One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth.
This shatters the faith of the common man in the dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its death.
It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. According to an estimate by the World Bank, the country suffered a revenue loss amounting to 10.08 billion dollars in 2004-05 because of smuggling. In 2003 its quantum was estimated at over 8 billion dollars.
Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs 40 to Rs 45 billion in 1989-90, Rs104 billion in 1995-96 and Rs 250 billion in 2004.
Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan.
There is a need for a wider plan to document the entire economy once and for all. The present government must remember that half-hearted measures, typical of tax bureaucracy, will not yield the desired results. Firmness, consistence and steadfastness must be shown to counter money launderers, terrorists and tax evaders. Our survival now lies in freeing the society from the clutches of the corrupt.
According to figures released by independent quarters during 2005, the parallel economy is growing at an alarming rate of 22.93% per annum. Every fifth rupee transacted in Pakistan is black, according to the volume of black money generated in the year 2004-05 at Rs 900 billion meaning by that everyday tax fraud exceeds Rs 2.47 million.
This is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling (eg huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic.
Every now and then the State announces a tax amnesty scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals. Such schemes are a spank for the honest taxpayers [making them appear as a foolish lot for paying taxes].
An extortionist in Karachi or Lahore can decriminalise his ill gotten money through such a scheme but the poor businessman who paid that extortionist due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return!
The situation needs to be corrected. The facilitation of whitening untaxed money should be restricted ONLY to genuine business investors so as to bring the capital back into formal sector by paying some percentage as tax (kuffara) and not for the criminals, corrupt and unscrupulous elements in society.
Dr Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission of Pakistan has stated in his research paper Tax Policy and Resource Mobilisation in Pakistan that 70 percent part of the economy consists of 36 percent 'pure' black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy and 2.5 percent informal economy (unreported economy).
His study shows that the problem in low resource mobilisation is the rigid system of taxation, and emphasis of the government to increase revenue, ignoring the details of long-term policy measures.
The Government must announce Compulsory Public Disclosure of Assets Scheme requiring the following to make their assets and liabilities public:
-- High ranking civil and military officials
-- All the MNAs and MPAs.
-- Judges of the superior courts
-- Businessmen/Directors of all the companies who availed loans exceeding Rs 5 million from any financial institution
-- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc
The above privileged classes of society should act as examples for others. Their declarations can inspire the common people to pay their taxes honestly. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes, as suggested above.
Pakistan needs to develop a permanent structure in all the institutions specifically CBR , Federal Investigation Agency (FIA) , Securities and Exchange Commission of Pakistan (SECP) and State Bank so that the money laundering issue can be effectively tackled.
Special courts should be established and judges having expertise in financial and banking matters should be appointed, to hear money-laundering cases. The judges of such courts must be especially trained in the fields of accountancy, and money laundering.
There is an urgent need for introducing policy and structural changes in the banks. It is unfortunate that 'Benami accounts' are widely accepted in the public and private sector banks. Presently, there are 28.8 million accounts with the Pakistani banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes.
The State cannot tap the real potential of revenue potential unless stringent measures are taken to combat money laundering and eliminating parallel economy through proper documentation. This will automatically broaden the tax base, besides freeing the society of many evils.
INDEPENDENCE OF APPELLATE SYSTEM: It is vital for the Government's tax reform strategy that administration of the tax appellate system keeps pace with the changing business environment and the legislative programme, so that it is forward looking and business supportive.
The Government should undertake a significant programme of modernisation of the tax appellate system, aimed at creating the best possible way of resolving disputes between the taxpayers and tax collectors. The main aim of all tax reform measures should be promotion of investment and facilitating decision-making that is driven by commercial factors rather than by tax considerations.
The principles underlying tax reforms should not mean forcing unnecessary obligations on taxpayers, but to help them boost economic activities that would automatically lead to generation of more revenues. Secondly, the reforms of any kind imposing new obligations should be introduced after consulting the business community and securing their consent.
The present tax dispute resolution system, based on conventional appeal and review system under various tax statutes, is on the verge of collapse. Everybody is totally dissatisfied with it.
Those who have to impart justice complain of lack of facilities and huge number of cases, the complainants cry for early orders but have to wait for years (sometimes decades), and the revenue is always worried about the blockade of colossal amount of money in litigation process.
