Government requires money to function and provide services to its citizens. The taxes and fees paid by citizens are used to finance these services. The government would not be able to provide for law and order, education, health, roads, system of justice, water supply and sanitation and other services, if citizens do not to pay their taxes. This is why tax has to be used a 'compulsory levy'. Moreover the taxpayers are more likely to hold the government accountable compared to those who don't pay their taxes. Furthermore, taxation helps the government establish a system in which resources are collected from rich and used to provide services to all citizens, especially poor-The Citizens' Budget 2015-16, Government of Punjab.
Punjab is the most populous province of Pakistan with largest resources and budget size after the Federal Government, and beneficiary of lion's share of National Finance Commission Award [commonly called Divisible Pool]-sharing of federal taxes under Article 160 of the 1973 Constitution of Pakistan. It was revealed in her budget speech by Punjab Finance Minister Dr Ayesha Ghaus Pasha on June 13, 2016 that the province would face a shortfall of over Rs ten billion in tax collection "as a majority of new services remained reluctant to pay taxes". She also revealed that "the province expects to achieve only 60 percent of the target of Rs 2.3 billion set for tax on agriculture income this year and that the target for the next fiscal year remains unchanged". This was an open admission of poor tax governance. The target of Rs 160.6 billion fixed for 2015-16, according to Dr Ayesha, was lowered to Rs 150.8 billion.
For fiscal year 2016-17, revenue target of Rs 184.43 billion is fixed through new indirect taxes. Punjab, like other provinces, heavily depends on the federal divisible pool to meet its expenses. In fiscal year 2016-17, Punjab is expected to receive Rs 1.010 trillion from Islamabad. In fiscal year 2015-16, the government of Punjab's share in federally collected divisible pool of taxes was estimated at Rs 888.5 billion and own tax receipts just at Rs 160.6 billion [in 2014-15 it was Rs 164.680 billion]. In 2013-14, Punjab collected just Rs 111.789 billion.
This is the same old story repeated every year. There is no will to tax the rich absentee landlords and owners of posh bungalows and farm houses. In the wake of 18th Constitutional Amendment, progressive taxes, eg wealth tax and capital gain tax on immovable property, estate duty (known as inheritance tax in the West) and gift tax are with the provinces but the Punjab and other provinces have shown no interest in levying these taxes.
Poor tax governance of Punjab is so obvious that it has failed to even collect Rs 160.6 billion, target fixed for 2015-16. It has, like all other provinces, shown no interest in making its tax system efficient and judicious. Presently, incidence is on the less privileged through indirect taxes whereas the rich are not paying any worthwhile direct taxes on their agricultural income and colossal assets. Meagre collection of agricultural income tax proves this point-in fiscal year 2015-16 even the target of Rs 2.3 billion is not achieved. In 2014-15, collection was Rs 775 billion whereas in 2013-14 total collection was Rs 827.344 million against target of Rs 2.019 billion. The actual potential under this head alone is not less than Rs 75 billion as elaborated in Reforming the Urban Property Tax in Pakistan's Punjab, a study by Development Policy Research Centre (DPRC) of Lahore University of Management Sciences (LUMS).
The Punjab government has not undertaken fundamental reforms to merge three tax departments, namely, Punjab Board of Revenue, Excise & Taxation Department and Punjab Revenue Authority. These could have been merged into one to provide a one-window facility to the citizens, avoid duplication of expenses and ensure efficient and better collection, but no such effort has been made.
Punjab Revenue Authority (PRA) was established in 2012 and it collects only sales tax on services earlier done by the Federal Board of Revenue (FBR) and after collection charges proceeds were directly transferred to the province.
Excise & Taxation Department collects the following taxes/fee/cess etc:
1. Property Tax
2. Motor Vehicle Tax
3. Excise Duty
4. Professional Duty
5. Entertainment Duty
6. Hotel Tax
7. Cotton Fee
8. Education Cess on Clubs
9. Farm House Taxes
10. Tax on Luxury Houses
Punjab Board of Revenue, established in 1957, deals with land revenue and taxation, including agricultural income tax. It is the controlling authority in all matters connected with the administration of land, land taxation, land revenue, preparation, updating and maintenance of records. It is the highest Revenue Court and custodian of the rights in land of all the right-holders and it exercises general superintendence and control over the Revenue Officers and Revenue Courts in the province and has suo motu jurisdiction.
The historic record shows that since fiscal year 2013-14, the government of Punjab has failed to meet revenue targets fixed. In 2013-14, it collected taxes of Rs 111.7 billion against the budget target of Rs 126.7 billion. In fiscal year 2012-13, it collected Rs 78.4 billion that included a collection of agricultural income tax at Rs 827.3 million only against the fixed target of Rs 2 billion. Collection of agricultural income tax in 2013-14 was just Rs 830 million. It confirms the point that though law is in existence there is no will to tax the rich and mighty landowners that dominate the political scene of Punjab. While, the rich are not contributing according to their ability to pay, the total debt of Punjab has surged to Rs 533.1 billion-domestic debt Rs 17.1 and foreign debt Rs 516 billion-in total budget outlay of Rs 1681 billion.
At present, there are 59 services subjected to charge under Punjab Sales Tax on Services, Act 2012. The Punjab Finance Bill 2016 intends to add two more services, namely cosmetic surgery/hair transplant and warehouse/cold storages. This is regressive taxation. It is going to hit the businesses and would lead to more evasion. Both the service provider and service recipient will not report most of the transactions. The Punjab Government wants to get tax from service providers that pass on the same to the end users, but it has no capacity to check inflows and outflows. It is imperative for economic growth that we should go for harmonised sales tax on goods and services all over Pakistan with collection through a single national agency. The complete blueprint of this model is provided in our paper, Towards Flat, Low-rate, Broad & Predictable Taxes, published by PRIME Institute, a public policy think tank, working for an open, free and prosperous Pakistan by creating and expanding a constituency for protective function of the state and freedom of the market.
In the wake of Eighteenth Constitutional Amendment, the fiscal management, both at federal and provincial levels needs fresh thinking. The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential and country is heavily indebted. On the other hand, provinces, which are almost entirely dependent on the NFC Award, have failed to raise their own sufficient resources for the needs of the ever-growing uncontrolled population.
In the given circumstances, Pakistan needs a paradigm shift in tax policy and revamping of the entire tax administration by establishing National Tax Agency (NTA). Through consensus and democratic process, all the parliaments may enact laws for establishing the NTA, which could be an autonomous body comprising of specialists and professionals that would facilitate people to deal with single body rather than multiple agencies at national, provincial and local levels. The working of NTA can be discussed and finalised under the Council of Common Interest [Article 153]. The control of the NTA should be under National Economic Council [Article 156]. The NTA should be assigned the task of collecting simplified, low-rate Harmonised Sales Tax (HST). This model can ensure economic growth, fairness in tax collection as well as afford much-needed ease-of-doing business climate to existing and future investors. (The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)
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