Dismantling unjust tax system

Our existing tax system, which has been proposed to be further unjust and oppressive through Finance Bill 2019, is indeed highly complex and manipulative. For example, the Finance Bill 2019 proposes to tax property income beyond certain limits at higher rate as a separate block on gross basis up to Rs 4 million, without giving any deductions as was the case earlier. Is it fair to tax property income at exorbitant rates on gross receipt basis! The State cannot be more unjust and exploitative. The same is the case with a poor widow who has invested funds received on death of husband in Bahbood Certificates, one of National Saving Schemes, and the government wants 10% tax on gross amount. The same is the case with many pensioners who are meeting ever increasing daily life expenses from savings deposited with National Saving Schemes. On the one hand, the government does not look after the population at large and on the other wants more taxes. People rightly ask why they do not get even universal entitlements guaranteed in the Constitution as fundamental rights in lieu of taxes they pay. While emphasis is on extracting more and more oppressive taxes, nobody in TV talk shows highlights the issue as to what citizens are getting-more miseries-and after all what are these taxes for? Not for betterment of masses but for meeting fiscal deficits and debt servicing for which common people cannot be blamed.
The prevalent unjust and distorted tax base benefits the rich and mighty (exploitative elements having monopoly over economic resources) and fleece the economically-deprived classes. For example, a writer is now proposed to be subjected to withholding tax on royalty instead of giving him tax exemption for contributing to society. The retired people contributing in newspapers and journals get meagre amounts as compensation but have to pay advance tax by way of withholding, whereas public office holders, judges and high-ranking civil-military officials enjoy palatial bungalows, facility of servants, free utilities, cars etc and no tax on it-ironically, all these met from taxpayers' money.
There is no political will to tax the privileged classes in Pakistan. The common man is subjected to exorbitant sales tax (though standard rate is 17% but actual incidence is over 40% in many cases after applicable customs duty, regulatory duty, mandatory value addition and advance income tax). In return, a common citizen even does not get what is guaranteed by Constitution e.g. free education and health cover-what to speak of affordable shelter and transport. Not even clean drinking water! On the other hand, the mighty sections of society get exemptions and concessions on perks and perquisites. The cost of tax free perks and perquisites to members of militro-judicial-civil and political elite alone is in billions-borne by taxpayers!.
Determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system. In all democracies, this rule is followed by adopting progressive rate schedule for personal income tax and property tax. In Pakistan, we have moved from this policy to unequal sacrificial rule where the mighty militro-judicial-civil complex (now an integral part of our landed aristocracy) and political elite are paying meagre taxes and actual incidence is shifted to the less-privileged. Businessmen are offered presumptive and or minimum tax regimes, even under income tax law, to pass on the burden to customers. The masses are overburdened with oppressive indirect taxes, ever rising costs of public utilities and items of daily use after enormous rise in petroleum products.
It was Louis XIV's finance minister, Jean-Baptiste Colbert, who claimed that the art of taxation was "to pluck the maximum amount of feathers from the goose with the least amount of hissing". Colbert's view is close to the truth, even in today's world, but taxation in his day was not used as an instrument to achieve a broad range of economic and social objectives. Rather, it was a tangle of practices and customs designed to finance wars, private and public works, as well as the pet schemes of the royal family-and their aristocratic hangers-on. In fact, until the 20th century, the notion of a progressive tax on income did not strike them as being virtuous. Our rulers are, however, still living in that era and in that state of mind.
In the second half of the 20th century, a number of governments in the West realised that taxation was indeed a multifaceted instrument which, if used sensibly, could help each society attain its economic and social goals. This required a delicate balance between rewarding entrepreneurship, innovation and risk-taking on the one hand, and the need to finance important public expenditures on the other, including education and social programmes, as well as the traditional public works which attracted Colbert. Not easy to do, and few countries, if any, can be fully satisfied with the balances they have struck. Pakistan, of course, is nowhere near such countries.
There are only three main sources of tax revenue upon which government treasuries depend: income, capital and consumption. Too heavy a tax burden on any one of those will cause it to become unreliable as a source of revenue, as well as generating distortions and inequities. In some cases, it might spur tax evasion or drive part of the economy underground or in age of globalization flight of capital to tax havens. Any well-intentioned politician sees no limits to levels of taxation and redistribution. If an elected politician has the courage to tax and spend in a transparent way on his or her perceived worthy social objectives, then it must happen in the democratic way. The politician must be sanctioned or approved by the electorate to go for a revolutionary move.
However, a government can be tempted to exercise a philosophy of social responsibility by penalising the productive sectors instead of introducing reforms which require greater political courage. Yet, in doing so, it runs the risk of undermining the economy's growth potential. Many do not believe that tax systems should be over-burdened with the social convictions of politicians. Have individuals and corporations pay their fair share of taxes, yes! Have social charges disrupt the good functioning of economies, no! Excessive and unbalanced taxation can prevent many individuals and businesses from taking full advantage of the opportunities of the new knowledge-based economies. Taxpayers (including businesses) should share the burden of protecting those who are vulnerable as a result of change, either through well-designed social protection measures or retraining, not through excessively rigid job protection measures and inflexible labour regimes that penalise productivity. That is why a fair and transparent tax system is so essential for maximising economic growth. In this regards, a detailed study [Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute, April 2016] is available that can be debated publically to find a workable tax model for Pakistan. Politicians must have the nerve to achieve a sensible balance between income, capital and consumption taxes. And they must also have the courage to spend, not on ill-designed programmes introduced more to collect votes than social returns, but on important investments in creating human capital (e.g. education, training and health), and necessary public infrastructure to increase productivity of the economy.
It is by no means an easy task in Pakistan but one has no option but to expect promising results. The public is increasingly suspicious of political motivations and better informed about the impacts of undisciplined public finance. At least, one hopes so! We must all do better. Independent observers should monitor tax data and survey the costs and benefits of various approaches to taxation that have been adopted, changed, abandoned and reinvented over last many years; experts should give frank advice on reform and best practices, and help the government reach consensus on tax matters. Politicians should listen to them. They should explore new challenges, such as the taxation of e-commerce, the problems of harmful tax competition and transfer pricing within large corporations. Simply put, the government must unshackle the constituent elements of economic growth by letting market forces play their respective roles. And governments must transfer the benefits of economic growth to enhance social well-being and cohesion through transparent and well-designed taxation. If the paradigm could be made to work, then Colbert's geese would barely hiss at all!!
(The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)