FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax (it was 65% last year). Out of total collection of Rs 1445.5 billion [it was Rs 1536.6 billion in 2017-18], Rs 39.2 billion [2.7%] received with returns and Rs 344.2 billion [23.8%] as advance tax. FBR's own efforts (collection of demand created) yielded only Rs 84 billion (5.8%, it was 7% last year) and from arrears Rs 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR-the same trend continues in the first six months of the current fiscal year; even after imposing oppressive taxes, FBR faced shortfall from July-December vis-à-vis original target is expected to be nearly Rs 300 billion.
Inflation in November 2019 skyrocketed at 12.7%-highest during the last nine years. Situation for December 2019 also remained disturbing on this account. The PTI government took foreign loans of US$ 10.4 billion in its first year in power resultantly Rs 571.6 billion were consumed by debt servicing alone from July to September 2019-foreign debt servicing was Rs 77.7 billion, showing an increase of 70%. Circular debt is expected to swell to Rs 1700 billion by end of this current fiscal year!
The World Bank in an appraisal paper related to Pakistan Raises Revenue (PRR) has termed "vested interests lobbying for tax exemptions, internal tensions and wariness of change among the Federal Board of Revenue (FBR) staff, and potential disputes affecting provinces' readiness to collaborate with the FBR as high-risk factors" for tax reforms. The World Bank has estimated "Pakistan's tax gap at 10% of the GDP or Rs 3.8 trillion. Our current tax-to-GDP ratio is 12.6% that according to the World Bank should be 23%. Among the 13 federal countries, Pakistan is second to last in the performance of provincial governments on tax collection. The World Bank analysis is that Pakistan has a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes".
The issue of fragmentation of taxes and multiple collection agencies was discussed in detail in 'Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms' [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged in any of its papers/reports related to PRR the contribution of local writers and presented it as its own recommendation. For example, it may be noted that we gave the idea of National Tax Agency in 2014 in an article Revamping tax system. This was later elaborated by us many a times in various articles and in Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute, April 2016]. It was also included by the Tax Reforms Commission in its final report submitted to the government in February 2016. It was suggested that the FBR or any other tax collection agency need to be run by a competent board as a short-term reform measure before all of these finally merged into a single national tax authority [NTA]. The NTA should not only collect taxes at all tiers of government but should also disburse benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitisation) can be a great step towards e-government model for the country that is presently non-existent. The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth adopting after modifications suiting our peculiar requirements [see details in Tax reforms strategy, The News, December 3, 2017 and Comprehensive Tax reforms, The News, September 9, 2018].
In fact, a serious of articles was carried out such as, Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018, PTI and tax reforms, Business Recorder, August 17, 2018 and Wither tax reforms, Business Recorder, August 2, 2019.
In the above articles, among other things, it has been repeatedly emphasised that Pakistan is caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and on its own collects too little to meet the national overall demand. Since the size of cake (Divisible Pool) is small, the provinces lack sufficient resources for the welfare of their people as they also not ready to impose progressive taxes on the rich and mighty that are under their domain now after the 18th Amendment. In this scenario, the real sufferers are the masses as elaborated in Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019.
The taxation rights under the prevalent Constitution of Islamic Republic of Pakistan ["the Constitution"] between the federation and federating units need reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the federal government. For example, Balochistan should get "net proceeds" of Excise Duty, which is presently not the case, on natural gas and Khyber Pakhtunkhwa on electricity, as envisaged in Article 161(1)(a) & (b) of the Constitution. Their present share in sales tax from NFC Award-commonly known as Divisible Pool-is as low as 9% and 14% respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. The same is the case for Sindh. They should get right to levy sales tax on goods as well as was the case at the time of independence.
In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. The planning, in the aftermath of 18th Amendment should be federalised rather than centralised. The 18th Amendment redefined National Economic Council (NEC) on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled 'Special Provisions'. The 18th Amendment also through Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. This subject was earlier held by the federal government. It needs to be implemented. Presently, many economists and politicians are arguing that the 18th Amendment and 7th National Finance Commission (NFC) Award are harming fiscal stability of Pakistan. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically.
The provinces should have the exclusive right to levy sales tax not just on services but also on goods within their respective physical boundaries as was the case in British India. It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling. After the 18th Amendment, right to levy wealth tax, capital gain tax on immovable property, gift tax, inheritance tax etc is with provinces but they are not ready to levy such taxes on the rich and mighty. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich classes-the meagre collection of agricultural income tax-less than Rs 2 billion by all provinces and the Centre in fiscal year 2018-19-is lamentable.
It is also imperative that further amendment should be made after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government. This will help FBR to collect income tax as per actual potential and the provinces by levying sales tax on goods in addition to services will generate sufficient funds for their needs. It will also reduce fiscal deficit at the federal level. This is the only way to achieve fiscal stabilisation in Pakistan. However, this can only be achieved if we also reform and merge all tax collection agencies at federal and provincial levels for which we need comprehensive structural reforms.
