In a highly encouraging move, Federal Board of Revenue (FBR) has decided to consider all such budget proposals that can enhance revenues in the coming fiscal year. We have been in these columns presenting some concrete measures for collection of revenues to the extent of Rs 8 trillion at federal level alone and will continue to do so in the coming weeks till the time Budget 2015-16 is to be announced. FBR, however, must realise that there is no dearth of rational and viable proposals. The real issue is lack of willingness to enforce tax obligations and establishment of a revenue agency that can win the hearts of the masses ensuring them that: "We make sure that the money is available to fund the public services by collecting taxes and duties as laid down by Parliament. We want to give you a service that is evenhanded, accurate and based on mutual trust and respect. We also want to make it as easy as we can for you to get things right." This alone can persuade people to discharge their tax liabilities voluntarily and happily.
Businessmen claim that they want to pay due taxes but FBR is the main hurdle. It harasses them and no speedy redressal system is available against their highhandedness. They cite the example of sales tax where a strong mafia exists comprising unscrupulous traders, dishonest tax advisors and corrupt tax officials because of whom, the effective rate of tax of sales tax is reduced to 3.7% against the standard rate of 17%.
Existing hotchpotch sales tax law with high rates is not bringing desired revenues but due to its regressive nature causes misery to millions living below the poverty line. The burden of this tax, like many others that are imposed as full and final discharge under the Income Tax Ordinance, 2001, is shifted to consumers, benefiting the rich. In the coming budget, the government must introduce a 5% single-stage sales tax across the board. It will yield three times more revenue than what is presently collected. At the same time, income tax from all those who have taxable income should be collected abolishing all kinds of presumptive and minimum tax regimes. Provinces should also tax rich landowners and collect tax on all services but at a low rate of 5%.
The culture of SROs should be abolished in totality. After doing away with all kinds of exemptions and immunities, including section 111(4) of the Income Tax Ordinance, 2001, the government should enact asset-seizure legislation for confiscating untaxed assets. This strong deterrence is a prerequisite for enforcing tax obligation. Even a just and fair tax system cannot work if not supported by effective enforcement mechanism. All untaxed assets, lying home or abroad, should be seized if owners are not ready to pay taxes voluntarily. We can never tap our real tax potential, which is not less than Rs 8 trillion, unless fundamental reforms in tax policy and administrations are made. Rapid industrial and economic growth and socio-economic justice should be our main objectives; tax being a by-product will automatically increase.
The successive governments, civil and military alike, have miserably failed to discharge their basic obligation of protecting life and property of its people, what to talk of providing essential services like health, education, housing and transport. Taxes collected are consumed mainly by debt serving, perks of VIPs, security of the rulers and their foreign tours. Besides indulging in regressive taxation, the government keeps on borrowing at a high cost, from whatever source available, to run day-to-day affairs.
It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax) and VAT-type sales tax. Since 1991, the burden of taxes on the poor has increased by 38 percent whereas on the rich it stands reduced by 18 percent.
The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line. Their number is now more than 60 million. The FBR claims that the share of direct taxes is increased to 40%. It is a blatant lie. From income tax collection, if presumptive taxes are excluded, its share in total collection will hardly be 25% or even less. It confirms that the present taxation system is highly regressive. The IMF and other lenders are least pushed about the inequitable character of our tax system, under which the burden of taxes is less on the rich and more on the poor. They are merely interested in getting their money back with interest.
Over the period of time, our tax system has become rotten, oppressive, unjust and target-oriented.
There is a dire need for discussing the philosophical framework, principles of equity and justice, which should be the main concern of our tax policy; not simply achieving of targets. Our fiscal managers want to meet budgetary targets through oppressive taxes, shifting incidence on the poorer segments of society and exempting the rich. We must enforce income tax and reduce progressive taxes. Undoubtedly, 17% sales tax (on many items, eg, over 25% on petroleum products) has proved inflationary and its impact on business and industry has proved destructive.
The government should accept the demand of the Federation of Pakistan Chambers of Commerce and Industry of single-stage low-rate sales tax subject to two conditions: first, there would be no refund and/or adjustment for any sector and second, that all of them would pay income tax on their real income, but in no case less than 2.5% on their assets liable to charge under Zakat & Ushr Ordinance, 1980. This kind of alternate minimum tax is imposed on the rich in many countries, notably the US in recent years. As regards protecting local manufacturers and avoiding dumping of cheap raw material and goods, the appropriate regulatory and antidumping duties can be imposed.
Presently, the perquisites and benefits in kind of high-ranking civil-military officers and judges are either not taxed or concessional rates apply. This creates unfairness in the tax system and dissuades ordinary people from paying taxes seeing the life of comfort and luxury enjoyed by them at their expense.
This malady needs to be addressed to restore public confidence in the system. Equity and justice demands that their perquisites should be monetised and composite salary packages on market rates should be given to all government employees in whichever grade they are serving. Ensuring a decent living for them with strong accountability is necessary for effective governance. At the moment, low-grade employees complain that the state gives them inadequate emoluments to survive. Not only all employees should be paid according to their needs and work but also made to pay taxes in the same manner as other citizens. This will help in enhancing revenues, reducing wasteful expenses and above all establishing a fair and just society.
(To be continued)
(The writers, authors of many books and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty Members at Lahore University of Management Sciences)
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