In this article, we are presenting some fundamental institutional/structural reforms in tax system prior to announcement of budget 2019-20. For the last many decades, the main emphasis of every budget has been meaningless and cumbersome changes in the existing outdated, oppressive and anti-growth tax system, which itself is the root cause of major fiscal ills. It is strange and shocking that we want to reform a system that needs to be dismantled in entirety and should be replaced with all together a new one. Reforming the incorrigible is a futile and Sisyphean task.
Unfortunately, successive governments-military and civilian alike-have been ignoring or sidetracking fundamental institutional reforms to achieve a higher rate of investment and growth and make the tax system simple, predictable, fair and equitable. It is a golden opportunity for the Government of Pakistan Tehreek-i-Insaf (PTI) to undertake institutional reforms, details of which are either available or to be found after public debate, to win the support of masses. All the previous governments have failed to tackle the most essential issues of ensuring ease of doing business, reducing cost of doing business, accelerate growth, induce and boost investment, concentrate on human skills, tap resources, generate employment, and deconstruct the unproductive tax system which imposes high taxes, but yields low revenues. A system that is operationally inefficient, anti-business, complex, time-consuming and costly. Even after imposing all kinds of oppressive taxes and tall claims of "extraordinary" performance, revenues are still below the real potential, which is not less than Rs 10 trillion at federal and provincial levels.
The government of PTI must be reminded that no agenda for rationalisation of tax codes or simplification of tax system can improve tax compliance, unless there is substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to relentlessly pursue and punish tax evaders without any political and other interference. The present functional structure in Inland Revenue Service (IRS) has failed to achieve these objectives. While there is always talk of giving "market" wages to tax officials, nobody has ever emphasised having a national tax agency by improving the overall working conditions and professional skills of officers and staff. If one goes to a tax office as a taxpayer only then one would feel the taste of inhuman and insulting treatment, an ordinary citizen receives daily. Does it really need enormous money or funding from World Bank and foreign donors to extend the well-deserved respect and courtesy to taxpayers? Does this issue relate to market wages or foreign funding or advice?
The fundamental element of tax reforms is providing a simple tax system that is manned by an efficient and competent administration, which is nowhere visible in Pakistan. Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely altering tax laws or suggesting cosmetic changes here and there. Reforms can be successful only if comprehensive analysis is made of the whole system, that is, tax structure, tax administration, state of economy, taxpayers' attitude, revenue needs of the country and many other allied aspects.
The present government, under the leadership of Imran Khan, earnestly desires tax reforms, but needs to realise that it is not possible without first establishing an efficient, workable structure. The best example of an efficient tax structure is that of Sweden's tax agency, Skatteverket that maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish National Tax Authority (NTA)-see details in 'Need for National Tax Authority', Business Recorder, October 20, 2017. This kind of innovation alone can counter massive pilferages in collections that were estimated at Rs 3 trillion by IMF in its country report of 2016, Unlocking Pakistan's Revenue Potential.
The existing tax system is not taxing the rich 5 million. Resultantly, income and wealth distribution disparities are rapidly widening. Under the given scenario, efforts are needed both at federal and provincial levels to enhance the size of the pie by shifting to growth-oriented taxation-see details in 'New Tax Model', Business Recorder, August 28, 2015.
The PTI in its coming budget must provide a fair and transparent tax system for which complete model is available in a study, 'Towards Flat, Low-rate, Broad and Predictable Taxes', published by PRIME Institute. This model provides for revenue collection of Rs 8 trillion along with maximising economic growth. The PTI government must demonstrate a sensible balance between income, capital and consumption taxes. It must spend not on ill-designed programmes to collect votes but make investments in creating human capital (e.g., education, training and health), and necessary public infrastructure to increase productivity of the economy.
The following measures/steps are necessary to enforce tax obligations and ensure that the rights of citizens are safeguarded:
1. All individuals, whatever the level of income may be, should be required to file simple and easy tax return form which should be available both in English and Urdu-incentive for filing return should be Rs 2,000 cash payback in the bank account of the filer. It will help in facilitating the process of documentation, data base at national level about households and their earning levels. Households earning below Rs 400,000 should be paid Income Support Allowance of Rs 40,000 per annum (negative income taxation of 10%).
2. Individual income tax rate for taxable income (exceeding Rs 1,200,000) should be 10% or 2.5% of net wealth exceeding Rs 10 million on the last day of tax year, whichever is higher.
3. All non-filers should be given a chance to whiten all untaxed assets/incomes for any past year, at home or abroad, by paying 10% tax latest by June 30, 2021. After the deadline, stringent action under the law should be taken including confiscation and imprisonment. For this, asset seizure legislation needs to be passed.
4. One-time de-log litigation scheme for taxpayers to pay 10% of tax arrears up to June 30, 2021. This would clear the backlog of pending cases in various courts and recover stuck up revenue of billions of rupees.
