt burden is increasing monstrously, the fiscal deficit is getting beyond control, inflation is crushing the poor, taxes are being evaded and avoided by the rich and whatsoever little is collected, is mercilessly wasted by the men who matter.
What a tragedy that the rich and the mighty are not only refusing to pay taxes but also living shahana zindagi (emperor-like life) at the expense of taxpayers'. They are the de facto beneficiaries of the State's resources - generated mainly by the landless tillers, industrial workers, professionals and white-collar employees.
Pakistan is not a poor country; the State'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. The absentee landlords (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper taxation on their enormous income and wealth. The President promulgated an Ordinance on March 15 to levy 15% surcharge on existing taxpayers and enhance indirect taxes on poor growers and the common man instead of taxing the rich.
An unholy anti-people alliance of the trio of indomitable civil-military complex, corrupt and inefficient politicians and greedy businessmen - controlling and enjoying at least 90% of the State resources - contribute less than 3% towards the national revenue collection. This tax gap has not at all been discussed in 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology', a study which is nothing but an eyewash.
The gigantic and useless government apparatus - doing nothing for public welfare - is also busy wasting whatever taxes are collected. The army of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) are not willing to cut down their perquisites and privileges. They are not ready to live like the common man by surrendering unprecedented perks and privileges that they are enjoying at the cost of the taxpayers' money.
For their shahana zindagi, they are burdening the poor, propertyless masses with more and more taxes. Time and again we have made a case for magnetising all perks and perquisites and rightsizing of government departments and corporations, but civil-military complex and their cronies in politics are not ready for such reforms.
The existing exploitative, rotten, regressive, ill-directed and unfair tax system is widening the existing gulf between the rich and the poor and this will ultimately lead to civil commotion and breakdown of the entire society. The sole emphasis on regressive indirect taxes [even under the garb of income taxation through presumptive and minimum tax regimes on goods and services] without evaluating their impact on the economy and the life of the poor masses and the lack of political will to tax the rich and the mighty is the real dilemma of our State - not scarcity of resources or the narrow tax base (100 million mobile users are paying exorbitant sales tax at 19.5% and 11.5% income tax after 15% surcharge).
Equity demands higher taxes from those who have higher income and wealth, but in Pakistan since 1991 all tax policies have been aimed at decreasing the tax burden on the rich but increasing its incidence on the poor. The realistic and correct working of tax gaps in Pakistan is not possible unless the quantum of the loss of revenue of trillions of rupees caused by successive governments since Ziaul Haq's - civil and military alike - is not taken into account. Successive governments have extended unprecedented exemptions and concessions to the rich and the mighty, some of which are mentioned below:
-- Ziaul Haq abolished all the progressive taxes eg 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 contained in section 2(1) of the Income Tax Act, 1922 then in existence, to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income for the first time in Pakistan, but foiled by a military dictator, supported by the Mullahs, who were funded by the big landlords and businessmen. It is now well-established that the pro-people economic policies of the Bhutto regime posed a great threat to the neo-imperialists and their gumashtas in Pakistan.
-- Zia's legacy continued for long 11 years and that of General Musharraf for nearly 9 years, but absentee land owners (including the mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax.
-- Taxation of "agricultural income" is the prerogative of the provincial governments under the 1973 Constitution of Pakistan. All the four provinces have enacted laws to this effect, but total collection in 2010 was only less than Rs 2.5 billion against actual potential of Rs 200 billion (share of agriculture in GDP in 2010 was about 22%).
-- Non-taxation of capital gains at stock market - exemption is meant for the rich and the mighty and not the small investors who lose more money than what they make due to manoeuvrings of big players - caused an annual loss of billions of rupees to the national exchequer till 2010 [loss from 2007 to 2010 alone was Rs 412 billion as admitted by the government in the Economic Surveys of Pakistan]. Despite, this so-called tax incentive, the market crashed many a times and billions of rupees of the small investors were gobbled up by big fish - once small brokers are now owners of many banks and investment companies and bid for vital national assets when privatisation offers are made! In the current tax year a nominal tax is imposed on capital gains if holding is less than a year and that too as a separate block of income. Full and proper taxation of big shark is still a distant dream due to the influence of the mighty whose benami accounts are managed by big brokerage houses. Annual tax gap under this one head alone is Rs 125-200 billion.
