Faced with the daunting challenge of relief and rehabilitation of flood affected people and areas, the governments-central and provincial-must introduce emergency tax measures. These measures should tax the rich and mighty rather than imposing new levies that could be further detrimental for the economy crushing the poor under ever rising wave of inflation.
Through these measures, funds of over Rs 500 billion at federal level and Rs 300 billion at provincial levels can easily be raised, saving us from further borrowing at domestic and international level. It is high time that the federal government introduces Emergency Tax Amendment Bill 2010 in the National Assembly. In the same manner, the provincial legislators must table and pass finance amendment bills 2010 to raise necessary revenues-rather than roaming around with beggar's bowl.
In the emergent situation faced by Pakistan, funds of Rs 800 billion can be raised locally from those, who are holding assets idly or squandering huge cash available with them on luxury consumption. The most important objective of taxation is to provide economic justice-help the needy echelons of society.
Economic justice envisages distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society, eg landless tillers, women and children. Taxation is a democratic method to influence the distribution of income and wealth on desired lines.
Time is now ripe for us to tax the rich and mighty landed classes, cartels and persons indulging in extravagance consumption. During the recent talks with Pakistani team in Washington, the IMF declined the request for payment of tranche of US $1.7 billion for non-implementation of VAT. Strangely, the IMF never forced the Pakistani governments-military and civilian alike-to collect income tax, capital gain and inheritance tax from the wealthy classes. Our rulers are happy to get US $450 million as emergency grant from the IMF, but are least pushed to impose progressive taxes that can change the fate of this country.
The rich and mighty ruling Pakistan own 90% of country's wealth, but their contribution is less than 2% in total revenue collection. This is the real malady that is the root cause of everything-the major for failure of democracy. Unless they start paying taxes according to their ability, nothing will change. Rather things will further deteriorate-they are paving the way for total anarchy that ultimately may also destroy them.
This is high time that undeclared, untaxed assets should be disclosed by all-a special legislation should be passed to this effect as was done in the form of Martial Law Regulation 54 by Field Martial Ayub Khan. The state must either confiscate such assets or owner must pay tax on them to get them whitened. The entire proceed should be earmarked for relief and rehabilitation of the flood affected people, paying back of debts and providing social services to the masses.
Pakistan, at the moment is suffering on three major accounts: bad governance coupled with corruption, inability to tap real potential of taxes accompanied with wasteful spending and the quest to live beyond means by recklessly borrowing. The factors responsible for the present crisis-emptiness of national kitty-are failure of Federal Board of Revenue (FBR) to collect revenues of Rs 4000-5000 billion (real tax potential of Pakistan) and wasteful expenses of over Rs 500 billion by the governments, which include meeting the losses of government-owned corporations.
Fiscal deficit of around Rs 800 billion-estimated for this year-is an open admission of inefficiency on the part of the FBR's and lack of political will by the ruling party to tax the rich and mighty as well as commitment to live within resources by reducing all wasteful expenses.
It is an admitted fact that in Pakistan, tax burden on the rich is decreasing while its incidence on the poor is increasing. Revenues of trillions of rupees were sacrificed by the governments-civil and military alike-through unprecedented exemptions and concessions to the rich and the mighty.
The progressive taxes, eg Wealth Tax, Estate Duty, Gift Tax and Capital Gain Tax, were abolished and were replaced with indirect, regressive taxes that had and continue to have disastrous impact on the poor. In the present crisis, we can generate funds of billions of rupees at federal and provincial levels by taking the following into consideration:
Taxation of "agricultural income" is sole prerogative of provincial governments under the 1973 Constitution of Pakistan ("the Constitution"). All the four provinces have enacted laws to this effect, but total collection is just a joke, never exceeding Rs 2 billion against actual potential of Rs 200 billion (share of agriculture in GDP is nearly 22%).
The provincial governments can generate enormous funds-not less than Rs 300 billion-by levying tax on gain of immovable property. It was in vogue till 1979 when General Zia asked all the provinces to abolish it to as mighty generals started to earn huge profits on selling their plots allotted by state on throw-away prices. Tax losses for not taxing speculative transactions in real estate and capital markets are to the extent of Rs 200 billion per year. These should be recouped immediately.
-- Multi-national companies (MNcs) through abusive transfer pricing mechanism are depriving Pakistan every year of taxes of over Rs 200 billion. Serious action is required to recover this tax.
-- Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of ex-Premier-cum-Finance Minister Shaukat Aziz before taking charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his world assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis.
The repeal of this progressive law, especially suitable in Pakistan where enormous assets are created without disclosing income sources, was shown to be justified despite tremendous revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan. In 2002 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemption given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US $60 billion) started pouring in from all over the world remitted by all and sundry without any fear of being investigated, courtesy amnesty given under section 111(4) of the Income Tax Ordinance, 2001.
-- Influx of enormous wealth was directed to the stock exchanges and real estate market where the real sharks continued to engulf small investors through unholy manoeuvrings; or was used to artificially enhance the prices of property. With no wealth tax to pay, both these avenues greatly helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity. From 2003 to date, according to a conservative estimate, we have lost Rs 200 to 350 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life.
-- Section 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium of 1 to 2 percent of the entire proceeds! The loss caused due to this provision alone for the last five years is nearly Rs 275 billion. In the last two years alone, revenue loss on account of taxing income from property at reduced rate is estimated at Rs 90 billion. If tax withholding of 10% is imposed on remittance exceeding Rs 50,000-it would protect money sent in small amounts by workers-we can easily collect Rs 200-300 billion from this source alone.
-- Total money required for paying interest and re-payment of loans-external and internal-is Rs 1644 billion during the current fiscal year. It is 98.6 % of total tax revenue of Rs 1667 billion assigned to the Federal Board of Revenue (FBR) for fiscal year 2010-11, which it claims would not be able to collect in the aftermath of floods.
The debt servicing, including repayment of loans, may go up to Rs 2000 billion if the government borrows more money to meet the expenses on flood relief and rehabilitation. Instead of borrowing more money, the government should tax the rich, reduce wasteful expenses, reduce the numbers of ministers and advisers-Punjab government alone is funding 28 useless task forces-and get rid of loss-ridden corporations. The total amount that could be saved by taking all these measures would be over Rs 400 billion.
As established from above, if our federal and provincial governments introduce proper taxation and stop wasteful expenses, we can generate funds not only required for flood relief and rehabilitation but also reduce our fiscal deficit to reasonable levels in the coming three years. This would eliminate dependence of the government on internal and external debts. We could easily raise funds of Rs 4000 billion in fiscal year 2010-11 if above tax measures are introduced-there is no need to levy more oppressive indirect taxes, like 5% flood surcharge, that are detrimental for economy as bound to raise inflation and making our exports further incompatible in the world.