The adoption of Finance Bill 2011 on June 22, 2011 without any meaningful debate and in utter haste by the national parliament has once again proved that our elected representatives (sic) are least bothered to work for the welfare of the people by devising long-term economic policies aimed at achieving the cherished goals of self-reliance, social justice and equal opportunities for the deprived segments of society.
They are only interested in safeguarding their untaxed assets, besides obtaining more and more perquisites and benefits. The ruling trio - mighty civil-military complex, corrupt politicians and unscrupulous businessmen - imposes its will on members of parliament in all matters. The Finance Act, 2011 is an epitome of apathy of parliamentarians towards the poor masses of this country, who voted them into power with the hope that they would do something for their socio-economic uplifting or at least provide them basic essential services - housing, transport, education and health, to say the least.
As was in the past, the worthy members of national assembly (MNAs) did not assess nor even bothered to give any thought to the impact of regressive taxation on the ailing economy and its devastating burden on the poor. Earlier, the excuse was that "we are not allowed to perform our constitutional duties under the umbrella of a military dictator". Now, in the absence of this pretext, it is obvious that fault lies somewhere else. Time and again, we have been emphasising that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation. This is only possible if the Parliament performs its Constitutional role, implements flawless process of accountability and ensures good governance. Theoretically, the Cabinet is answerable to the Parliament! But the truth is that MNAs run after ministers for personal favours and gains.
Parliament is subservient to the vested interest primarily, for the reason that the strongest man of the ruling party is the Head of State - dictating everybody inside or outside the government. This fatal combination of powers distorts the concept of democracy - absolute power, undoubtedly, corrupts absolutely. The model near home - India - proves the point. Sonia Gandhi as head of party does not hold any post in the government. She is thus in a position to enforce accountability of those in the government - party policies are her domain and not that of Manmohan Singh. In Pakistan, the real controlling authority is just one man having absolute say in all governmental and party matters. This is the real malaise of non-functioning of democracy in its true sense. The MQM once-again-angry- saga of June 27, 2011 erupted because the man at the top through his 'Czar' tried to twist their arm over AJK electoral issue - the real controversy allegedly was over Zulfikar Mirza's return to power in Sindh opposed ferociously by Altaf Hussain.
There was a 70-day-long debate - meaningful and constructive - in Indian Parliament on budgetary proposals of the government this year. In contrast, ours lasted for only 17 days - rather 11 days if holidays are subtracted. It is a national disgrace! Important tax measures and policies were not given any serious thought by the House. It adopted the Bill, as amended by the government on June 22, without going into the details, rationale and impact of each and every proposal. Proposals by the Opposition were rejected arbitrarily.
The government was adamant to pass the Finance Bill 2011 without any evocative debate, ignoring suggestions and amendments by Opposition and Senate, disregarding all norms of parliamentary process and transparency. The treasury benches in Parliament have once again proved that they are a mere rubber stamp as far as formulation of tax policy is concerned. The Finance Bill as usual was the handiwork of the wizards sitting in the Finance Ministry and Federal Board of Revenue (FBR).
This highly lamentable attitude of the government must be condemned by the public at large and media must play its role in highlighting this issue of vital national importance. In every civilised and democratic society, it is the sole prerogative of elected members to initiate the process of law-making and devising of national policies after taking public input. It is the prime rule of a democratic process that no law or policy should be made unless a thorough debate is held in the parliament. In Pakistan the rulers, military and civilian alike, always try to bypass parliamentary processes and then complain about lack of "democratic behaviour and culture" on the part of opposition. Every year budget-making exercise is entrusted to bureaucrats sitting in Ministry of Finance and Board of Revenue while the Parliament conveniently restricts its role as a silent approver.
Due to non-participation of public representatives in budget-making, the financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances as their tax policies are based narrowly on collecting taxes at source, without bringing the mighty sections of society within the tax net or collecting what is actually due from them.
They are interested only in number games and are bent upon collecting taxes where they are not due: there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when major tax burden was shifted on consumers by massive introduction of presumptive taxes in income tax law. Lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax has pushed an overwhelming majority of Pakistanis either towards or below the poverty line - the number is now over 72 million. Since fiscal policy has never been devised by the Parliament but by financial wizards imposed by the IMF and the World Bank, no priority is ever given to tax the rich and give relief to the poor. In Finance Act, 2011 regressive taxes have been enhanced but not a single progressive tax has been levied.
