We can never come out of the 'debt trap' unless real tax potential is tapped, the mighty sections of society are taxed and tax policy is used as a tool for economic growth and equitable distribution of wealth. The main emphasis of tax policy should be taxing the unproductive sectors to divert money to productive sectors.
At the same time, it is necessary to ensure redistribution of income and wealth through progressive taxation - taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich. The rich and mighty squandered public money to keep the country in debt-enslavement - the main cause of our subjugation. We can never overcome it unless we become a self-reliant economy.
While terrorists and gangsters are challenging writ of the state in Karachi and elsewhere, the state is wasting billions of dollars on the so-called "war on terror". This war has caused Pakistan not only a colossal economic loss of nearly US $80 billion so far, but armed conflicts coupled with drone attacks killing innocent civilians, have pushed Pakistan in a situation where society and its institutions are at the risk of survival - one obvious outcome is massive flight of capital - when lives are at stake, how can people risk their investments? Economic survival of Pakistan depends on ending the so-called 'war on terror' as early as possible to forestall further bleeding of resources, terrorism and militancy. We need to forge friendly ties with all countries, enhance trade and boost investments in all spheres.
Taxation in welfare states serves as a catalyst for industrial and commercial expansion, economic growth and support of the weaker sections. But in Pakistan, ill-directed, illogical, regressive and unfair taxes have devastating effect on the industrial and business growth. Had our financial and tax managers concentrated on economic growth and productivity, tax revenues would have risen substantially. They have failed to realise that investment-related tax incentives not only increase revenues but create jobs and prosperity for all, whereas oppressive taxes destroy economy and give rise to poverty. For economic growth, the present structure of FBR and mindset of tax administration needs to be changed. The politically-appointed high-ups in FBR "collect" funds for themselves and their masters. They also protect the tax-evaders and plunderers of national wealth - frequent tax amnesty schemes and immunities testify to it. These high-ups force field officers to meet budgetary targets by hook or by crook - they penalise honest taxpayers and facilitate the tax-evaders. The taxation officers, having no will to bring tax-evaders into tax net, are always keen to squeeze the existing taxpayers - creating huge tax demands arbitrarily - abusing their authority and vast discretionary powers. The generally accepted principles of taxation are efficiency (explained by reduction in distortions in the allocation of resources), equity (requiring the more able to bear burden of paying tax at higher rates) and effectiveness (insulating tax machinery from all outside influences). How can these principles be enforced in Pakistan when tax machinery is repressive, both in thinking and practice?
The failure of our rulers to tax the rich and mighty is the core problem. By fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, have created a dilemma, where the government can neither afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to regressive tax measures]. This is a vicious circle in which we are trapped. We can come out of this tangle and make Pakistan a competitive place where investors find congenial conditions to live and invest for which, first of all, the state would have to protect life and property of its citizens, ensure rule of law, even playing field for all, justice for everybody, a responsible government and transparency in all spheres.
There is dire need of complete reshuffling of economic priorities. We must concentrate on increasing productivity, efficiency and sustained growth - these alone can generate more revenues for the state. The main cause of our prevailing distressing situation is the unholy alliance between inefficient and corrupt politicians and repressive and criminal governments/institutions, which do not give a damn for the welfare of the common man. They force business houses to indulge in malpractices as no genuine work is done without bribery, favours and malpractices.
Successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line - their number is now about 60 million. 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. We need to rapidly develop infrastructure and knowledge-based economy. Rational taxation is essential for correcting macroeconomic policies because alternative ways of financing government expenditure - money creation, domestic borrowing and foreign loans - have very harmful effects on the economy.
Like civilisations, tax systems evolve over times. Harley Hinrichs in General Theory of Tax Structure Change During Economic Development has mentioned five stages through which tax structure has changed historically as economies have developed. These are:
First stage: A traditional society relies primarily on traditional taxes like taxes on land, livestock, water rights etc.
Second stage: Society breaks away from old ways and indirect taxes become more important, especially external indirect taxes (ie taxes on foreign trade).
Third stage: Traditional direct taxes decline relative to national income and governmental revenues.
