EDITORIAL: Federal Finance Minister Muhammad Aurangzeb while talking to the media persons during his meeting with local businessmen, agri, dairy and poultry farmers (particularly those engaged in dairy and poultry) at his Dera Judgewala Kamalia in Faisalabad pledged to ensure that the elite, estimated at around 190,000, currently evading taxes will be brought into the tax net.
FBR (Federal Board of Revenue) has been proactively sending notices and while as yet there has been no visible evidence of a reduction in the number of evaders one would hope that this effort, unlike past such efforts, is successful and those evading taxes do not find another avenue of evasion or relocate to other countries. Sadly, at present, given that the input costs (utilities, etc.) are far higher than those of our competitors, many units have relocated abroad.
Aurangzeb added that taxes are the lifeline of an economy, and the country cannot manage on borrowed funds alone. No one, locally or internationally, would challenge the veracity of his statement; however, two observations are critical.
First and foremost, tax evasion is illegal; however, tax avoidance is not illegal, and therefore the administration must initiate mitigating measures to ensure that all policies (be they rooted in the constitution or in the Finance Act) that allow for avoidance are appropriately dealt with.
The constitutional provision that disallows the federal government to impose a tax on the income of the rich landlords, stipulating it as a provincial subject, has not only supported the elite farmers but also provided the rich (from industry or banking sector or corruption) to invest in farm land with the objective of avoiding paying their due taxes.
The ongoing International Monetary Fund (IMF) programme requires the provinces to pass legislation that would allow them to tax the income of the rich farmers. Punjab to-date is the only province that has passed such a law with implementation to be effective from next fiscal year which is not assured as the law was passed hurriedly when the visiting IMF team challenged the 140 billion rupee deficit Punjab budget for the first three months that led overnight to showing a 40 billion rupee surplus and approval of the tax on rich farmers by the provincial parliament – legislation that was opposed by the Pakistan People’s Party that raises questions as to whether this law will be passed by the other provinces.
The best course is to amend the constitution which would enable the Federal Board of Revenue to collect income tax from the rich farmers at the same rate as the salaried class; given that the 26th amendment was passed against all odds one would hope that the stakeholders make a concerted effort again to pass this as well.
Second and equally importantly, tax proposals to widen the net with the objective of reducing the current high dependence on indirect taxes, easy to collect but whose incidence on the poor is greater than on the rich which accounts for rising poverty levels in this country, to direct taxes have been waylaid by organised (elite) sectors.
There are the traders who, through threat of strike action, have once again compelled the government of the day to withdraw the Tajir Dost Scheme that FBR officials claimed in March 2024 would generate an additional 250 to 300 billion rupees.
Subsidised utilities and zero-rating to five major export industries, recently ended as per the pledge by our economic team leaders to the Fund under the ongoing programme; however, pressure on the Finance Ministry to reconsider is mounting with the Commerce Ministry in the forefront of such demands. And at the same time our tax structure is anomalous, which implies that an industrial unit with the same output as another is being taxed differently.
There is no doubt that the entire tax structure is premised on easy to collect indirect taxes; and 75 to 80 percent of total direct tax collections claimed by FBR are in actuality taxes levied in the sales tax mode and collected by withholding agents.
There is therefore an emergent need to first formulate a tax structure that is fair, equitable and non-anomalous rather than focusing on raising revenue, as in previous governments, which has implied raising existing taxes, and the budget for the current year is no exception.
It is important to note that the acceptability of reforms is going to take a year or two, and in the interim period it is critical for the government to: (i) massively reduce its budgeted expenditure on the elite and reform the pension system; and (ii) Competition Commission of Pakistan must be vigilant in taking action against powerful associations of producers (textiles, cement, tobacco, etc.) used to set domestic prices, seek export subsidies and tax concessions as well as subsidised utilities.
Copyright Business Recorder, 2024
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