No society can surely be flourishing and happy, of which the far greater part of the numbers are poor and miserable-Adam Smith. Historically, majority of people in the Indian Subcontinent were poor, except those who received jagirs (estates) as lackeys of the foreign rulers or those who due to an unjust system were beneficiaries of concentration of wealth in a few hands (ashrafiya). One of the motives for Independence was to get rid of economic exploitation and establish an egalitarian State. This dream, however, till today remains unfulfilled.
In an independent Pakistan, highhandedness of the powerful and the rich in fact further augmented and consequently, people living in the less-privileged and less-developed areas were destined to face more miseries. From the very beginning, the federal government showed ruthlessness and insensitivity by encroaching upon the rights of the federating units. For example, in 1947, sales tax on goods was a provincial subject. In 1948, it was made a federal subject by the Constituent Assembly of Pakistan through the Pakistan General Sales Tax Act, 1948 enacted on 31st March 1948. This was a deviation from section 100(1) of the Government of India Act, 1935 providing that provinces will have the right to levy taxes on sale of goods and advertisements. Resultantly, those provinces, where valuable goods like jute, printing paper, gas and mineral were produced, were deprived of fair share in taxes and people residing there remained poor culminating in dismemberment of the country in 1971.
Provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Had they been allowed to generate their own resources, the present chaotic situation could have been averted. The Centre has been claiming that provinces lack the infrastructure to efficiently collect sales tax. This has proved wrong as Sindh, Punjab and Khyber Pakhtunkhwa after the 18th Amendment established their own revenue authorities which have collected much more sales tax on services than what they were getting from the federal government. All the tax authorities, however, should merge in a single National Tax Authority for facilitation of taxpayers and efficient collection. The bigger the size of pie, the larger will be share of federal government and provinces.
Progressive taxes, eg, Wealth Tax, Estate Duty, Gift Tax and Capital Gain Tax were gradually withdrawn during the periods from 1958 to 1971, 1977 to 1988 and 1999 to 2008. This made the rich, richer and poor, poorer. The Great Divide between the rich and the poor in Pakistan, having historic roots, is assuming alarming proportions with every passing day as the so-called civilian governments also lack political will to levy progressive taxes, for example, collection of agricultural income tax by all the provinces in 2014-15 was less than Rs 2 billion.
There is a direct link between growing poverty in Pakistan and income inequalities due to distortion in tax base. The lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax and petroleum development surcharge has pushed an overwhelming majority of Pakistanis towards the poverty line.
The single most devastating factor for increased income and wealth inequalities remains the regressive tax system in Pakistan. Incidence of tax on the poor during 1977-2014 has increased substantively (35%) while the rich are paying meagre taxes on their colossal income and wealth-for them tax burden has decreased by 18% for the same period.
The incidence of highly oppressive indirect taxes (rate is from 17% to 50%), even under the garb of income tax through presumptive taxation, on the middle-class and poor (earning less than $2/day who constitute now 6% of population) is the ugliest part of the governance in Pakistan. On the contrary, the rich are enjoying extraordinary benefits. The annual cost of tax-free perks and benefits (big portion of it is award of free state lands or at concession rates) available to militro-judicial-civil complex and public officeholders alone is above Rs 500 billion, more than the total spending on health and education!
Only 3,633 persons as per Tax Directory 2014 paid tax of rupees 10 million or more! This is the real dilemma faced by Pakistan. The rich and mighty are not paying income tax and even if they are, it's just in paltry amounts. Contribution of retail sector is only 0.5% in total income tax collection, whereas middle-class salaried people contribute 5%.
Poor widows pay 10% income tax on yield of Rs 100,000 [much below the minimum threshold of Rs 400,000] from national saving schemes, whereas the same rate applies to a rich man earning millions as interest income [called 'profit on debt' in the Land of Pure as deception to show that it is not riba!].
Over the last many years, tax policies have been formulated that serve the interest of billionaires (including the ruling elite, wealthy generals and high-raking civil bureaucrats, industrialists and rich property owners) and that too by hurting the poor through exorbitant indirect taxes.
From 2003 to date, according to a conservative estimate, we have lost Rs 200 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life. According to Credit Suisse, total wealth in Pakistan amounted to $495 billion in 2015. This was $170 billion in 2000 showing that total wealth in Pakistan has increased at an annualised rate of 7.4% during the last 15 years-it confirms how untaxed wealth has been growing and what the real size of undocumented economy is. Study of Credit Suisse says that the share of middle-class adults in Pakistan's total adult population of 111 million is 5.7% (6,327,000 adults). To qualify to be a middle class Pakistani adult, the person must have wealth of at least $14,413.
Claim of the authorities that wealth tax was/is useless and not contributing much to the exchequer speaks of the rigid target-oriented mindset that taxes are only meant to raise revenue. They forget that wealth tax may be an outdated levy in civilised countries of the world (after achieving the supreme goal of creating an egalitarian society) but was specifically introduced in the Subcontinent because of the tendency of the rich of developing nations to invest in unproductive areas as gold, real estate, bank balances or even cash tucked away in hidden vaults.
Wealth tax was meant to discourage hoarding of wealth and directing it towards constructive sectors and economic growth, for which innumerable incentives were provided in the Act. What to talk of ordinary people, many of our own political elite have been found to be owners of unfathomable wealth, safe in Swiss banks and foreign countries. If they claim to be the true representatives of the people, they owe it to this country to bring back all this wealth and if not surrender to the nation, at least should be ready to pay tax, due on it.
It has been mentioned in these columns time and again that tax authorities cannot investigate into unexplained investment, expenses, etc, as section 111(4) of the Income Tax Ordinance, 2001 renders them helpless. It allows the unscrupulous to whiten illegally-earned income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium! If section 111(4) is not to be deleted then at least wealth tax should be imposed on assets whitened through its mischief.
(The writers, tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
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