Our tragedy is that on the one hand we have too many taxes and on the other revenue collection is much below the real potential. The biggest failure of the successive governments has been to spend taxes for the public good. Since the government is not ready to check wasteful expenditure and end the policies of appeasement towards the rich and mighty, fiscal gap is increasing every year bringing more miseries for the common man of Pakistan. The so-called wizards sitting in FBR and Ministry of Finance have utterly failed to reform the obsolete tax system. They have wasted millions received in the name of reforms as loan from donors, a process initiated as early as 1990s and still continuing!!
In fact, the twin malady of complexity of tax codes and weak tax administration has not been properly studied by anybody. Towards Flat, Low-rate, Broad & Predictable Taxes is an attempt in this direction. Federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the country's tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are main factors for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer. Towards Flat, Low-rate, Broad & Predictable Taxes argues radical revamping and restructuring of the entire tax system, suggesting broad, low, flat and predictable taxes.
Tax reforms undertaken to date, have mainly been a patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.
The so-called reforms, including the World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. The number of tax filers has fallen significantly since 2003. The only viable option for meaningful change is to replace the existing tax system with low, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. With such a system in place, those who are not into the tax net or who avoid true disclosures would be induced to pay their taxes voluntarily. This should be coupled with transparent and quality spending of taxpayers' money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.
In Towards Flat, Low-rate, Broad & Predictable Taxes, the structural and operational weaknesses of the existing federal tax system have been analysed and alternate solutions are suggested in the following areas that require fundamental reforms:
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Area Solution
Complex Income Flat-rate
Taxation Taxation
Distorted/Multiple Single-stage
Sales Taxes Sales Tax
Customs/SRO Culture Single-rate
Customs Duty
Multiple Tax Collection National Tax
Agencies Authority
Inefficient Appellate Federal Tax
System Tribunal
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These fundamental reforms alone can provide the basis for an alternate tax system. Tax reforms without a fair and efficient tax administration will not be enforceable. For this a new tax collecting agency, National Tax Authority (NTA), is proposed. The NTA can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 read with the Fourth Schedule to the Constitution of Pakistan by federal and provincial parliaments). This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption.
Presently, taxpayers have to deal with multiple tax agencies adding to their cost of doing business. A well-equipped, automated and efficient tax agency is imperative to facilitate the citizens for discharging their tax obligations through a one-window operation and also to disburse to all tax-related benefits (pensions, social security, income support etc.). The non-existence of tax-related benefits is the most neglected area of our discourse on reforms.
The existing four-tier tax appellate system has also failed to deliver. The problems faced by taxpayers in appeals/references speak volumes of the ineffectiveness of various judicial forums that have been assigned the statutory obligations to safeguard them against unjust imposition of taxes. The revenue authorities are also unhappy with the tax appellate system as litigations take years for the settlement of tax disputes. Therefore, in order to make the appellate system more responsive, the existing tax tribunals dealing with direct and indirect taxes to be restructured.
Towards Flat, Low-rate, Broad & Predictable Taxes proposes a two-tier tax appellate system where first appeal goes to National Tax Tribunal with the right of another appeal in the form of intra court appeal. Subsequently, if any substantial question of law needs consideration, it can be referred to the Supreme Court by way of leave to appeal. This will help in achieving uniformity of decisions since at present High Courts in different provinces sometimes differ on identical questions of law and it takes years for final authoritative pronouncement by the Supreme Court. The two-tier tax justice system can ensure expeditious settlement of tax disputes, preferably within a year's time of first order.
Income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum taxes have been added to distort the entire concept of personal income taxation. Towards Flat, Low-rate, Broad & Predictable Taxes suggests simple and flat rate taxation of 10 percent for all entities other than companies, for which a flat rate of 20 percent is proposed.
The right to levy sales tax on goods rests with the federal government and that on services lies with the provincial governments. Presently, federal sales tax on goods is fraught with exemptions, multiple rates (from 17% standard rate to about 70% on high diesel oil) and complicated procedures for various kinds of goods. The same position prevails with the provincial tax codes where telecommunication services are taxed at 19.5 percent in addition to 14 percent advance income tax paid by the subscribers. This kind of harmful taxation is anti-growth and anti-investment. Towards Flat, Low-rate, Broad & Predictable Taxes proposes single-stage, single-digit sales tax on goods by federal government at the rate of 5 percent across the board with no exemption, albeit exporters shall have zero-rated regime. The only exemption shall be on food, life-saving drugs, books, children's garments and educational equipment. Provinces can also consider imposing a harmonised sales tax (HST) at the same rate on services.
Under the current customs law (Customs Act, 19691), exemptions/concessions are granted to goods that are imported into Pakistan through Statutory Regulatory Orders (SROs). There are about 5,000 effectively traded tariff lines. However, SROs, covering nearly 84 percent of those tariff lines and impacting 45 percent of imports across almost all sub-sectors, have been issued over the course of years. The SRO-based customs policy has rendered the actual tariff different from the standard tariff.
As a result of this, customs' tariffs have multiple rates and several exemptions, and various "conditions and requirements" are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and mis-declarations for evading duties. Recognising these problems, this proposes that there should be a single slab of 5 percent for all imports to end these undesirable practices.
The essential points of Towards Flat, Low-rate, Broad & Predictable Taxes are:
-- Low, flat, predictable and broad-based taxes administered through efficient tax apparatus
-- Pakistan must achieve fairness in taxation system. It will create incentives for better compliance and lead to accelerated economic growth
-- A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefiting all members of society
The federal government has miserably failed to tap the real revenue potential, which is not less than Rs 8 trillion. The failure of FBR on this account adversely and directly affects the provinces as they are heavily dependent on what the Centre collects and transfers to them from the divisible pool. Pakistan is thus, caught in a dilemma. The size of the cake-divisible pool-is so small that nothing substantial can be done for the welfare of the poor masses, no matter in which part of the country they live. The real issue of generating sufficient resources for public welfare and rapid growth is still unattended and Towards Flat, Low-rate, Broad & Predictable Taxes is an attempt to initiate a debate on fair tax policy from this perspective. Of course, our budget makers are still not aware what the real challenges are and how to deal with them. Thus the budget 2016-17 will be another routine and ritualistic exercise of number games.
(Concluded) (The writers, tax lawyers and partners in HUZAIMA, IKRAM & Ijaz, are Visiting Faculty at Lahore University of Management Sciences (LUMS).)
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