5. Government may offer all persons to pay unpaid income tax/sales tax for any previous year under a self-assessment scheme, paying more than 25% tax over the last year, with no audit or inquiry. It would bring much-needed revenues to overcome fiscal deficit. In the next three years' time (2020 to 2022), while businessmen concentrate on business growth, the government should prepare their tax profiles by data integration. After three years, both would be in a position to determine income tax/sales tax payment on actual basis.
6. Simplified and harmonised sales tax on goods and services at a low rate of 8%.
7. Simplify Customs tariff with 'One-Chapter One-rate'. Rate of 5% with certain exceptions to protect local industries and exporters. TVs, air conditioners, cars and other luxury items (to be identified in consultation with stakeholders), tobacco, liquor should be taxed at a higher rate.
8. Radiographic scanning of all inbound and outbound containers to plug revenue leakages. Stringent measures to counter under-invoicing etc.
9. No functional mechanism has so far been evolved to effectively check any unfair practices on the part of tax administrators. They are not made liable to punitive actions and/or pecuniary damages even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
10. Taxpayers must be given adequate rights before the State justifies strict actions for enforcing tax obligations. For restoring confidence of taxpayers the State should promulgate Taxpayers' Bill of Rights that must safeguard and strengthen the rights of taxpayers, ensure equality of treatment, guarantee privacy and confidentiality of their declarations, provide right to assistance by State in tax matters, guarantee unfettered right of appeal through an independent tax appellate system and provide facilities for independent review of disputes with tax authorities.
11. There is massive sales tax evasion-even registered persons are not depositing full amount of sales tax. A scheme should be announced entitling a payer of sales tax to get refund of 10% of the amount paid. He/she should send invoices to federal treasury, which can authorise and remit refund after verification of genuineness of the invoice (by checking sellers' registration number). In this way, the government can develop data base about sales of all persons and then cross verify the same with the receipts declared by them in their sales/income tax returns.
12. In Pakistan under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz.
a. Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;
b. Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and
c. 6% mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.
The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001.
13. Presently refunds of billions are stuck up. This issue needs systemic analysis. Refunds should be issued as expeditiously as demands are collected. The following should be made effective and mandatory through statutory provisions so that no one can exercise discretionary powers:
* Income and sales tax refunds should be issued without application within 60 days of their becoming due.
* There should be automatic payment of compensation if any refund is issued after 60 days.
* The officer responsible for incurring compensation should be made liable to pay the amount from his salary.
* There should be zero tax regime for exporters to avoid refund accumulation.
14. Recovery of tax demand should be made only after decision of the Tribunal and not before. Bank accounts should not be attached without prior notice to the taxpayer and after seeking approval in writing of Commissioner in the light of reply submitted by the taxpayer.
15. In developing economies like Pakistan, one of the biggest problems is a relatively small tax base and the reluctance of ordinary people to file tax returns and thus submit themselves to scrutiny of their affairs by the tax administration. However, once a taxpayer professes faith in the effectiveness of legal remedies against an unjust tax levy or unjust action of the taxation authorities, he would be more likely to be truthful to the taxation authorities, and willing to accept a reasonable levy of tax.
16. To a tax collector, an efficient tax judiciary ensures that demands arising out of legitimate tax assessments, which can stand scrutiny of law, are not unnecessarily locked up in litigation. As long as there is a pending litigation in relation to a particular tax levy, there is a natural, and quite understandable, desire on the taxpayer's part not to pay the disputed amount during pendency of litigation. An efficient tax judiciary resolves disputes quickly, quashes demands which are not legally sustainable, and thus segregates serious tax demands from frivolous tax demands, as also giving finality to legitimate tax demands. This in turn ensures that taxpayers cannot resort to dilatory tactics for paying these genuine and legitimate tax demands which have received judicial approval. An efficient tax judiciary thus helps removing impediments in the way of collection of genuine tax demands by the State, which, once again, results in greater resource mobilization. An effective tax judiciary does not only settle tax dispute between a taxpayer and the State, but it also lays down principles on the basis of such resolved disputes which provide guidance for the future. These decisions, which have precedence value in the sense that same decision has to be taken on materially identical facts, also have normative effect thus helping in correcting the judicial course. This way, an effective tax judiciary also contributes to smooth functioning of the tax machinery.
17. To make Tribunal a truly independent forum, it is imperative to replace the existing 4-tier appeal system under the tax laws-direct and indirect-with two-tier system. The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into singular National Tax Tribunal. Like the Services Tribunal this too should work under direct supervision of the Supreme Court. Appeals against its decisions should go directly to the Supreme Court. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Tribunal. Appeals against the orders of the Tribunal should lie with the Supreme Court alone. Members for Tax Appellate Tribunal should be recruited in the same manner as judges of High Court. The pay, perquisites and salary structure of Chairman, members and staff should be at par with the Judge of a High Court.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)