-- Tax losses for exempting (in fact not taxing) speculative transactions in real estate are to the extent of billions of rupees per annum. According to the Economic Survey of Pakistan 2009-10, the loss for fiscal year 2009-10 was Rs 700 billion.
-- Multinational Companies (MNCs), through abusive transfer pricing mechanism deprive Pakistan of a tax loss of over Rs 200 billion every year.
-- Wealth Tax Act, 1963, was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before taking charge as Finance Minister. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his world assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability annually. Repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without showing income, was shown to be justified despite tremendous revenue losses, distortion in the social set-up and the resultant misery inflicted on the majority of the people of Pakistan.
-- In 2002 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemption given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US $60 billion) started pouring in from all over the world remitted by all and sundry without any fear of being investigated, courtesy amnesty given under section 111(4) of the Income Tax Ordinance, 2001. Influx of enormous wealth was directed to the stock exchanges and the real estate market, where hungry sharks continued to devour the small investors through unholy manoeuvrings; or was used to artificially enhance prices of immovable property. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.
-- From 2003 to date, according to a conservative estimate, we have lost Rs 400 to 500 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life.
-- Section 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium of 1% to 2% of the entire proceeds! The loss caused due to this provision alone in the last five years is nearly Rs 275 billion.
-- In the last three years alone, revenue loss on account of taxing income from property at reduced rate is estimated at Rs 480 billion. The above are just a few areas showing how much tax loss we have been incurring perpetually since 1977. In 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology', no effort was made to take into account all these factors to correctly determine total federal tax gap.
The Pakistani state does not need any borrowing at all, if the rich and the mighty are taxed according to the established norms of democratic dispensation of justice.
Equity principle The existing tax system itself is a worst expression of colonial heritage. It is highly unjust. It protects the establishment and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. The poor are paying an exorbitant sales tax of 17% (in fact 45% on finished imported goods after mandatory value addition, federal excise duty, special excise duty, income tax and surcharge) on essential commodities. But the mighty sections of society - big industrialists, landed classes, generals and bureaucrats - are paying no wealth tax/income tax on their colossal assets/incomes.
It is tragic that in a country where billions of rupees are being made on daily basis in rent-seeking, speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low at 9.5%. The government is least bothered to seize undeclared assets and bring tax evaders to justice - there is not a single instance of prosecution of a tax evader under the law!!!.
The dire need in today's Pakistan is to reduce inequalities through a policy of redistribution of income and wealth by taxing the rich and mighty. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends in all democratic countries. In Pakistan, there has been a gradual shift from equitable to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the fundamental principle of horizontal and vertical equity. The equity principle can be held to be satisfied when the overall classification of individuals into categories is reasonable and broad enough to contain many individuals within each category and there is equality of treatment within each category.
