Over the period, our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy.
Our revenue potential for 2008-09 is not less than Rs 3 trillion provided the tax base is broadened, equitable and rational policies are devised with the backing of stakeholders, tax machinery is completely overhauled and all exemptions and concessions available to the privileged sections of society are withdrawn.
Now that the new Finance Minister has taken oath of his office and only two months are left for announcing national budget for fiscal year 2008-09, the new coalition government must start a countrywide debate on formulation of a pro-growth 'National Tax Policy'. Presently, the Federal Board of Revenue (FBR) is performing the role of legislator and policymaker, which is not only highly lamentable, but a transgression on the powers of sovereign parliament. It is duty of the elected parliament to make laws and policies and FBR should implement them in letter and spirit.
During the last many years before the announcement of annual federal budget, plethora of proposals are solicited by FBR from trade and professional bodies, tax bars and industry's representatives. This practice should be stopped. A parliamentary committee should be formed to receive such proposals and make recommendations to the house.
The house and not the FBR should prepare Finance Bill. From 2003 to 2007, FBR introduced avalanche of mindless changes in tax codes having no meaningful impact on much-needed industrial expansion and economic growth of the country. The entire process has been faulty. In a true democratic set up, tax proposals are prepared through parliamentary processes, and are implemented after thorough public debate whereas in Pakistan it has always been a bureaucratic prerogative. This is the root cause of failure of our fiscal and revenue policies.
FBR in order to show "wonderful performance" has been resorting to ill-directed, illogical, regressive and unfair tax regulations that caused a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy was a self-defeating exercise.
Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today. It is impossible to enhance revenues without achieving sustainable economic growth. Over-taxing economy, as has been done in Pakistan, destroys the economic growth and expansion leading to unemployment and social unrest.
It is well-recognised that private sector regards the problem of dealing with government revenue agencies, in particular the FBR, a major constraint to its business operations and growth prospects. (see "Punjab Economic Report-2007, Towards a Medium-Term Development Strategy", which is jointly compiled by the Punjab government, the World Bank, Department of International Development, UK and Asian Development Bank.)
The successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan's undeniable geo-strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest.
This article suggests some key areas where paradigm shifts are needed in structural and operation level to ensure not only more tax revenue for the State but also social equity, redistribution of wealth and fairness so that honest taxpayers are not disillusioned.
PROVISIONS FOR COUNTERING TAX EVASION:
It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains. What is more tragic is that this social evil inherent in tax system is doubly compounded as it necessitates greater and greater tax burdens on those who are law-abiding.
The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar occupations. The honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are not paying anything with the connivance of their friends and mentors in tax machinery. The unholy alliance between the tax evaders and corrupt tax officials has to be eliminated as a first and the foremost step if we want to initiate any meaningful change in tax system.
In the form of section 111(4) of the Income Tax Ordinance, 2001, unprecedented tax amnesty scheme favouring tax evaders, smugglers, corrupt, extortionists, drug barons and criminals is available. Such schemes are a spank for the honest taxpayers [proving them the most foolish for paying the taxes].
An extortionist in Karachi can decriminalise his ill-gotten money through this scheme but the victim (a businessperson) who paid it due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return! The situation needs to be corrected. The facilitation of whitening the untaxed/undeclared money should be restricted only for genuine industrial investment to bring such capital back into disclosed/formal sector by paying some percentage as tax (Kafara will be a better word) and not for the criminals, corrupt and unscrupulous elements in the society.
POSITIVE CHANGE IN TAX POLICY:
There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment-oriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily to be understood and hassle-free from implementation perspectives.
The recent efforts of the government to reform the tax system through World Bank loan/grant, recruitment of new members on market wages and relying on the reports of so-called foreign experts have not yielded any positive results or acceptability from the taxpayers. It remains a closed door, bureaucratic exercise lacking any meaningful dialogue with the taxpayers, public pressure groups and tax experts who matter in the subject.
In the absence of a well-designed tax policy, the agenda of tax reform will remain lopsided. The members of parliament should not allow the IMF-World bank nominated tax bureaucrats to make any legislative and administrative changes.
The powers to issue SROs (Statutory Regulatory Orders) by FBR against Article 162 of the Constitution should be withdrawn immediately. Before the announcement of budget 2008-2009 a rational and pro-growth tax policy should be evolved by the elected representatives of the people through debate and consensus in the Parliament. Such a policy should then be announced to secure support of all those who are affected by it before its actual implementation in the Finance Bill 2008.
EQUITY PRINCIPLE:
The existing tax system itself is a worst expression of colonial heritage. It is highly unjust. It protects establishment and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. The common poor are paying an exorbitant sales tax of 15% (in fact 42% on finished imported goods after mandatory value addition and income tax at source) on essential commodities. But the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes.