There is thus an urgent need to provide a fast track 'Tax Dispute Resolution System', under the independent Authority like federal Tax Ombudsman, aimed at:
(1) expanding the availability to taxpayers of administrative means for resolving disputes, and
(2) ensuring the availability of informal tax dispute resolution system for all taxpayers.
If the CBR wants to modernise the appellate system, the best first step can be to provide fast track mediation in tax dispute resolution that may restore its much-tarnished image in the eye of the public in general and taxpayers in particular.
The following can be the salient features of a fast track mediation tax dispute resolution system:
-- Fast track mediation should be offered to taxpayers universally without any conditionality. It should be done only through the office of Federal Tax Ombudsman through section 33 of the Federal Tax Ombudsman Ordinance, 2000 and not by persons themselves parties in the dispute or engaged in tax practice.
-- The program should be designed to assist in resolving tax disputes arising from an assessment, audit, raid etc.
-- Taxpayers may not give up any legal rights available under the statutes by using fast track mediation. The decisions under this mechanism should be appealable, and any unresolved issues can move forward to another court of law.
Appellate authorities, as a matter of law and principle, should be independent in the true sense of the word. At present, the taxpayer, if aggrieved, can file an appeal against the order of the Deputy Commissioner of Income Tax (DCIT)/Assistant Collector of Customs/Sales Tax before the Commissioner of Appeals/Collector Appeals who works under the administrative control of Central Board of Revenue.
It is a mockery of justice that an important functionary in the hierarchy of the judicial system is directly subordinate to Central Board of Revenue, which is the highest administrative authority under the Tax Laws. Everybody knows the attitude problems of these worthy Commissioners of Appeals/Collector of Appeals (sic!).
They are part and parcel of revenue collection machinery. They work as a strong arm of the assessing officers/collectors and their fellow field Commissioners/Collectors, who are assigned with budgetary targets.
The genuine appellant, victim of arbitrariness of the DCIT/Assistant Collector, cannot get any relief unless he pays "due" share to the first appellate authorities.
The judicial system under the tax statutes, or for that matter under any statute, should completely and truly be independent of administrative interference or control. It is an essential prerequisite for ensuring proper tax compliance and confidence of the taxpayer in the system.
The present tax culture is based on "bad faith" between the taxpayers and the tax collectors. Both are victims of self-interest and their main aim is to cheat each other. This culture can only be changed if an effective judicial system is introduced and properly implemented. All appellate authorities should be part of the judicial service working under the administrative control of the Honourable High Court.
The present working of Tribunal under the Ministry of Law is against the principle of "independence of judiciary". The Tribunal as well as first appellate forum (Commissioner/Collector Appeals) should work under the High Court of their territorial jurisdiction. The same system is presently in vogue for civil judges/magistrates.
In any society, administration and dispensation of justice should be the top most priority. A society without a sound, reliable and speedy judicial system that does not ensure effective justice dispensation cannot survive for long. Administration and dispensation of justice under the various tax laws in Pakistan need serious attention.
The entire system is now at the brink of disaster. There is an urgent need to ensure "justice", "rule of law", "fairness", "equity" and independence of appellate authorities from administration. The alternate informal tax resolution system on the pattern of Fast Track Mediation in USA, UK and EEC countries can be of immense help to improve collection of taxes and restoration of public faith in our tax machinery.
The present pathetic state of tax administration can be measured from the fact that every year over 75,000 writ petitions/appeals are filed in Pakistan against the orders of the tax authorities. The litigants have to wait for years to obtain orders. On the contrary, in the civilised countries, only a few cases go for litigation to higher courts.
A case in point is the United Kingdom where the number of income tax payers alone is 30 million whereas the number of appeals reaching the Lord Chancellor is only around 30 in a year. This confirms the tremendous public satisfaction with the quality of law and fiscal administration. In Pakistan we have barely 1 million registered income tax payers but the number of appeals filed annually is in thousands.
In addition to revamping our existing tax appellate structures, there is an urgent need that the CBR reviews its links with businessmen and provide them a fast track dispute resolution system thus helping them instead of forcing them to enter into costly and time-consuming litigations in courts/tribunals.
Taxpayers, especially huge transnational corporations and foreign investors, want certainty on the tax treatment of transactions as quickly as possible (and preferably in real time). Closely related to this is a desire for transparent processes that enable businessmen to predict with reasonable confidence the Revenue's attitude to an issue.
