Tax proposals - III

The existing tax system is highly unjust as it protects the rich and heavily taxes the poor. This cruel taxation is meant to finance the luxuries of militro-judicial-civil complex and politicians. The mighty sections of society not only enjoy tax-free benefits but also amass more and more wealth. They get State lands at either throwaway prices or free as awards. It is tragic that in a country where billions of rupees exchange hands daily in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low at 9.6%. However, the Government is least bothered to tax undocumented economy and benami transactions. Since the mighty sections of society are engaged in these transactions, Federal Board of Revenue (FBR), being their handmaid, has no will to tax them. It is evident from Tax Directory 2014 published on 10 April 2015 showing only 52,349 persons in whole of Pakistan admitting tax liability of more than Rs 500,000!
The determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of any fair tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax world-wide. After the 18th Constitutional Amendment, the right to impose estate duty and wealth tax on immovable property is vested with the provinces. None of the four provinces has levied any of these taxes since 2010.
The dire need in today's Pakistan is dismantling the elitist culture of VIPs, plots and perquisites, boosting the growth, improving the governance, cracking down on the corrupt, stopping wasteful, unproductive expenses, cutting the size of cabinet and government machinery, accelerating industrialisation, increasing productivity, revitalising agriculture sector, reducing inequalities through a policy of redistribution of income and wealth and making the country a self-reliant economy.
Our tragedy is that on the one hand we have too many taxes in the country and on the other the benefits of revenue collection are not reaching the poor masses. The few rich are the real beneficiaries of every luxury that is available. Fiscal gap is widening every year increasing the miseries for the common people of Pakistan. Our rulers have utterly failed to reform the tax system, despite getting huge loans and grants from the World Bank and others. Reforms are a continuing process for which 5% annual allocation should be made from taxes collected by FBR.
Assignment of a tax means transfer of taxation power form a higher level to a lower level government. The governments in all the four provinces have yet not implemented the command of Article 140A of the Constitution that envisages empowering the people at grass root level by devolving political, administrative and financial responsibility and authority to the elected representatives of the local governments. Taxation power includes the right to levy tax, collect tax, and appropriate proceeds from the tax. Thus, there can be three interpretations of assignment of a tax. Firstly, higher-level government may levy and collect a tax but hand over the entire proceeds to lower level governments. Secondly, the higher-level government may levy a tax but allow the lower level governments to collect it and retain fully the proceeds therefrom. Finally, the higher-level government may transfer a tax to lower level governments, a situation which defines assignment of a tax in its strictest sense.
In the entire world, the Pakistani nation is one of the most heavily and brutally taxed. They are liable to over 50 local and provincial taxes and levies. What makes the situation more painful is the fact that the system of taxation is complex and costly, which punishes the honest and detracts savings and investment.
Taxation is a potent instrument to shape and influence the socio-economic policies of a country. It is, therefore, imperative to formulate a nationally acceptable tax policy keeping in view our own peculiar conditions and not by taking dictates from donors, who suggest only what suit their interests. Our tax policy must take into account the ways that can help us to grow fast from the present stage of economic development to a higher one. It must be remembered that priorities of economic policy continually change with the changing economic, social, and political milieu.
It is necessary for us to use the forthcoming budget 2015-16 as a tool for change and not as protector of the rich and mighty alone. In taxes, we need to bring some fundamental structural and operational changes. Mere amendments here and there will serve no useful purpose. The first and foremost objective must be to raise resources for public authorities for administration and development. Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idly or squandering them on luxurious consumption.
According to a noted expert in the field of public finance, Roy Gobin, "the revenue criterion is usually the dominant consideration, since governments in developing countries have become increasingly aware of the active role which budgetary measures can play not only in initiating and promoting growth but also in maintaining political power. Not only are higher revenue levels needed, but also tax yields should be increased at a faster rate than income, if infrastructural investments and social welfare expenditures are to be financed without generating unacceptable inflationary pressures and/or increasing reliance on foreign assistance."
The revenue performance is in fact the best and optimal use of resources. Since the composition of investment is an important determinant of growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing high tax rates on luxuries and other low priority items (such as motor cars, air conditioners, and jewellery), the government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors.
Conversely, offering tax concessions or even subsidies can encourage production of necessities of life and employment-oriented industries.
In Pakistan, the successive governments, military and civilian like, have moved away from equitable taxation. The rich, including industrialists and businessmen, are paying meagre personal taxes and the poor people are compelled to pay unbearable sales tax and other indirect taxes. This is a gross violation of Article 3 of the Constitution. The government must immediately remove these dichotomies. Taxes should be for the welfare and benefit of public at large and to make the State invincible, and not for the luxuries of the rulers and State functionaries.
(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)