Even a cursory reading of Finance Bill 2008 shows beyond any doubt that it is the handiwork of same old tax baboos of the Federal Board of Revenue, who have only one concern ie how to rob the poor and protect the wealthier sections of society.
Tax proposals confirm criminal culpability between the ruling elite and tax collectors as unprecedented burden of taxes is imposed on the poor, whereas no progressive taxes are introduced to tax the rich and the mighty. It is tragic that the new elected government has placed total reliance of tax bureaucrats, who are responsible for our existing pathetic politico-economic situation.
Tax policy of the new government shows no concern whatsoever for redistributive social justice. For achieving the revenue target of Rs 1.25 trillion for fiscal year 2008-09 resort is made to regressive taxation: increasing the burden of indirect taxes and introducing new presumptive taxes under the income tax laws.
The lack of political will to tax rich absentee landlords exposes all tall claims of pro-people budget of the new government. Non-taxation of colossal wealth of the rich but increased tax burden on the poor people is the most lamentable aspect of Finance Bill 2008.
Tax proposals of Mr Gilani's government testify to intellectual bankruptcy of ruling political leadership. PPP should have prepared a sound tax policy through its own party's committees after taking direct input from all the stake-holders. But it has just relied on tax bureaucrats and elitist experts (sic) who are completely alienated from the masses and take guidance from foreign donors. Their approach is target-oriented and they are least concerned with the welfare of the common people.
The economic team of Zardari has not introduced any fundamental tax restructuring to get rid of figure game of FBR and use tax policy as tool for rapid industrial growth. No effort has been made by the tax wizards of new regime for achieving judicious balance between the direct and indirect taxes and diverting the money from unproductive sectors to productive sectors by imposing heavy taxation on idle capital and passive investment. The tax agenda under the new government remains inclined towards promoting interest of the rich and mighty.
Revenues, in addition to finance public funding, meant for distributive justice, is an important function of tax policy. Economic justice relates largely to distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, racial and religious tolerance in a society. Tax policy is a democratic method to influence the distribution of income and wealth on desired lines.
The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by low-income groups.
In Pakistan we are moving from progressive taxation to regressive taxation. It is a dangerous step that is bound to create ever-widening gulf between the have and have-nots in volatile society that is already divided on economic, geographical and religious lines.
A successful tax system must reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes.
The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has transferred the burden of taxes from the rich to the poor.
The tax planners of new government [is there are any] have failed to realise that for the last many years tax revenue targets are met through regressive taxation having negative impact for the poor. More and more people are being pushed towards poverty line due to inequitable distribution of income and wealth in society.
In the absence of genuine industrial growth neither Tax-GDP ratio can be improved nor economic stability and sustainability be ensured. Thus the important issue is not how taxes are collected but the manner in which they are levied vis-à-vis their impact on the various segments of society.
In the name of "dire national need" for revenues regressive taxation is resorted to in utter disregard of principle of imposing tax according to one's ability to pay. Why the rich and mighty have been spared in new tax proposals and entire burden is shifted to the poor is a question that is boggling everybody's mind. The rich have not been taxed on their colossal incomes and wealth, but the burden of indirect taxes is passed on to the poor masses, who are already finding it difficult to meet both ends.
Criminally, widows, pensioners and senior citizens are asked to pay tax of 10% on income earned from national saving schemes, whereas the rich property developer are allowed to pass on burden of presumptive tax to the purchaser. The rich have been given immunity from probe in respect of any untaxed moveable and immovable assets by just paying 2% tax on their value.
In any civilised society such untaxed assets should have been seized for the welfare of the masses. The limit of donations eligible for tax credit in the case of individual/association of persons and companies presently admissible @ 30% and 15% respectively are proposed to be reduced to 10% of the taxable income, which is to dissuade the people from charitable work and contribute towards welfare organisations in the country.
Withholding tax on cash withdrawal from banks presently collected @ 0.2% is proposed to be enhanced to 0.3%, hurting the common man and small business concerns. Builders and developers would be required to pay tax @ Rs 50 per sq. ft. of the covered area of a unit. The developer of open plots would be subjected to tax @ Rs 100 per sq. yard of the plot. This being presumptive tax will be passed on to the buyers. Instead of boosting up housing industry, it will rather retard its growth.
Rate of sales tax and federal excise duty has been increased from 15% to 16% "to meet revenue targets", without realising that it will badly hurt consumers who have to ultimately bear the burden of indirect taxes. Rate of Federal Excise Duty (FED) on all kinds of telecommunication services is being enhanced to 21% that is again going to be a substantial burden on consumers.
The tax proposals of the present regime are no different from its predecessors as these are aimed at protecting the exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. There is no concern for determination of a tax base capable of measuring an individual's ability-to-pay, which is incorporated in all the progressive tax systems of the world in the form of higher income tax rates for higher income earners, estate duty, and property tax.
In Pakistan we have moved from this policy to unequal sacrificial rule where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning 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 16% [it is as low as 2% to 4 % even in Japan and Singapore which are affluent societies].
The priority of our rulers in achieving revenue targets, fixed ambitiously every year in utter disregard of how taxation measures will affect the economy and lives of common people, is the main problem.
Fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where it can neither afford to give any meaningful tax relief package to the common people, trade and industry [due to huge fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers find themselves trapped.
They will have to find ways and means to come out of this tangle to make Pakistan a competitive haven where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, investors will never venture to risk their capital.
(The writers, tax advisers, are visiting professors at the Lahore University of Management Sciences (LUMS).)