It is tragic that in a country where billions of rupees are being made on daily basis in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low and the Government is least bothered to tax undocumented economy and 'Benami' [name-lender) transactions.
The mighty sections of society are engaged in these transactions and FBR being their handmaid has neither will nor ability to tax them. It exposes the uselessness of FBR as an institution to tap the real tax potential of the country. The existing tax system is a worst expression of colonial heritage. It is highly unjust. It protects establishment and exploitative elements that have monopoly over economic resources.
Pakistan's indirect tax system is aggressive and biased against the poor putting greater burden on the lower income households than the upper ones, shows a report, "Social Development in Pakistan; Annual Review 2004", issued by the Social Policy and Development Centre (SPDC) in May 2005.
It states that the poorest 10 percent of households contribute 16 percent of their income to the three indirect taxes - General Sales Tax (GST), Central Excise Duty (CED) and Customs Duty. However, the report reveals, the burden of tax progressively declines as income rises and the richest 10 percent of households contribute only about 10 percent of their incomes to the indirect taxes.
The report states that Pakistan's tax regime consists of four main revenue sources; GST, CED, Customs Duty and Income Tax. Its structure is dominated heavily by indirect taxes, which combines over two-thirds (68 percent) of combined federal and provincial tax receipts. If surcharges are included, it observes, the indirect taxes rise to over three-fourth (76 percent).
In terms of the share of federal taxes, indirect taxes account for nearly half (46 percent), and if surcharges are included it touches 55 percent, the report said. According to the report, the average share of direct taxes for high income countries is 46 percent while in the low income countries it is 28 percent. Iran and India post direct tax shares of 40 percent and 29 percent respectively as compared to 27 percent by Pakistan.
GST claims 9.3 percent of the income of the poorest 10 percent of households, but only 5.9 percent of the income of the richest 10 percent. In other words, the burden of GST on the lowest deciles is 58 percent higher than the highest deciles. Thus CED is the most aggressive tax, with the burden on the lowest deciles being 100 percent higher than on the highest deciles. The customs duties are the least regressive with the burden on the lowest deciles being 28 percent higher as compared to that of the highest deciles.
The policymakers have exempted selected food items like wheat and rice from GST rate. However, this does not imply zero-rating of GST on account of the fact that the inputs that go into the production of these items are subject to tax. That's why, the nominal tax rate of these items is zero, the effective tax rate amounts to about 7 percent.
The average burden of direct taxes is 0.3 percent, while the burden of indirect taxes is 13 percent. Nevertheless, the structure of personal income taxes is still progressive. The lowest six deciles are exempted from taxation of their incomes, and the burden of income on the 7th, 8th, 9th and 10th deciles is shown to rise progressively.
However, it adds, the average burden of personal income tax on household incomes halved from 0.6 percent in 1987-88 to 0.3 percent in 2001-02 and the progressivity of the tax also declined over the period. This can be discern from the fact that while the burden of personal income tax as a percentage of household income has doubled from 0.1 to 0.2 percent for the 7th deciles, the corresponding burden for the 10th deciles has declined by half from 4.3 to 2.1 percent. The preceding incidence analysis of the tax regime shows that the richest 10 percent of households bear the least burden of indirect taxation, and that their relative advantage with respect to direct taxes has further improved over the last decade and a half.
The report issued by the SPDC is an eye-opener for the policymakers. In the report the impact of presumptive taxes on goods and services under the garb of the income tax law has not been taken into account. Had it be done, the ratio of direct taxes would have shown a further declining trend. The incidence of such taxes, which are imposed under income tax (sic), is borne directly by the consumers and the worst hit are the poor people. They have to pay GST on supplies of iodised salt, which is sold under brand names.
In the sub-continent when the British rulers imposed salt tax, there was mass movement of disobedience that forced them to withdraw the levy. Our rulers are even worst than the British imperialists as unashamedly they have imposed exorbitant GST of 15% on salt. What makes the situation more painful is the fact that nobody has ever raised voice against this cruel tax. It shows national apathy.
The 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 this policy to unequal sacrifice rule where the mighty civil and military bureaucrats (now they are part of the landed aristocracy by getting State lands as awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled to pay GST of 15% [it is as low as 2 to 4 % even in Japan and Singapore which are affluent societies] and ever rising costs of public utilities and POL products.
This is in direct violation of constitutional guarantees [Article 3]. The new government must immediately remove these dichotomies. The taxes should be for the welfare and benefit of public at large and to make the State invincible, and not for the luxuries of the rulers and State functionaries.
(To be concluded)