The adoption of Finance Bill 2012 on 14 June 2012, with a number of amendments proposed on the last day, was a disgrace for the National Assembly. There was no debate at all on tax measures and the proceedings were wound up in utter haste. This shows apathy of the elected representatives (sic) towards important constitutional obligations under Article 73 and 82 of the Constitution Islamic Republic.
Every year, their attitude confirms that they are only interested in safeguarding their privileges, untaxed/undeclared assets, besides obtaining more and more perquisites and benefits. The ruling ashrafiya - mighty military-civil complex, corrupt politicians and unscrupulous businessmen - gets what it wants from members of parliament in all matters. Indifference shown by the Treasury and Opposition benches during budget session amounts to open defiance of the mandate of the masses of this country, that 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, worthy members of the National Assembly (MNAs) did not assess nor even bothered to ponder about the impact of regressive taxation on the ailing economy and its devastating burden on the poor - out of total revenue 78% comes from indirect taxes and tax-to-GDP ratio is one of the lowest in the world.
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. Constitutionally speaking, 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 the 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 Dr 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 government was adamant to pass the Finance Bill 2012 without any evocative debate and Opposition was not at all interested to suggest any changes. Some amendments suggested by Senate were incorporated but without any debate. The Parliament once again proved that it is 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).
Due to non-participation of public representatives in budget-making, 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 the tax base since 1991, when major tax burden was shifted on consumers by introduction of massive presumptive taxes in income tax law. A 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 60 million.
Reliance on indirect taxes that constitute 78% of total collection proves beyond any doubt that the tax system is directly contributing to poverty as people who possess enormous income and wealth are not being subjected to personal taxation in Pakistan. Thus, the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified. The present tax policies 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 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 common man is subjected to exorbitant sales tax and Federal Excise Duty (FED) of 16% to 19.5% (tax incidence is 35% 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 amassing more and more wealth without paying any income tax. It is tragic that in a country where billions of rupees are concentrated in a few hands, tax-to-GDP ratio is pathetically low (just 9%) and the Government is least bothered to tax undocumented economy and benami (in the false name of other person) transactions. The mighty sections of society are engaged in these transactions while rulers of the day getting due share from them, have no inclination to tax them.
Unfair taxation resulting into 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 Sri Lanka has tax-to-GDP ratio of 17 percent in 2011. After 10 years of World Bank-sponsored tax reforms, we have ended up with a monstrous informal economy and rampant corruption in tax machinery.
FBR as it exists today is incapable of exploiting real tax potential of nearly Rs 7.5 trillion. By collecting just Rs 1930-1950 billion at the end of this fiscal year, they are claiming to have achieved wonders and created record! Let us examine some facts and figures: if 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 3,750 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 5,000 billion. FBR collected only Rs 520 billion as income tax during fiscal year 2009-10 and figure for this year would be around Rs 650 billion. This shows a whopping tax gap of Rs 4,350 billion.
Similarly, due to rampant corruption in sales tax, federal excise and customs duties, 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 customs duties. Total indirect collection of Rs 694 billion was pathetically low. It should have been at least Rs 2,500 billion. If tax gap is bridged, the total revenue collection of Pakistan would be Rs 7,500 billion (Rs 5,000 billion direct taxes and Rs 2,500 billion indirect taxes). This would change the entire fiscal scenario. We would have enough money for development and public welfare - government would retire debts in a 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 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 partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences.)
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