Paradigm shift in tax policy

‘The impact of economic growth on the lives of people is partly a matter of income distribution, but it also depends greatly on the use that is made of the public revenue generated by economic expansion’—An uncertain glory-India and its contradictions by Jean Dreze and Amartya Sen.

This is in continuation of last week’s column [Budget, taxes, revival & growth, Business Recorder, May 19, 2023]. Achievement of the cherished goal of self-reliance is not possible with the existing outdated, oppressive and unjust tax policy and outdated tax machinery coupled with unproductive expenditure, burgeoning debt burden and massive debt servicing. It is high time to make a paradigm shift in prevalent tax policy.

Our revenue potential at federal and provincial level is not less than Rs 14 trillion provided tax base is broadened, pro-growth, equitable and rational policies are devised with the backing of stakeholders, tax machinery is completely overhauled and all exemptions and concessions available to the privileged sections of society are withdrawn.

If we succeed in tapping optimum tax potential, there will be no need for any internal or external borrowing. Implementation of a rational tax policy can convert our current fiscal deficit into surplus within a short span of time for which we need inclusive and sustainable growth.

Rational ‘National Tax Policy’ is essential to increase government revenues and to improve citizens’ lives. When taxes are fair and government spending prioritizes essential public services, growth becomes a reality resulting in reduction of both poverty and inequality.

This was emphasised in a paper titled, Fair Taxation for Poverty Reduction & Equality (Huzaima & Ikram 2015). This can be treated as “proposals”, the Federal Board of Revenue (FBR) is seeking for the budget 2023-24, though it was mentioned in earlier columns that “it is the constitutional obligation of Legislature and not Executive” under the Constitution of Islamic Republic [“the Constitution”].

Tehreek-e-Insaf (PTI) that had coalition governments at the centre and in three provinces during its tenure in office, could not even start a meaningful countrywide debate on devising a pro-growth National Tax Policy what to speak of presenting its blueprint that it claimed during election campaign was ready and awaiting implementation. Position of the alliance government of Pakistan Democratic Movement (PDM) is equally pathetic. It is more concerned with eliminating PTI and its head than holding elections.

Tax policy reforms have never been on its agenda as the present National Assembly has 5-year tenure till 12 August 2023.

The PDM came to power just to save the skin of its top leadership from the National Accountability Bureau (NAB), which is again being used by those who matter in the land for eliminating “undesirable” political figures or for forcing them to change camps or for the time being saying goodbye to constituency politics.

It is an incontrovertible fact that onerous tax policies of successive governments, military and civilian alike, have widened the rich-poor gap. In the wake of Covid-19 endemic and even before, millions were pushed below the poverty line, courtesy anti-growth and pro-rich policies.

The State, as defined in Article 7 of the Constitution, must act quickly for a paradigm shift in all spheres of governance—both at structural and operational level.

As regards taxation for ensuring substantial revenues as well as social equity and economic expansion, a road map is available in Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE).

Our main dilemma

High taxes and lower yields have resulted into lack of funds for industrial and business growth and public benefits, but colossal unaccounted/untaxed cash is circulating in the economy in search of further “undercover” gains. Our political culture supports rent seeking and racketeering. Tragically, this social evil is doubly compounded as it necessitates greater and greater tax burden on law-abiders.

The most crucial problem faced by Pakistan is devising measures to curb tax evasion and distributing the burden of taxes fairly and justly—the rich enjoying tax exemptions and amnesties. Honest taxpayers are disillusioned by the fact that elites not only get amnesties for concealed assets but also abuse taxpayers’ money for unprecedented luxuries.

For a meaningful change, the federal and provincial governments should abolish all regressive taxes forthwith and concentrate mainly on growth. Tax amnesty schemes must be dispensed with once and for all and unexplained assets must be confiscated by the State for the benefit of the poor.

Fundamentals of tax policy

There is a national consensus that existing tax policy needs to be reformulated providing an equitable, pragmatic, investment-oriented tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from implementation perspective.

Past efforts to reform the tax system, through foreign loans/grants, have not yielded desirable results. The bureaucratic, closed-door meetingsand lack of any meaningful dialogue with stakeholders and tax experts is the root-cause of failure for a research-based, pragmatic tax policy—foreign-funded tax reforms will never succeed. The Executive should have no power to issue Statutory Regulatory Orders (SROs) in blatant violation of Article 77 read with Article 162 of the Constitution.

Equity principle

The existing tax system as a whole—at national and provincial levels—is highly unjust. It protects those having monopoly over economic resources. There is no political will to tax the privileged classes.

The poor are paying exorbitant sales tax and even advance income tax. On the contrary, the mighty get tax waivers and concessions. The predatory segments even indulge in benami [name-lender) transactions and invest heavily in real estate through front men to whiten proceeds of crime. This culture must end.

Transparency should be in all areas. At the same time, tax rates should be brought down to promote industrialisation and growth of small and medium enterprises (SMEs).

Benefit principle

Successive governments have failed to convince the people for voluntary payment of taxes on their real incomes. Since rulers indulging in wasteful expenditure have never bothered to live within their means, failed to protect the life and property of the people and provide them basic needs like health, education and civic amenities, massive tax non-compliance has become a rule and not an exception.

Things will never improve unless citizens are convinced by actions and not mere words by rulers that taxes are meant for public welfare, not for the luxuries of rulers and state functionaries. The Government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty.

These welfare-oriented schemes may also include free medical and educational facilities, low-cost housing, and drinking water, uplifting of rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of their taxes, there will be better tax compliance.

Our tragedy is that even after numerous oppressive and high-rate taxes fiscal gap is widening every year, bringing more miseries for the common people of Pakistan. Taxation is a potent instrument to shape and influence the socio-economic policies of a country. It is, therefore, imperative for us to formulate a rational tax policy beneficial for all and not by following blindly, prescriptions given by lenders/donors. Its main features are available in above mentioned books.

The governments in the coming budget to be announced on June 9, 2023 must bring fundamental structural and operational changes and not mere amendments here and there in tax codes that instead of servingsome useful purpose, further complicate matters.

The government must work for National Tax Policy taking all stakeholders on board for achieving rapid industrial and economic growth that will automatically take care of revenue mobilisation without putting any undue burden on the masses.

(Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023