The sole stress on indirect taxation [even under the garb of income taxation through presumptive tax regime on a number of transactions] without evaluating its impact on the economy and the life of poor masses is a serious cause for concern. According to official figures, the contribution of income tax [although major portion of it is now composed of indirect levies or expenditure taxes) as percentage of GDP is continuously declining; it was merely 2.2% in 2009-10, 2.6% in 2008-09, 2.9% in 2007-08, 3.0% in 2006-07, 3.01% in 2005-2006, whereas in 2004-2005 it was 3.15% [YEAR BOOKS 2004-05 to 2009-10 of FBR and Economic Surveys].
In the face of this declining pattern, FBR is making tall claims that direct taxes during the fiscal years 2006-07 to 2009-10 have maintained "marvellous growth". A brazen misrepresentation of figures is committed claiming that in respect of direct taxes "the year-end overall growth has been over 45 percent". In fact, FBR has conveniently ignored the quantum of taxes collected at source on goods, contracts, supplies and rent, which being full and final discharge, are in substance indirect levies. If the amount collected under these heads is subtracted from income tax collection, its actual share as percentage of total revenue is not more than 20%, whereas the same is claimed to be at 34.7 in Economic Survey of Pakistan 2011. This exposes the so-called authenticity and reliability of official figures.
Reliance on indirect taxes that constitute 80% of total collection proves beyond any doubt that the tax system is directly contributing to rising poverty as people who possess enormous income and wealth are not being subjected to income taxation in Pakistan. Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified. It is pertinent to mention that in 2010 the government of Sweden collected taxes at 53% of GDP, almost twice as high as the total tax revenue of America and Japan, with both collecting around 25% of GDP. In the Euro area, tax revenue, on average, reaches 40% of GDP. In contrast, we have collected taxes at 9.8 % of GDP.
The present tax policies of the government are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The ability-to-pay principle is regarded as the most equitable and just method of taxation and emphasised upon primarily for its redistributive role. In Pakistan, our rulers have completely deviated from this principle, which is, in fact, a constitutional obligation of the government. The existing tax system protects the establishment and exploitative elements that have complete monopoly over economic resources. There is no political will to tax the privileged classes. Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental policies, meeting trade deficits, fiscal deficits and balance of payments, in addition to numerous others. One of the factors responsible for the present situation is the accelerating speed with which black money is being generated.
FBR is directly responsible for this phenomenon as its mafia-like operations has helped the people to avoid tax on incomes by paying it "due share". Through the infamous system of SROs [Statutory Regulator Orders], the FBR's top officials provide "legal" ways and means to the mighty sections of society to amass huge wealth that is now threatening the State's very survival. The most recent case is that of SRO 283(1)/2011 of April 1, 2011. This was issued as a result of negotiations between the export-oriented spinners and the government. APTMA did consider the problems of all those spinners who spun yarn that is used in the domestic consumption of cloth. Since it is becoming very difficult for them to pay 6% sales tax, the result is use of illegal ways to avoid paying tax by purchasing cheques at the rate of 2 to 3 percent. Yarn which is primarily meant for domestic consumption is being invoiced in the name of registered sales tax buyer thus depriving the national exchequer of 6% sales tax. This leakage alone is in terms of millions on daily basis. Goods are supplied at different stations and invoices are manipulated at other places. It is strange that exporters ostensibly having no domestic sales possess huge cash deposits in banks - no questions can be asked, courtesy presumptive taxation law.
It is worth mentioning that even before the passage of Finance Bill, 2011 by the Parliament, the Government reduced rate of duties for many "favourites" through SROs. Reduction of duties for cartels and those having enormous money (as claimed from exempt agricultural source) was extended by using executive authority. Pakistan is a unique country where the executive authority can conveniently undo laws made by the Parliament under so-called delegated powers which is again, gross violation of Article 162 of the Constitution of Pakistan, which reads as under:
"162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: - No Bill or amendment which imposes or varies a tax or duty the whole or pat of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression "agricultural income" as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President."
Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President but interestingly, this power has been delegated unconstitutionally to an executive authority. How can Parliament delegate a power which it cannot exercise itself without the prior sanction of the President? By delegating powers under tax codes, the Legislature has violated Article 162 of the Constitution.