Fourth stage: Domestic commodity production increases and internal indirect taxes (excise duties and sales taxes) grow rapidly to replace customs duties.
Fifth stage: Economy gains maturity and modern direct taxes like personal income and corporate profit taxes become dominant.
Pakistan is still struggling to achieve the fifth stage that eventually leads to an egalitarian state - the most desirable entity conforming to promised made with the citizens in Article 3 of the Constitution: "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."
In order to fulfil the above command of Constitution, we need to revamp the entire tax system - use taxation as a tool for economic development rather than collecting money for the luxuries of the rulers. Economy cannot be revived through harsh and illogical tax measures. The tax potential
of Pakistan is not less than Rs 8.5 trillion. We can even generate more with rapid economic growth as taxes are nothing but a by-product of economic activity. If we have more productivity and rapid growth, there would be more taxes that can be utilised for providing better facilities to all. In an efficient and fair system, taxes are imposed through democratic process by eliciting consensus of all stakeholders and also ensuring them that these would be utilised for the welfare of public at large and further development of society.
Pakistan needs a new tax model, capable of generating sufficient resources for the government and helping the country in paying off its ever-increasing debt burden. Taxation, a potent instrument to shape and influence the socio-economic policies of a country, has not received due attention in Pakistan. The foremost objective of a tax policy is raising resources for administration and development, transferring of resources from private to public use. A rational tax policy penalises those who hold assets idly or indulge in luxury consumption. In social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden and benefits of public expenditure. Taxation of the rich for the benefit of the poor is at the core of social democracy. It encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society eg women and children, minorities, the disabled and unemployed. All these elements are missing in our polity and tax policy.
FBR has been single-handedly destroying Pakistan's trade and industry by withholding undisputed refunds payable to taxpayers, making excessive tax demands, flouting court judgements, harassing foreign investors through complicated tax procedures and resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets. Our parliamentarians (sic) have been criminally overlooking, rather endorsing, actions of the tax machinery destroying business and industry. While FBR, despite all highhandedness, has failed to meet annual targets, let alone to tap the real tax potential of Pakistan, its oppressive tax policies are pushing millions of Pakistanis below the poverty line - courtesy overwhelming emphasis on indirect taxes (70 percent of total collection) that take larger portion of income of the poor and facilitate the rich to become the richer.
Pakistan is in dire need of establishing a number of "employment zones', which should be low-tax or tax-free for corporate income and for companies creating new jobs. It will be an effective tool to reduce the mounting unemployment burden and to help boost industrial/business growth. The government should identify areas where structural employment is particularly high and then earmark revenue for establishing employment zones in those areas. Out of total collection of taxes at least 25 percent should be transferred directly to an independent fund for establishment of 'employment zones'.
The rich in Pakistan are either outside the tax net or do not pay personal taxes in accordance with their actual ability to pay. As a result, the poor are overburdened with indirect taxes and withholding income tax - 16 percent sales tax on most of the items consumed by them and exorbitant withholdings at source even where income is below threshold limit of Rs 400,000. Those who control 90 percent of resources contribute less than 2 percent in total tax revenue. We must tax every person having an annual income of Rs 500,000 or more at progressive rates irrespective of source of income - agriculture or non-agriculture. This measure alone would generate tax revenue of over Rs 6 trillion provided all exemptions and concessions are abolished.
"The fairness of tax system will be undermined if governments cannot show honest taxpayers that they are making a concerted effort to deal with dishonest taxpayers" - quote from Improving Access to Bank Information for Tax Purposes (OECD 2001).
Merely announcing policies on paper, as has been done in the past, is not going to solve our problems and change the existing scenario. Political change is a prerequisite. Voters will have to elect the people who have not only an agenda for change, but an able and determined leadership that can establish rule of law, fulfil and protect basic rights, ensure free and compulsory education, extend equal opportunities to all, spend taxes for the collective welfare and discourage concentration of wealth, monopolies and money power. To sum up in one line: For sustainable social democracy and just society we not only need an all-pervasive reform agenda but also an able and determined leadership to implement it.
(Concluded)
(The writers, lawyers and partners of HUZAIMA & IKRAM (Taxand Pakistan: http://www.taxand.com/our_locations/pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS)