Democracy and taxes

In Pakistan, a heated debate is going on about democracy, constitution and rule of law. Government and Opposition are busy countering what they call "onslaught of Tehreek-e-Insaf (PTI) and Pakistan Awami Tehreek (PAT) against elected parliaments." Both sides are accusing each other of violating constitution and laws. While PTI and PAT claim that vast majority of parliamentarians are tax cheats, the government's media co-ordinator has alleged that 82% of PTI elected members, including Imran Khan, have "evaded taxes."
Imran Khan on September 17, 2014 during his routine 'dharna speech' blamed the Sharif brothers for "taking the country to the brink of destruction". He alleged that they had "stolen money from this country, evaded tax and destroyed democracy to save their money". He said: "I dare Nawaz Sharif to declare all his assets and all the assets he has in the name of his children and other relatives, if he does this I will end this sit-in".
On the same day Salman Shahbaz, son of Chief Minister Punjab Shahbaz Sharif, said that Secretary General of PTI, Jahangir Tareen, "is the head of sugar mafia in Pakistan". He called him "the biggest manipulator of sugar prices in Pakistan". He questioned how Imran Khan "uses bullet-proof car worth Rs 30 million and pays only Rs 150,000 as tax". He said that Imran Khan "calls himself as Nelson Mandela but Mandela did not live in a 300 kanal palace". He alleged that "Lahore's land-mafia head stands on the container along with Imran Khan".
Now the question is who will verify these allegations and take action under the law. The Federal Board of Revenue (FBR) that is supposed to verify these claims and take action against evaders and avoiders remains a silent spectator. This is our real dilemma! The State institutions are politicised. They are not enforcing laws but are serving their political masters and powerful elites. So it is not surprising that democracy has failed to take its roots. No country can claim to be democratic if law favours the rich and penalises the poor. This is what is happening in Pakistan since decades under successive governments-military and civilian alike.
The Chairman of FBR has recently admitted that millions are outside tax net. He conceded that out of 2.5 million retailers, only 8,000 are registered under sales tax law. Our successive governments have been taxing the poor and giving extraordinary benefits to the rich. Abuse of taxpayers' money for personal comforts and luxuries of the ruling elite is the main cause of commotion in society. The government's yearning for "more and more taxes" has become a source of irritation for the citizens who argue that they get nothing in return and their plight is worsening every day.
Heavy taxes have failed to solve any problem-debts, both internal and external, are rising and inflation is crushing the poor. We need all-out reforms and complete overhauling of the system. Voicing this concern, Nadeem Ul Haque, former Vice-Chancellor of Pakistan Institute of Development Economics (PIDE) and ex-Deputy Chairman of Planning Commission, in Reform or face fundamental ascendency, emphasised, "The State must first provide the social contract ie good law and order and security of life. It must dismantle the rent seeking that protects the rich. Rent seeking relies on three main components: state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system that allows the poor man's land to be acquired for the elite especially the army and civil service."
An equitable tax system is one under which tax payments are based on the amount of benefits received from government services-the Scandinavian social democracy model is a good example to quote and follow. In social democracies, the cost of government services are apportioned amongst individuals according to the relative benefits they enjoy. In economic terms, this is called "benefit principle" that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden.
To achieve the cherished goal of distributive justice, the government should tax the rich and launch programmes for rapid growth and generation of employment to ensure socio-economic justice. It is State's responsibility to provide fundamental facilities such as health, education, housing etc. Once there are tangible benefits of paying taxes, the people will be motivated to comply. Irrational taxes produce negative results. It is evident from the fact that FBR despite resorting to all kinds of highhandedness has failed to improve tax-to-GDP ratio. It declined to 8.2% in 2013-14 from 9.2% in 2007-08. Despite tax collection of Rs 2266 billion in 2013-14, fiscal deficit was of Rs 1800 billion, while in fiscal year 2009-10, total collection was Rs 1328 billion and the fiscal deficit was just Rs 777 billion. Our total debt is now over 70% of GDP and debt servicing takes away 79% of revenue collected by FBR.
In 2004, FBR promised 0.2 percent per annum growth in the tax-to-GDP ratio for the next five years while submitting 'tax projections' and 'revenue-to-GDP ratio' to the International Monetary Fund (IMF) on the conclusion of the 9th review under the Poverty Reduction Growth Facility (PRGF). In 2008-09, there was a decline instead of improvement even though the World Bank extended US $100 million for Tax Administration Reforms Programme (TARP). After TARP, tax-to-GDP ratio decreased substantially but debt burden and fiscal deficit increased monstrously, inflation skyrocketed and tax compliance nose-dived.
Our leaders speak about democracy and plight of the poor but at the same time, evade and avoid taxes and then whatever they extort from masses is mercilessly wasted on perks and benefits of those who matter in the land. The elites thrive on taxpayers' money and then befool them by claiming themselves as guardians of their rights. The government's kitty is empty because of unwillingness of the rich to pay taxes, colossal wastage of taxpayers' money on unproductive expenses and non-exploitation of vital natural and human resources. Main leaders, in government and opposition, have billions of dollars lying abroad but their contribution in terms of taxes in Pakistan is just peanuts!
Chairman FBR has said that if we increase tax-to-GDP ratio to 16% there would be no need of borrowing. We have given complete roadmap [Budget 2014-15; challenges before Chairman, Business Recorder, May 30, 2014] to increase it to 25%, but government wants to establish Tax Commission which will be another futile effort-a sheer wastage of time and money. The issue is that those in power are not ready to tax the rich and mighty as it would expose them. Can FBR Chairman tell the nation why expensive cars and residences of the parliamentarians is not probed vis-à-vis their partly income declarations? Can he tell how many rich doctors and lawyers file tax returns declaring their correct incomes? Why has FBR not taken any action against them and other tax evaders? The State is not at all interested in withdrawing huge tax-free benefits available to the militro-judicial-civil complex. On the contrary, protection is given to untaxed money through section 114(4) of the Income Tax Ordinance, 2001.
Pakistan cannot become a democratic welfare State unless the rich and mighty are taxed and billions spent on tax-free benefits of the President, Governors, Prime Ministers, Chief Ministers, Ministers, Advisers, judges and high-raking military-civil officers, are saved by giving them Composite Packages. Money so saved and taxes collected from the rich can be used for the benefit of masses. Board-based, single-stage sales tax at a lower rate of 5% should replace the present 16% complicated regime to give relief to low-income groups and boost business growth. The government should immediately withdraw all exemptions and immunities and pass asset-seizure law to counter money laundering, tax evasion and rent-seeking.
It is admitted by FBR that even after "great efforts" (sic) only 840,000 filed income tax declarations for tax year 2013. Thousands of non-filers included FBR's own employees, high-ranking civil-military officials, judges, rich professionals and businessmen remained unpunished. FBR has failed to take action against them under the law. This is the sordid story of rule of law in Pakistan where those who impose taxes on others, and those who are paid to collect these avoid their own obligations.
There are 130 million mobile users in the country, out of which two million pay hefty bills and must be compelled to file tax returns. Non-filing of returns by them and others possessing huge assets testifies FBR's inefficiency and ineffectiveness. FBR is taking credit of extra few thousands declarations filed after issuance of notices. However, it is completely silent about its failure to force all taxable persons to file tax returns. This failure is now admitted by the Chairman FBR but he has not outlined any strategy to remedy the situation, except oft-repeated rhetoric. As suggested in Budget 2014-15: challenges before Chairman, Business Recorder, May 30, 2014, FBR can easily generate taxes of Rs 6 trillion-collection at this level will not only eliminate dependence on domestic and foreign loans but also help in launching programmes for rapid growth and employment as well as providing all the fundamental facilities of education, health, housing and transport.
(The writers, tax lawyers and partners in law firm, HUZAIMA & IKRAM, are Adjunct Faculty at Lahore University of Management Sciences)