We have repeatedly pointed out this brazen violation of the Constitution requesting Supreme Court to take suo motu action under Article 189. It is sad to note that till today our pleadings have fallen on deaf ears. We were expecting that Bar Councils, taxpayers, tax advisers, civil society, and businessmen would raise their voices on this issue, but till to day there is complete silence from their side. No wonder, any dictator - military or civilian - can play havoc with the supreme law of land as he knows that those who claim to be champions of the rule of law keep mum when things suit them. We remain the lone fighters against this flagrant violation of constitution that has serious ramification for the federation as a whole. History will never forgive those who have deprived the smaller provinces from exercising their constitutional right of fair and equitable fiscal jurisdiction.
The common man is subjected to exorbitant sales tax and Federal Excise Duty (FED) of 16% (tax incidence is 45% on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities (even salt sold under brand names is subjected to 16% sales tax) but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are shamelessly not paying any wealth tax/income tax on their colossal assets/incomes. It is tragic that in a country where billions of rupees are being made in speculative transactions at stock exchanges and in the real estate sector, tax-to-GDP ratio is pathetically low (just 9.8% in fiscal year 2009-10) and the Government is least bothered to tax undocumented economy and benami (name-lender) transactions. The mighty sections of society are engaged in these transactions while rulers of the day getting due share from them, have no inclination or desire to tax them. The present tax policies of government are violative of Constitutional provisions that require the State to provide social justice for all.
The existing tax system protects the establishment and exploitative elements that have monopoly over economic resources - those who own 95% of national resources are paying less than2% of overall tax collection. This shows why there is no political will to tax the privileged classes. Unfair taxation and inequitable distribution of resources is the root cause of our multiple socio-economic ills. State policies induce massive tax evasion (section 111(4) of the Income Tax Ordinance, 2001 is a permanent tool for whitening of untaxed money). Pakistan, for the last decade has been witnessing below 10 percent tax-to-GDP ratio, whereas in our region even Sri Lanka has tax-to-GDP ratio of 15 percent. After 10 years of World Bank-sponsored tax reforms, we have ended up with a monstrous informal economy and rampant corruption in tax machinery.
Determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax world-wide. In Pakistan, we have moved from this policy to unequal sacrificial rule where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as meritorious awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes whereas the poor people are compelled, on the directions of the World Bank and the IMF, to pay sales tax and federal excise duty of 16% (sales tax is as low as 2% to 4 % even in countries like Japan and Singapore which are affluent societies and there is no federal excise duty in these countries).
We have 100 million mobile users who pay both income tax and sales tax but only 1.3 million file income tax returns - if we exclude statements filed for presumptive taxes the actual number is below 750,000. Majority of mobile users may not have taxable income (Rs 300,000, raised to 350,000 from tax year 2012) yet they are burdened with undue liability. On the contrary, many rich people just pay a fraction of income tax (withheld at source) on their actual taxable incomes without bothering to file their income tax returns - in Pakistan less than 250,000 non-salaried return filers admitted that their annual income was more than Rs one million!
If out of total population of 180 million, we have 10 million individuals having taxable income of Rs 1.5 million (this is a very conservative estimate), the total income tax collection at the current rate from them should have been Rs 3750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 100,000, the gross figure would be nearly Rs 5000 billion. FBR collected only Rs 520 billion as income tax during fiscal year 2009-10 and figure for this year would be around Rs 620 billion. This shows a whopping tax gap of over 650 percent.
Similarly, in sales tax, federal excise and custom duties, due to rampant corruption, the total collection is only 20 percent of actual potential. In fiscal year 2009-10, FBR collected Rs 516 billion under the head sales tax, Rs 16 billion under federal excise duty and Rs 152 billion under custom duties. Total indirect collection of Rs 694 was pathetically low. It should have been at least Rs 3500 billion. If tax gap is bridged, the total revenue collection of Pakistan would be Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes). This would change the entire fiscal scene. We would have enough money for development and public welfare - government would retire debts in few years and we can easily become a self-reliant nation free from political subjugation.
However, this dream for Pakistan can never be realised unless the mighty sections of society are taxed, tax policy is used as a tool for industrialisation - taxing the unproductive sector to divert money to productive sectors - and redistributive charter of tax system is ensured - taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich. This trend must be reversed before it is too late.
(The writers, tax lawyers and authors of many books, are Adjunct Professors at Lahore University of Management Sciences)
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