The adoption of Finance Bill 2007 by the lower house on June 22, 2007, in utter haste, without assessing its impact on the economy and devastating burden of regressive taxes on the poor, once again proved that the so-called elected representatives are not allowed to perform their constitutional duty under the umbrella of a military ruler.
The government was adamant to pass the budget without any meaningful debate, ignoring suggestions and amendments by opposition and Senate, disregarding all the 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 the formulation of tax policy of the government is concerned.
As usual it was the handiwork of the Finance Ministry wizards and bureaucrats sitting in the Federal Board of Revenue (From 1st July 2007 CBR is renamed as FBR) ), who even managed to get a number of laws, not falling in the ambit of Money Bill, approved under the grab of Finance Bill, 2007.
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 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 and the role of Parliament is adopting Finance Bill is that of an approver under duress.
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 on collecting taxes at source and without bringing the mighty sections of society within the tax net or collect what is actual due from them. They are interested in number game and are bent upon to collect 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 introducing presumptive taxes in income tax law.
The lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax, petroleum development surcharge etc has pushed an overwhelming majority of Pakistanis towards the poverty line. Since the fiscal policy has not been devised by the Parliament but by IMF-World Bank-loyal financial wizards, the priority has never been given to tax the rich and give relief to the poor.
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 is merely 2.8% in 2006-07, 2.9% in 2005-06, 3.0% in 2004-05, 3.01% in 2003-2004, whereas in 2002-2003 it was 3.15% [CBR YEAR BOOKS 2003-04 to 2005-06 and Economic Survey 2006-07].
In the face of this declining pattern, the Chairman FBR, in his Press conference on July1, 2007, made tall claims that the direct taxes during the fiscal year 2006-07 maintained "its marvellous growth throughout the year".
A brazen misrepresentation has been made by claiming that in respect of direct taxes "the year-end overall growth has been over 45.6 percent". In the collection of direct tax of Rs 328 billion for fiscal year 2006, 2007, the share of various taxes is as under:
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Direct Tax Collection during FY 2006-07
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Name of levy Rs (million)
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Income Tax 312000
Workers Welfare 1500
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Fund
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Workers 6500
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Participation Fund
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Foreign Travel Tax 2619
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Capital Value Tax 5000
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Source: Explanatory Memorandum on Federal Receipts 2007-2008
It is strange to note that Foreign Travel Tax has been shown as direct tax. In reality only income tax (excluding taxes collected under the garb of indirect taxes even within this levy) at around Rs 220 billion was the total share of direct taxes in total collection of Rs 840 billion.
Taxes collected at source on goods and services/contracts/supplies/rent etc, which being full and final discharge are in substance indirect levies, if subtracted from income tax collection, the actual figure comes to Rs 220 billion. Thus the share of income tax as percentage of total revenue is not more than 26%, whereas the same is claimed to be at 31.7% at page 68 of Economic Survey of Pakistan 2006-2007.
This exposes the so-called authenticity and reliability of official figures. The reliance on indirect taxes that constitute 70% 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 (wealth tax was abolished as a condition for joining a person as our finance minister!).
Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated. It is pertinent to mention that in 2006 the government of Sweden collected taxes at 50% 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 9.5 % of GDP.
Out of total collection of Rs 840 billion by FBR in FY.2006-07, regressive taxes are to the tune of Rs 620 billion (after making adjustment of indirect taxes collected under the name of income tax!). It has distorted the economy, raised the cost of doing business, widened the gulf between rich and the poor and made the national industry non-competitive.
The revenue deficit, despite this collection of Rs 840 billion, is monstrously high at Rs 200.5 billion and fiscal deficit at Rs 373.5 billion. The Chairman Revenue Board claimed that the share of direct taxes was sharply increased to 39 percent in fiscal 2006-07 against 30 percent in FY06.
This is gross misrepresentation of data. If presumptive taxes on goods and services camouflaged as income tax are included it touches 70 per cent. It is pertinent to mention that 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. In 2006, Iran and India posted direct tax shares of 40 per cent and 29 per cent respectively as compared to 39 per cent by Pakistan [in reality it is not more than 30%].
The present tax policies of 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.
It is emphasised 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 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 payment, and what not. One of the factors responsible for the present situation is the great speed with which black money is generated.
The 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. It is worth mentioning that soon after the passing of Finance Act, 2007, the Federal Government reduced rate of collection of tax from purchasers of locally manufactured cars from 5% to 2.5%.
This benefit to local car manufacturer cartel and those who has enormous money to buy cars [but not paying any tax claiming that it is from exempt source eg agricultural income etc] was extended by using executive authority. Pakistan is a unique place where the executive authority can undo the law made by the Parliament under so-called delegated powers which is 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 and 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 section 53 of the Income Tax Ordinance, 2001, the Legislature has violated Article 162 of the Constitution. At the time of promulgation of new law, the claim was that it would remove the infamous SRO culture and restore fiscal transparency in tax administration. On the contrary, the delegated power is even granted to FBR to amend the withholding tax rates.
We have pointed out this blatant violation of Constitution time and again and requested Supreme Court to take suo moto action under Article 189. It is sad to note that till today no one has taken note of it.
We were expecting that Bar Councils, taxpayers, tax advisers, civil society, and businessmen will raise voice on this issue, but till to day there is complete silence from their side. No wonder that a military ruler can play havoc with the supreme law of land as he knows that those who claim to be champion of the rule of law keep mum when things suit them.
We remain the lone fighters against this flagrant violation of constitution that have serious ramification for the federation as a whole. History will never forgive those who deprived the smaller provinces from exercising their constitutional right of fair and equitable fiscal jurisdiction.
The common man is subjected to sales tax of 15% plus 1% Federal Excise (tax incidence is 42% 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 15% sales tax] 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.
It is tragic that in a country where billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low [just 9.5% in fiscal year 2006-07] 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 and rulers of the day, being dependent on them, lack the will to tax them.
The present tax policies of 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. It is emphasised 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 monopoly over economic resources. There is no political will to tax the privileged classes. 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 World Bank and IMF to pay GST of 15% [it is as low as 2% to 4 % even in Japan and Singapore which are affluent societies].
(The writers are leading tax advisers and authors of many books on tax laws in Pakistan. They are members of visiting faculty of Lahore University of management Sciences (LUMS).
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