There will be times when a dispute is unavoidable but a mature relationship, built on mutual understanding and openness, should be capable of accommodating an element of business-like disagreement. To achieve this goal the CBR needs to introduce a fast track dispute resolution system without any further delay.
The present ADR mechanism is faulty and against the principles of Constitution of Pakistan requiring right to independent judicial hearings. The Mukmaka (settlement) under the present ADR (sic) system under the administrative control of CBR is totally unlawful.
POSITIVE CHANGE IN TAX POLICY: There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment-oriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from procedural implementation.
The recent efforts of the government to reform the tax system through World Bank loan/funding, recruitment of new members on market wages and relying on reports of the so-called foreign experts have not yielded any positive results or acceptability from the taxpayers.
It remains a closed door, bureaucratic exercise with no meaningful dialogue with the taxpayers, public pressure groups and tax experts who matter in the subject.
In the absence of a well-designed tax policy, the agenda of tax reform will remain lopsided. The parliament should not allow IMF-World Bank-imposed prime minister-cum-finance minister and his henchmen to make any legislative and administrative changes through the budget 2006-2007 till the time a transparent tax policy is evolved by the elected representatives of the people through debate and consensus in the house.
Such a policy then should be announced to secure support of all those who are directly/indirectly affected by it before its actual implementation.
Over the period of time our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy and not mere achieving of targets set out unreasonably on the dictates of foreign donors.
Our potential is much higher than these targets, which can never be achieved with the present incompetent, inefficient and corrupt tax machinery.
We should get ourselves free from the figure game. The existing tax policies have not only failed to reduce the fiscal deficit but have destroyed our industry and business. If we manage to formulate a rational tax policy and implement it through consensus and not coercive measures, there is every possibility that we would rid ourselves of IMF in a short span of time.
However, if we keep on following their prescription, we will neither realise fixed targets, nor achieve the cherished goal of self-reliance through resource mobilisation.
Our present annual tax potential is not less than Rs 800-950 billion provided the tax base is made equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn.
EQUITY PRINCIPLE: If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa.
The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability-to-pay principle views tax policy issues in isolation to incidence of public expenditure. Many regard this principle as the most equitable and just method of taxation. It is emphasised primarily for its redistributive role.
We in Pakistan have completely deviated from this principle, which is a constitutional obligation of the government. We must follow the Quranic injunctions in this regard which unambiguously and unequivocally command us to spend in Allah's way whatever is surplus after the fulfilment of one's legitimate needs [2:219]. There is no room of concentration of wealth in a true Islamic society.
The existing tax system itself is a worst expression of colonial heritage. It is highly unjust. It protects establishment and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes.
The common man is paying an exorbitant sales tax of 15% (in fact 42% on finished imported goods after mandatory value addition of 10% and 6% income tax) on essential commodities but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes, courtesy exemptions they have granted to themselves, as they are the rulers, but not taxpayers.
It is tragic that in a country where billions of rupees are being made on daily basis in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low and the Government is least bothered to tax undocumented economy and benami {name-lender) transactions.
The mighty sections of the society are engaged in these transactions and CBR being their handmaid has neither will nor ability to tax them. It exposes the uselessness of CBR as an institution to tap the real tax potential of the country.
The definition of 'business' given in section 2(9) of the Income Tax Ordinance, 2001 covers "adventure in the nature of trade" and yet our tax machinery is sitting idle causing colossal loss to the national exchequer by not bringing adventures in the nature of trade in real estate into tax ambit and giving undue tax exemption on gains arising on speculative transactions in shares and stocks.
Our tax-to-GDP ratio can rise to 20% in one year if we tax speculative dealings in real estate (this will also help in promoting construction industry as skyrocketing prices of land will come down) and bring black economy into tax net.
Instead of performing its prime duty, that is levy of tax where it is due, the CBR is busy in constituting committees to ponder over many issues relating to tax policy and administrative reforms, which are in fact the job of Parliament. It appears that the CBR is more eager to do the job of legislators rather than performing its primary function of levy and collection of taxes.
It is painful to note that the present structure of presumptive taxation has complicated the poverty problem of Pakistan. According to an Asian Development Bank study, the tax system of Pakistan, which was progressive till 1990, was converted into a regressive regime in 1991 with the introduction of certain withholding provisions in the Income Tax Law ( most of which are retained even in the new law promulgated in 2001) and VAT-type tax in the Sales Tax Act, 1990.
