“Simplify taxes, reduce the cost of excessive documentation, open the economy for higher growth and employment, taxes too will increase”—Pakistan Institute of Development Economics (PIDE) Policy Viewpoint [16:2020] Doing Taxes Better: Simplify, Open & Grow Economy
The biggest challenge on tax mobilisation front faced by Federal Board of Revenue (FBR) and provincial tax authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA) is bridging the monstrous tax gap through automation, introduction of tax intelligence system and levying taxes on the rich, rather than enhancing the rates of existing ones, especially indirect taxes—have already made us uncompetitive in the world.
The budgets for fiscal year 2024-25 by federal and provincial governments are in the making amid very difficult times when we are faced with economic meltdown and stagflation. The federal budget is expected to be presented on June 7, 2024.
The traditional approach adopted for decades in Pakistan for balancing the books, levying irrational taxes, containing fiscal deficit and other number games will have to be reconsidered in totality under the prevalent exceptional circumstances as a paradigm shift is needed in our economic policy to come out of perpetual fiscal mess.
In these columns, we have been presenting concrete measures to increase revenues (tax and non-tax) without hampering the already collapsing economy, incentives and stimuli to revive businesses fast, proposals for better fiscal management in the post-Constitution (Eighteenth Amendment) Act of 2010 [18th Amendment] and finally using integrated new city model to achieve desired growth of over 8% for a sustainable period of at least a decade by tapping rich natural and human resources.
The efficient and enhanced collection of revenues (tax and non-tax) is very important to meet the needs of a rapidly-growing population and running the State effectively. These are urgently required to help millions living below poverty line identified in the latest United Nations’ Human Development Report [2023-24] to rescue them from a charity-dependent trap.
The central theme of all budgets of 2024—federal and provincial—should be achieving the long-delayed and much-needed goal of simplification of tax system, ensure welfare of the common people and provide universal entitlements [free education and health, decent living, affordable public transport, universal pension, income support, civic amenities etc.] through a comprehensive social security system.
This would only be possible by following a rational tax system proposed in 2016 and updated in 2020 [Towards Flat, Low-rate, Broad and Predictable Taxes] and some concrete measures suggested below.
At least for coming five years we will have to strive to ensure survival and revival of businesses adversely affected first by Covid-19 pandemic and later by political debacle that started on April 10, 2022.
An overwhelming majority of industries is now struggling to survive. Industries and businesses in Pakistan have been suffering due to sluggish economic activities, high utility bills and markup rate even prior to Covid-19 outbreak that further accentuated the challenges after harsh conditions imposed by the International Monetary Fund (IMF) for its two bailout packages of July 2019 [abandoned] and July 2023 [completed].
Since 2020, no one, except PIDE and a few writers, have suggested some out-of-box solutions to overcome persistent fiscal mess and stagflation.
In these columns, it has been repeatedly emphasised that the iniquitous prescription of erratic and oppressive taxes and austerity in the federal and provincial budgets by IMF and local economic wizards (sic) will not solve our problems, especially in the prevalent circumstances.
The federal and provincial governments need to generate and spend more money on infrastructure improvement and human resource development to create more employment and ensure higher growth, engaging private sector to take part in public projects to revive and grow. This would kick-start the economy.
Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their inefficient machinery, monetize all perquisites of bureaucracy and make taxes simple and low-rate.
State lands, occupied unproductively by elites, owned by the federation and provinces should be leased out for industrial, business and commercial ventures. It will generate substantial funds, revenue (in public auctions 10% full and final tax can be collected amounting to billions and thereafter on development and construction of various housing and commercial projects huge amount of taxes, both direct and indirect, for FBR and provincial tax agencies) and facilitate rapid economic growth opening many vistas for employment.
The dire need in today’s Pakistan is to undertake fundamental institutional and structural reforms. Our biggest burden on economy is the huge unproductive workforce comprising nearly four million people, in various governments (federal, provincial, local and corporations) and Public Sector Enterprises (PSEs), who mostly waste time and money creating hurdles for citizens and businesses rather than serving them.
Rightsizing of monstrous administrative machinery and improving quality of public services should be top priority in the agenda of reforms. This can be done by transferring much of the work to Local Governments, which should be installed from the lowest level up.
Local elected authorities should handle all health, education, water and sanitation, local roads, local policing, local property transfer, property and income tax etc.
For making Pakistan a self-reliant economy, we must stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, the government-owned corporations should be run with private-public partnerships, giving stock shares to the employees and introduce other steps to make these profitable through complete restructuring, increasing productivity through better technology and trained human resource, improving agricultural sector to meet local needs as well as creating exportable surplus; and reducing economic inequalities through redistribution of income and wealth using rational tax policy.
The following are some measures to generate revenues (tax & non-tax) for both federal and provincial governments to become self-reliant as well as steps for providing relief to all, especially the weaker sections of society. In the present difficult economic situation, we have a great opportunity to create nation-wide data of all persons, showing their earning/expenditure levels and ownership of assets in order to provide a comprehensive social security system.
The political parties having governments in the centre and provinces can easily implement these through negotiations with opposition under democratic process. They will certainly extend their consent as for pro-people changes none would like to face the wrath of voters.
Till the time, the governments complete the process of digitization and automation, actual quantification of income of non-corporate businesses and professions should be deferred and taxation may be moved to gross basis at fixed rate (after determining the fair rate for each class of business/profession). There should be no audit/raids. Taxpayers in their books should be allowed to take credit of imputable income.
Presently, barring a few, income tax is levied on net income with minimum tax to the extent of amounts collected through over 50 withholding provisions. It is patently unconstitutional as held by Supreme Court in the Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582].
The Supreme Court held that the National Assembly through Money Bill can impose taxes on income under Entry 47, Part I, Fourth Schedule to the Constitution or impose the same under Entry 52 on the basis of capacity to earn, but “it cannot adopt both the methods in respect of one particular tax”. Since the Finance Act 2019, this blatant violation is persistently going on.
For ease of doing business and waiving off lengthy disclosures in exceptional circumstances, if presumptive tax is imposed on turnover/receipts under Entry 52 as was done in 1991-92, the collection would be around Rs 3000 billion from all businesses and professions, other than companies, and employees that would keep on paying taxes under the existing tax rates and system. Its working and enforcement will be discussed in the next week’s column elaborating efficacy of tax intelligence system developed by some top experts to capture turnovers/receipts for all businesses and professions.
The total collection, if we add corporate sector’s contribution, after levying excess profit tax to counter monopolies and cartels, under the head income tax for fiscal year 2024-25 alone would be Rs 9000 billion. Revenue under one head alone can be a great achievement without hampering economic revival and, in fact, giving businesses and professions a stimulant to grow. FBR can get much more tax than what is presently collected after giving share to provinces under the 7th National Finance Commission (NFC) Award.
The federal government should also amend the definition of “agricultural income” to bring into its ambit receipts from sale of orchards, lease of lands, nurseries and in this way, the rich absentee landowners and those engaged in businesses of nurseries will come under the Income Tax Ordinance, 2001. Additional revenue of Rs 400 billion can be obtained from this source, if taxation is based under Entry 52 as discussed above.
The historic decision of taxing “agricultural income” by the federal government was passed by Federal Parliament in the shape of Finance Act, 1977, but was thwarted by the military regime of General Ziaul Haq.
Through the Finance Act, 1977, the Parliament amended the definition of “agricultural income” to tax big absentee landlords under federal income tax law. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in Pakistan’s history but was unfortunately foiled by a military dictator. It needs to be revived. Small farmers having holdings up to 15 acres are already exempt from income taxation and will remain so. There is no need to amend the 18th Amendment or disturb NFC Award if this measure is adopted in Finance Bill 2024.
During Zia’s 11-year rule and that of General Pervez Musharraf for nearly 9 years, absentee landowners did not pay a single penny as agricultural income tax, capital gain tax or wealth tax.
Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution under Entry 47. All four provinces have enacted laws to this effect, but total collection during the last five years never reached even Rs 2 billion cumulatively (share of agriculture in GDP on average was about 20% for this period). Therefore, there is need to impose income tax on the rich absentee landowners as suggested above.
Military rulers abolished all progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax, etc. Now these are with provincial governments after the 18th Amendment, but they are least interested in taxing the rich and mighty. If these taxes are imposed an additional revenue of Rs.300 billion can be generated.
Multinational Companies (MNCs) through abusive transfer pricing mechanism deprive Pakistan of taxes of over Rs 500 billion every year and this can easily be recouped with advance transfer pricing agreements—presently, no provision exists to this effect.
The Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before he took charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his global 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 to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite substantial revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan.
Through amnesties and asset-whitening schemes successive governments have caused billions of rupees loss to the national exchequer. Levy of 1% tax on those having net moveable assets exceeding Rs 10 million by the Federal Government and at the same rate on immovable assets by the provincial governments will bring equity as the rich will be forced to contribute at least Rs 500 billion to help the economically distressed.
Total collection by imposing unified sales tax on goods and services (as done by India in 2017) can reach Rs 7,000 billion. This would not only give fiscal space to the federal government to narrow down fiscal deficit but also enhance distribution amount to the provinces. Distribution to be strictly as per the Constitution. Collection under new law could be by FBR as provincial assemblies only need to pass resolutions under Article 144 of the Constitution, empowering the National Assembly to enact integrated sales tax on goods and services.
There is no need to enter into any controversial amendment in the Constitution disturbing the 18th Amendment. The slogan of ‘One nation, One Tax’, adopted by India in 2017, and Harmonized Sales Tax (HST) by Canadian federal and provincial governments is the way forward as taxpayers operating on transprovincial level are facing many difficulties. If provinces do not agree, then for transprovincial entities, FBR can include in Finance Bill 2024, sales tax on services, following the command of Supreme Court in the case of Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802. It extensively elucidates that the post-Eighteenth Amendment position vis-à-vis legislative competence of federation and federating units as under:
“We are in agreement with the observation made by the learned High Court that though in a Federal system, provincial autonomy means capacity of a province to govern itself without interference from the Federal Government or the Federal legislature, but as the Provincial legislature does not possess extra-territorial legislative authority i.e. it cannot legislate regarding the establishments operating beyond the territorial boundaries of that province”.
Supreme Court’s above pronouncement is not restricted to any particular law and covers tax laws as well. It is binding under Article 189 of the Constitution and if provinces do not agree for integrated sales tax of goods and service they are bound to suffer.
In Customs, massive evasion takes place due to under-invoicing and wrong declarations. If revenue leakages are plugged as suggested in Dismantle containers’ mafia, Business Recorder, September 14, 2018, revenue could be Rs 2000 billion.
Loss in Federal Excise Duty (FED) due to illicit and smuggled cigarette sector alone is about Rs 200 billion a year. It can be plugged by track and trace (T&T) system [see detailed study by Huzaima & Ikram, Flourishing illicit tobacco industry & “soft state”, 2020].
As evident from the above, the additional revenue generation of at least Rs 9000 billion is possible at federal and provincial level, improving tax-to-GDP ratio substantially and reducing fiscal deficit in fiscal year 2024-25, if measures as suggested above are taken.
In the next column, we will discuss why a paradigm shift is required in various areas in the tax system and fundamental structural reforms to improve tax collection at federal and provincial levels making Pakistan a self-reliant and truly welfare state and paying off internal and external debts.
Copyright Business Recorder, 2024