Anwar Kashif Mumtaz (Advocate Supreme Court) is a Tax and Corporate Lawyer, currently serving as President of Pakistan Tax Bar Association (PTBA). He also served as Secretary General and Senior Vice President of PTBA, Secretary General, Vice President and President of Karachi Tax Bar Association (KTBA). He has also served as Chairman of Federation of Pakistan Chamber of Commerce and Industry (FPCCI) Committee on Direct Taxes.

He has also been appointed by World Bank as its Consultant on Enforcing of Contract Indicator for Ease of Doing Business. He is an Advisory Board Member of Public Interest Law Association of Pakistan (PILAP). He also served as a Member of Business Integrity Champions Network by British Deputy High Commission. He has presented papers on Tax & Corporate matters including Corporate Governance, Corporate Social Responsibility (CSR), International Business Best Practices and Right to Information (RTI).

BR Research sat down with Anwar to discuss matters surrounding Pakistan’s taxation landscape. Below is an edited excerpt from the conversation.

BR Research: We keep hearing about tax base expansion, yet we continue to hover around 9-10 percent of tax to GDP, as squeezing the existing taxpayer seems the easy way out. We have not moved out of heavy reliance on a few sectors such as energy and banking over the years. So, when you advocate tax base expansion, is that a general policy prescription or do you have a workplan with key areas highlighted?

Anwar Kashif: The fundamental reason Pakistan performs poorly on the taxation front is documentation. Our economy is not documented properly by any stretch of imagination and that is the reason why those at the helm of policymaking, who are often the biggest beneficiaries of the lack of documentation, continue to offer prescriptions that lead to further squeezing of the existing tax base.

The global world has made the switch to technology in the taxation ecosystem, whereas we are still deciding whether to give technology a critical role in taxation system or not. At this point, you cannot have human involvement beyond a certain point, when it comes to ensuring a task as daunting as documentation of economy. Let us not forget we have a very sophisticated software system available in the form of NADRA, and our inability to document the economy despite that is a big failure.

Remember that tax will be the trickledown effect of complete documentation. You cannot expect things to be sorted out at the policy or implementation stage when the root cause is left unaddressed. Super taxes are not the problem as the basic concept remains the same that the more you earn, the more you have to pay.

The problem is that two to three key segments are either completely or partially out of the tax ambit. One is retail and trade, which is completely out of the tax net, because whenever there is even a small attempt to document the sector, they come out with knives and daggers to protest. The other big fish is the real estate sector, which has been the preferred parking lot for accumulated wealth over the years, and lack of documentation and inefficient taxation meant we lost hundreds of billions of rupees in potential tax revenue.

BRR: Is smuggling of goods also something that is hampering the entire process?

AKM: Another area that causes a lot of harm is rampant smuggling of goods. Imported goods coming in through the legal process with full tax compliance often lose competitiveness in the market, because of smuggled goods which have continued unabated for decades. In certain cases, you will hear of crackdowns, but that does not last long, and smuggled products cause a substantial loss to the exchequer.

And then the government usually responds by increasing the General Sales Tax (GST) rate. Instead of increasing it further from 18 to 19 percent, the authorities must seriously consider lowering the GST rate, which will in turn lower the retail prices of genuinely imported goods and lessen the incentive for smuggling. Obviously, this is not going to eradicate the menace of smuggling but will certainly reduce the extent.

BRR: Although there have been some strides taken of late, Pakistan remains a predominantly cash-based economy, which is obviously linked with the documentation exercise you talked about earlier. How do you see cash-based transactions with the taxation lens?

AKM: If you go to any tax-developed country, you will see negligible use of cash, even for the tiniest of transactions. If this gets implemented in Pakistan to the fullest, the entire trade and retail chain will be documented. Imagine that in a lot of cases in Pakistan today, retailers offer a higher discount for cash purchase, which tells you the incentive to stay undocumented in massive. It is the other way round elsewhere in the world, where digital transactions are the ones attracting discounts.

BRR: Do you think more than the policy side of things it is the implementation part that has hurt more? For example, we see big retail chains openly flouting the system, issuing fake invoices, as the cost of rigging the system is less than compliance, because of excessive human involvement.

AKM: Human involvement is not suited to the entire tax collection mechanism, and more so in our culture, where personal relations are used excessively and that leads to leakages and non- compliance. The simplest and perhaps the only way forward is complete digitization of the taxation process.

In developed economies, there is a certain level of trust between the taxpayers and the government as they know that certain necessities such as health, education, transportation, and infrastructure will be taken care of. In Pakistan, unfortunately the tax cycle is not there yet.

BRR: Where do you see Pakistan standing on the principles of equitable taxation? Do you think there is even an iota of fairness or sense of equity in how taxes are and are not applied to different segments of society?