The FBR and all provincial tax collection agencies, after necessary reforms, should ultimately merge into single National Tax Authority [NTA], manned by members of All Pakistan Unified Tax Service (APUTS). The NTA will collect taxes at all levels that would be distributed as per Constitution to respective entities. It will also disburse benefits like pension, social security, food stamps and income support etc. The linkage of database of various bodies with NTA (complete digitization) will be a great step towards e-government model that is presently non-existent, but efforts are now initiated for achieving this goal. The mode and working of NTA can be discussed and finalised under CCI and its control can be placed under (NEC).
Let Prime Minister be informed that the iniquitous prescription of World Bank and IMF of more taxes, austerity and high interest rate will not solve our problems-this has miserably failed in the past. The only solution is to reduce wasteful expenditure, right-size the monstrous size of the government, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive, should be leased out for industrial, business and commercial ventures. It will generate substantial funds and facilitate rapid economic growth.
Shockingly, the World Bank, IMF and FBR ignored the proposals presented in various articles mentioned above suggesting how to generate revenue of Rs 8 trillion at federal level alone [Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019 and 'Raising Rs 8 trillion', Daily Times, November 12, 2017] enabling Pakistan to overcome monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens. The IMF in its first review of December 19, 2019 [Country Report No. 19/380] has admitted that "more than 40 percent of total tax revenue in Pakistan is collected at the import stage". The fact of oppressive and narrow-based taxation was highlighted repeatedly by us in various articles by us and viable solutions were offered to make it fair and broad-based, but FBR and IMF paid no heed.
The agenda for the remaining six months of the current fiscal year and beyond should include among others:
* All individuals having taxable income or below taxable limit should be facilitated to file simple tax returns [no wealth statement]. Those earning below taxable limit should be paid income support [negative tax]. Return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create data bank at national level of all households. Their earning levels will determine who need to pay and who should be entitled to social benefits under Benazir Income Support Programme, Ehsaas etc and how to improve social/economic mobility ending poverty trap.
* All entities-individuals, association of persons/firms/companies/any other artificial juridical persons-should be offered to pay income tax/sales tax for any tax/assessment year/tax period for any past lapse under National Tax Clemency Scheme. They should be encouraged and facilitated to pay past liabilities and thereafter would not face any penal action-prosecution, penalties, additional tax, default surcharge etc.
* The State must end the culture of appeasement-no more amnesties and immunities giving incentives to the dishonest and penalising the honest who have been paying taxes diligently at normal rates. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit. It would bring in much-needed revenues-even exceeding the revised target fixed for FBR at Rs 5.2 trillion.
* For reducing fiscal deficit to the level of 4% of GDP this year, it is imperative to (i) curtail unproductive and wasteful expenses by 30%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc through public auction and for specific activities to generate employment and boost economic activity and (iii) taxes at all levels-federal, provincial and local-should be made simple, low rate, broad-based, payable with ease.
* In the next three years' time, the businessmen instead of being overburdened with advance/heavy taxes/duties/other charges should be facilitated by improving all indexes of 'Ease of Doing Business' that must also include reducing cost of doing business. They should be given tax credits/incentives for compulsorily investing in human resource so we have trained and qualified workforce in all areas-providing employment to all and paying them as ordained in Article 3 of the Constitution. We must encourage and offer all possible facilities and incentives to all kinds of entrepreneurs, especially Small & Medium Enterprises (SMEs) to concentrate on growth and productivity.
* All the governments-federal, provincial and local-should join hands and prepare national level data of all citizens determining their economic and social status. There should be universal pension, social security and food stamps for the needy at the same time empowering them to come out of poverty entrap.
* In three years, after achieving consensus through consultation with all stakeholders we should have National Tax Agency manned by members of All Pakistan Unified Tax Services having the professional expertise in all related fields. This Agency would be in a position to communicate to all citizens what their income/expenditure levels are-it will determine tax obligations as well as who needs income and social support from the State.
* After national debate and taking input from all stakeholders national and provincial legislators should go for simple, predictable and low rate taxes-there should be income tax on all incomes including agricultural income to be under the exclusive domain of federal government and single harmonised sales tax on goods and services to be given exclusively to the provinces on the basis of goods produced and supplied and services rendered or performed within their territories-it will create fiscal consolidation and make federal and provincial governments self-reliant.
* We must abolish multiple taxes and collect local taxes e.g. property, vehicle taxes etc to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
* All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems-of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine and/or imprisonment.
Determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from progressive to regressive taxes where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as meritorious awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes. On the contrary, the poor are compelled to pay exorbitant sales tax on goods and services (levied under federal and provincial laws). This is absolutely criminal and blatant violation of Article 3 of the Constitution which says: "The State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability, to each according to his work". Resultantly, PTI Government is becoming unpopular as people are feeling the real heat of high inflation. However, the Government still has a chance that it missed in the first year of its rule to end oppressive taxation and reduce drastically wasteful expenditure. It must resolve to reverse its ant-people policies in 2020, which should be declared as "Year of Prosperity", in the light of agenda narrated above.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)
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