For social justice and pro-people economic development, the government, through tax policies, must discourage certain activities, which are considered undesirable, for example, excise duties on liquor and tobacco and special excise on luxury and semi-luxury goods. Such measures act as deterrents in avoiding a spill-over of these items and creating disturbance in the society as a consequence. For achieving the cherished goal of establishing an egalitarian State, we need to take the following steps through the ability of the taxation system to influence allocation of resources:
-- transferring resources from the private sector to the government to finance public investment programme;
-- directing private investment into desired channels (rapid industrialisation) through heavy taxation of collossal income earned by absentee landlords from orchards and exploitation of labour;
-- influencing relative factor prices for enhanced use of labour and economizing the use of capital and foreign exchange;
-- increase the level of savings and capital formation by enhancing investment resources for economic development. In Pakistan we find a reversal of this principle. Recent years have experienced flight of capital, closure of huge industries and recession in the trade market. Lack of consistency in the tax policies have forced the business community to move towards safer havens depriving the country of invaluable capital. Similarly, foreign investors feel shy to make use of the tremendous Pakistani talent that goes to waste for lack of proper funding.;
-- protect local industries from foreign competition through the use of import duties, turnover taxes/VAT and excise. This has the effect of transferring a certain amount of demand from imported goods for domestically produced goods. Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But unfortunately and thanks to IMF-imposed economic wizards (sic), our dependence on imported products has been hit with an upward surge in the recent years. Due to the introduction of harsh tax measures and misadministration, our industrial sector has suffered so badly that instead of being able to export our goods we are forced to import in order to cater for the demands of the nation;
-- stabilise national income by using taxation as an instrument of demand management. Taxation levels could be used to eliminate the inflationary or deflationary gap in the economy. Taxation reduces the effect of the multiplier and so can be used to dampen upswings in trade cycle.
Taxes and poverty
There is a direct link between growing poverty in Pakistan and distortion in the tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax). The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line. According to official figures, in fiscal year 2009-10, the share of indirect taxes rose to 62% and that of direct taxes dipped to 38%. It once again confirmed that the taxation system in Pakistan is highly regressive. The government statistics wrongly accounted for in direct tax collection that portion of income tax collection which in fact was indirect in nature (fixed tax on imports, supply of goods, contracts and services and rental income). In reality, after adjustment of these collections, the share of indirect tax was not less than 78% in the total collection.
The poor and helpless masses of Pakistan desperately owe explanation from all those in power:
-- Why the privileged are continuously being favoured and thriving on the money collected as "tax" (sic) from their own poorer brethren?
-- Why it is that ordinary taxpayers having income of more than Rs 500,000 are required to submit annual wealth statements whereas the rich and mighty politicians, who have exempt agricultural incomes, have not yet made public their declarations of assets?
-- Why do they hesitate from paying wealth tax but charge taxes and levies of Rs 32 per litre on petroleum products knowing very well that these are consumed by the general masses?
-- Why not subsidize the poor and make good the loss by levy of wealth tax on the rich?
-- Why not monetize all the perks and perquisites of government employees and those working in state-owned corporations and force them to live amongst the common people rather than in fortified (cordoned off) GORs and palatial houses?
-- Why not curtail unnecessary and extravagant expenses on the civil-military establishment starting from the President House, to fill up the void?
-- Why not reduce the number of ministers/advisers instead of following a policy of appeasement and doling out public offices as if this nation was not burdened enough by worthless and incompetent bureaucrats?
Taxing the poor for the rich!
The people of Pakistan are the most heavily taxed nation in Asia. The privileged classes - ruling the country for the last six decades-are the culprits who do not pay due personal taxes on their collossal wealth and incomes and are beneficiaries of huge loan write-offs. They are guilty of plundering and wasting public money. The State has become so callous that the people living under the poverty line are also being subjected to tax on the purchase of salt, being sold under brand names. People are dying of hunger and abandoning their children but the President, Prime Minister, Governors, Chief Ministers, the army of ministers, state ministers and their lackeys are wasting millions on their "security", personal comfort, lunches, dinners and visits (domestic and foreign).
Based on above facts and figures, our revenue target for the coming fiscal year (2011-12) should not be less than Rs 4 trillion. This is achievable provided the mighty segments, identified above, are taxed according to their capacity, number of tax filers are substantially increased, equitable and rational policies are devised with the backing of the masses, tax machinery is completely overhauled and all exemptions and concessions available to the privileged sections of society are withdrawn. If taxes are collected to this extent, Pakistan can become a self-reliant economy and easily move towards an egalitarian State. This is the only way to get out of the present quagmires of "debt prison" and political enslavement.
(The writers, tax lawyers and authors of many books are Adjunct Professors at Lahore University of Management Sciences)
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