The adoption of Finance Bill 2014 on June 21, 2014 using the crude tool of majoritarianism, ignoring sound tax policy needs, once again confirmed disrespect of the rulers for a responsible democratic dispensation. It also proved their apathy towards the economic growth and improving the lot of the poor. The Government of Pakistan Muslim League-Nawaz [PML-N] was adamant to pass the Finance Bill 2014 without any meaningful debate. It ejected all the proposals of Opposition-even the major tax amendments suggested by Senate were ignored. The parliamentarians of ruling party as usual acted as a rubber stamp. The Finance Bill, the handiwork of the tax bureaucrats sitting in the Federal Board of Revenue (FBR), was passed in routine as has been the case every year. Interestingly, nobody takes the incompetent people of FBR to task, because of whom the country has failed to collect even Rs 2200 billion in taxes, though actual potential is Rs 8500 billion.
The members of Pakistan People's Party criticised the government for giving powers to FBR to enhance Gas Infrastructure Development Cess (GIDC). They said it was the exclusive domain of the Parliament. However, Ishaq Dar insisted that GIDC was a federal tax and it would continue. Since PML-N had majority in the National Assembly, the Finance Minister secured changes in the GIDC through the Finance Bill in utter disregard of the Constitution. This could not have been part of Money Bill. The matter should have gone to Senate as well. This shown old mindset of PML-N leadership to always violate the established laws and rules.
Dar, in the winding up budget speech, withdrew many revenue generated measures in the name of accepting "sensible" proposals-in other words submitting before the power of mighty trading class. He maintained levy on bonus shares and the alternate corporate income tax knowing that both the measures were detrimental for corporatisation of business. The PML-N has given free hand to the traders to avoid taxes, but has imposed extra burden on already over-taxed corporate sector.
There is no worthwhile measure in the Finance Bill 2014 that can force the super-rich to file their income tax returns. For non-compliance their assets should be confiscated. They are still enjoying tax amnesty through section 111(4) of the Income Tax Ordinance, 2001. Extra tax of Rs 250 has been imposed on SIMS. It would have no impact on the rich but is going to hurt the poor. As we have already mentioned in our previous article, Dar misses reforms again, Business Recorder, June 13, 2014, the extra burden of withholding tax for non-filers would not increase number of income filers as they have margins to pass it on the consumers.
The need of the hour is creating a modern and efficient National Tax Authority replacing FBR that has lost its relevance. It is evident from the fact that out of 727,076 individual who filed income tax returns, 304,359 paid nil tax. 32,663 individuals paid 78.43% of total income tax received by FBR. In January 2014, there were only 19,850 persons that paid sales tax with their returns! Do we really need FBR after this performance? All of us know how they show tax collection, which is either refunded later on or collected through arbitrary demands that never stand the test of appeals.
Like earlier years, the militro-judicial-politico-bureaucratic complex-real rulers of Pakistan-received whatever they wanted from the taxpayers' money- billions allocated for the perquisites of President, Prime Minister, ministers and advisors, parliamentarians, generals, judges and high-ranking civil servants. The poor voters as in the past have been subjected to more hardships through indirect taxes.
Time and again, we have been emphasising in these columns that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation. This is only possible if the Parliament performs its Constitutional role of providing the people of their fundamental rights, implements flawless process of accountability and ensures good governance. Constitutionally speaking, the Cabinet is answerable to the Parliament, but the truth is that MNAs run after ministers for personal favours and gains.
Parliament is subservient to the vested interest primarily, for the reason that the head of the ruling party is also Prime Minister and his close relative is Finance Minister. This fatal combination of powers distorts the concept of democracy-absolute power, corrupts absolutely and in Pakistan it is more than evident as the real controlling authority vests with just one man having absolute say in all governmental and party matters. This is the real malaise, the main cause of non-functioning of democracy in its true sense.
The common man is presently subjected to exorbitant taxes (tax incidence is as high as 35% to 45% on finished imported goods after applicable customs duty, regulatory duty, sales tax, federal excise, mandatory value addition and income tax at source), but the mighty sections of society such as politicians-cum-businessmen, landed classes, big industrialists, generals, judges and bureaucrats are amassing more and more wealth without paying any income tax. The Government is least bothered to tax undocumented economy and benami (name-lender) transactions. The mighty sections of society are engaged in these transactions while the corrupt FBR officials getting due share from them, have no inclination to tax them.
Unfair taxation resulting into inequitable distribution of resources is the root cause of our multiple socio-economic ills. State policies induce massive tax evasion (section 111(4) of the Income Tax Ordinance, 2001 is a permanent tool for whitening of untaxed money). FBR as it exists today is incapable of exploiting real tax potential of nearly Rs 8.5 trillion. By collecting around Rs 2000-2100 billion or even revised target of Rs 2275 billion at the end this fiscal year, they would claim to have achieved wonders and created record! They will get rewards, bonuses and double salaries for this pathetic performance. Nobody will look into the fact that they blocked refunds over Rs 150 billion, if not more, and unlawfully secured at least Rs 30 billion in advance. Everybody will also forget the fact that 1090 officers out of about 1575 did not file their income tax returns till 20 May 2014. Is there still a justification to reward them?
Pakistan can easily collect Rs 8.5 trillion as revenues. If there are 5 million individuals having annual taxable income of Rs 1.5 million (FBR itself has admitted that there are 3.6 million rich people who do not file returns), total income tax collection from them at the prevalent tax rates comes to Rs 1875 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000, the gross figure would not be less than Rs 5000 billion. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. The total collection under these heads should be at least Rs 3500 billion. Had Dar devised and implemented ways for bridging the prevalent tax gap, he would not have any need to increase indirect taxes or impose erratic taxation like advance income tax collection on bonus shares and alternate corporate tax of 17% of accounting profit.
Collection of Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes) would change the entire fiscal scenario. We would have enough money for development and public welfare-government would retire debts in a few years and we can easily become a self-reliant nation free from subjugation of donors. However, this dream for Pakistan can only be realised the ruling classes start paying taxes due from them, tax collected are used for welfare and development Tax policy encourages industrialisation by taxing the unproductive sector to divert money to productive sectors. At the same time redistribution of wealth through progressive taxes is ensured-taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich. This trend must be reversed before it is too late.
(The writers, tax lawyers and partners in Huzaima & Ikram (Taxand Pakistan), are members of Adjunct Faculty of Lahore University of Management Sciences)
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