AKM: Equitable taxation has been a particular subject of my interest and I have penned articles on the same. Let me summarize my thoughts on equitable taxation for your audience to have a better understanding of what fairness and equity in taxation mean.

Addressing economic disparities should be the crux of any exemption concept, tailoring it to an individual’s financial standing rather than the sector in which they operate. This approach aims at avoiding the state’s undue fixation on specific segments, fostering a more balanced tax system. However, the introduction of a distinct category labelled ‘non-filers’ by the state has raised concerns. This classification inadvertently provides tax evaders with an avenue to enjoy a privileged status, allowing them to pay minimal taxes as needed while circumventing audits and compliance. This not only demoralizes the existing tax filers but also erodes the crucial elements of fairness and equity within the taxation framework.

A big concern is the disproportionate burden placed on salaried individuals, who bear a substantial share of the tax load. Advocating fairness proposes a broader distribution of this burden, encompassing various income groups, including landowners and agriculture producers.

Indirect taxes present another challenge to the principle of equitable taxation as individuals with differing economic conditions are subjected to the same tax rates on goods, fuel, and related necessities. The resentment among taxpayers escalates when taxes primarily serve debt- servicing purposes.

The introduction of a distinct category labelled ‘non-filers’ by the state has raised concerns. This classification provides tax evaders with an avenue to enjoy a privileged status, allowing them to pay minimal taxes as needed while circumventing audits and compliance. This not only demoralizes the existing tax filers but also erodes the crucial elements of fairness and equity within the taxation framework.

BRR: What is your view on taxing all income regardless of its origin?

AKM: Absolutely. There is no concept of exemption anywhere in the world.

BRR: Do you see Pakistan going into that direction anytime soon, especially in terms of taxing the agricultural income?

AKM: Countries in the region had done land reforms in letter and spirit and reaped the benefits, whereas in Pakistan, that process has not taken place. But I want the government to first focus on the three key areas of retail trade, real estate and smuggling. Taxing agricultural income will also have an impact on food inflation, so that also needs to be taken into consideration. I am not against taxing agricultural income, but I am just stating the sectors in terms of priority.

BRR: Do you have a firm view on the post 18 th amendment scenario in terms of taxation? Have we improved over the years in terms of capacity building and overall performance?

AKM: In principle, I see no harm in the 18 th amendment, but our political system lacks maturity which is a drawback. At most times, we have had different government in each province, and they are often fighting for adjustments, which makes it a futile exercise in the end. It will work only when and if you have a collaborative approach. Having said that, provinces everywhere in the world have financial autonomy so why not in Pakistan. But it has to be done in a collaborative manner for it to work.

BRR: Are you suggesting that the federation would have done a better job in collecting tax on services than provinces?

AKM: No, I am not suggesting that. I am just stressing the need for a collaborative approach. In fact, Sindh Revenue Board has done a remarkable job in tax collection over the years. But the tax collected needs to be spent on the people. For example, 65-70 percent of tax is collected from Karachi, but look at the state of the city.

BRR: This brings us to the question of taxation without representation, of which Karachi’s example is the most glaring one. Also, in light of the recent election results which may not necessarily be a true reflection of people’s representation and could only lead to higher distrust between the taxpayers and the federation. With the level of disconnect today, are we not farther than ever before in terms of the public-government trust pact which is often times considered the foundation of taxation?

AKM: I think people’s confidence generally rises when representatives publicly disclose their assets. Once that information is in full public view, you will see more willing taxpayers. The purpose of the 18 th amendment was not to strengthen provincial governments, but to strengthen local governments. The true essence of the 18 th amendment was in devolution, which never really happened unfortunately. There will be no representation until and unless the powers are devolved to the grassroot in a transparent way.

BRR: As an office bearer of the Tax Bar, how do you see the tax filing and notice mechanism, and do you have any suggestions for the authorities to further streamline the process?

AKM: I must say that the authorities must conduct proper due diligence of all filings and only when there is a mismatch should a notice be issued. The energy spent on sending largely frivolous notices to filers, the focus and energy is much better spent converting the “non-filers” to filers. When the tax is deducted from every non-filer transaction, it simply means that the FBR has all the information.

That is the problem of “withholding”. It is not a revenue measure or a revenue stream. It is only intended to document the transaction chain, but there has not been any noticeable shift in well over 30 years.

The FBR also needs to dispel the notion that filing your tax returns gets you on an imaginary radar. If anything, there are multiple benefits of that, and I urge the government to further lower the rates for those who file returns. If your disclosure is any accordance with law, the FBR might issue a notice, but cannot bother you beyond that. There is nothing to be scared about and people need to realize that. In this digital era, you cannot hide your income and expenses from the authorities. So, it is in the best interest of the taxpayer to disclose a true declaration. Also, the process of filing tax returns has been made quite simple and easy by the FBR, so there are no excuses for people to not file tax returns.