The result is that during the ten years' period (1991-2000), tax burden on the poorest households was estimated to have increased by 7.4 percent, while it declined by 15.9 percent on the richest households. This study of ADB is an eye-opener for the target-oriented CBR's stalwarts (sic) that in their frenzy of showing higher figures to their foreign masters they have put extra burden of taxes on the poor of Pakistan. History will never forgive them for this senselessness and treachery with their own people.
Pakistan's indirect tax system is aggressive and biased against the poor putting greater burden on the lower income households than the upper ones, shows a report, "Social Development in Pakistan; Annual Review 2004", issued by the Social Policy and Development Centre (SPDC) in May 2005. It states that the poorest 10 per cent of households contribute 16 per cent of their income to the three indirect taxes - General Sales Tax (GST), Central Excise Duty (CED) and Customs Duty.
However, the report reveals, the burden of tax progressively declines as income rises and the richest 10 per cent of households contribute only about 10 per cent of their incomes to the indirect taxes.
The report states that Pakistan's tax regime consists of four main revenue sources; GST, CED, Customs Duty and Income Tax. Its structure is dominated heavily by indirect taxes, which combines over two-thirds (68 per cent) of combined federal and provincial tax receipts. If surcharges are included, it observes, the indirect taxes rise to over three-fourth (76 per cent).
In terms of the share of federal taxes, indirect taxes account for nearly half (46 per cent), and if surcharges are included it touches 55 per cent, the report said.
According to the report, the average share of direct taxes for high income countries is 46 per cent while in the low income countries it is 28 per cent. Iran and India post direct tax shares of 40 per cent and 29 per cent respectively as compared to 27 per cent by Pakistan.
GST claims 9.3 per cent of the income of the poorest 10 per cent of households, but only 5.9 per cent of the income of the richest 10 per cent. In other words, the burden of GST on the lowest deciles is 58 per cent higher than the highest deciles.
Thus CED is the most aggressive tax, with the burden on the lowest deciles being 100 per cent higher than on the highest deciles. The customs duties are the least regressive with the burden on the lowest deciles being 28 per cent higher as compared to that of the highest deciles. The policymakers have exempted selected food items like wheat and rice from GST rate.
However, this does not imply zero-rating of GST on account of the fact that the inputs that go into the production of these items are subject to tax. That's why, the nominal tax rate of these items is zero, the effective tax rate amounts to about 7 per cent.
The average burden of direct taxes is 0.3 per cent, while the burden of indirect taxes is 13 per cent. Nevertheless, the structure of personal income taxes is still progressive. The lowest six deciles are exempted from taxation of their incomes, and the burden of income on the 7th, 8th, 9th and 10th deciles is shown to rise progressively.
However, it adds, the average burden of personal income tax on household incomes halved from 0.6 per cent in 1987-88 to 0.3 per cent in 2001-02 and the progressivity of the tax also declined over the period. This can be discern from the fact that while the burden of personal income tax as a percentage of household income has doubled from 0.1 to 0.2 per cent for the 7th deciles, the corresponding burden for the 10th deciles has declined by half from 4.3 to 2.1 per cent.
"The preceding incidence analysis of the tax regime shows that the richest 10 per cent of households bear the least burden of indirect taxation, and that their relative advantage with respect to direct taxes has further improved over the last decade and a half.
The report issued by the SPDC is an eye-opener for the policymakers. In the report the impact of presumptive taxes on goods and services under the garb of the income tax law has not been taken into account. Had it be done, the ratio of direct taxes would have shown a further declining trend.
The incidence of such taxes, which are imposed under income tax (sic), is borne directly by the consumers and the worst hit are the poor people. They have to pay GST on supplies of iodized salt which is sold under brand names. In the sub-continent when the British rulers imposed salt tax there was mass movement of disobedience which forced them to withdraw the levy.
Our rulers are even worst than the British imperialists as unashamedly they have imposed exorbitant GST of 15% on salt. What makes the situation more painful is the fact that nobody has ever raised voice against this cruel tax. It shows national apathy.
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 awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled on the directions of the IMF to pay GST of 15% [it is as low as 2% to 4 % even in Japan and Singapore which are affluent societies] and ever rising costs of public utilities and POL products.
Being directly violative of Quranic injunctions, the government must immediately take due cognisance and try to remove these dichotomies. Taxes should be meant for the welfare and benefit of public at large and to make the State invincible; not for the luxuries of rulers and State functionaries.
(To be concluded)
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