Budget 2019-20, expected to be announced in the last week of this month, will be very important for the coalition government of Pakistan Tahreek-i-Insaf (PTI). It will determine the direction of economy in the wake of another bailout agreement with the International Monetary Fund (IMF) and action plans for tax reforms under a new World Bank's US$400-million- project. The document prepared by World Bank (WB) for US$1.5 billion worth 'Pakistan Revenue Mobilization Project' says that "the existing taxes have the potential to generate annually Rs.10 trillion revenues, which are equal to 26 percent of GDP". Last year, Pakistan's tax-to-GDP ratio was 13 percent (half of the potential that the WB has worked out in the report). In a paper ['Towards Flat, Low-rate, Broad and Predictable Taxes'] published by PRIME Institute, Islamabad in 2016 the same estimation was made, however, our financial managers and tax bureaucrats remained in denial mood. They readily accept what so-called experts of IMF or WB say but ignore the work of local experts.
Dr Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, who replaced Asad Umar on April 20, 2019 in the coming budget will toe the line of IMF and WB and not what PTI promised in its election manifesto. The important question is, will he also rely on bureaucrats who so far have successfully captivated/trapped the PTI government? They skillfully manage all the governments and PTI has proved not an exception; by disconnecting the leaders from masses and convince them to defer the fundamental structural/institutional reforms as these would end their controls, benefits, perks, perquisites and privileges. The IMF and WB are also not interested in such reforms empowering the masses and simplifying the tax system.
The spasmodic approach to tax reforms through economic advisory council or tax policy board, task forces, or "foreign experts" (sic) or bureaucrats sitting in the Ministry of Finance and FBR will never work. In the past as well they have been suggesting patchwork here and there, with no tangible success-see detail in 'Tax reforms with borrowed funds', Business Recorder, October 11, 2004.
As we have mentioned time and again, unless and until, the rich and mighty pay taxes there is no way that Pakistan can break free from debt shackles and humiliating submissions before the IMF and WB. Unless tax delinquents are brought to justice, honest taxpayers would have no reasons to revel. For a long time the honest ones have been bearing the brunt of high taxes while their deceitful counterparts were on different occasions, generously awarded with extremely low-rate amnesty and money whitening schemes-the proposed latest one testifies to it. The following measures are sine qua non for making the tax system conducive for both local and foreign investors and ensuring sufficient resources for the state:
I. Documentation/broadening of tax base/raising number of filers
According to the 2017 census, our population is 207.77 million [provisional]. The dependent population of children under the age of 15 years is 35.4% and 4.2% people are above 65 years. Out of total population, 40 million are below poverty line earning less than two dollars a day. Our labour force, among the tenth largest in the world, is around 70 million. Majority of rural labour force [42.3%] earns below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001.
Analysing all the above figures (juxtaposed), individuals liable to income tax could not have been more than 5 million in tax year 2018. FBR collected 12.5% advance, adjustable income tax from 95 unique million mobile users alone (Out of total 151 million subscribers as on June 30, 2018, many had multiple and/or dormant SIMs) during the fiscal year 2017-18. Out of these only 1,492,507 (0.98%) filed tax returns for tax year 2018 till December 17, 2018 after availing many months of relaxation. The government later extended the date up to April 30, 2019. After yet another generous amnesty, FBR is hopeful that the figure of income tax return filers may go up to 2 million-there will remain a huge gap of over 100% as the real potential is around 5 million. The following measures are required to improve the situation:
1. After reducing tax rate for individuals to 10%, subject to minimum alternate tax of 2.5% of net wealth, if net value of assets exceeds Rs. 20 million on the last day of tax year, all individuals having taxable income should be required to file simple and easy tax return form which should be available both in English and Urdu. It will help create a data base at national level about households and their earning levels.
2. 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. Declaration should be made latest by June 30, 2019 but for payments reasonable time with additional charge may be provided as many will have liquidity issue. After the deadline of declaration of untaxed assets/income/expenditure/non-payment of any tax, stringent action under the law should be taken including confiscation of property and imprisonment.
3. One-time de-log litigation scheme for taxpayers to pay 10% of disputed tax demand/arrears. This will clear backlog of pending cases in various courts and recovery of stuck up revenue of billions of rupees.
4. Government may offer all persons to pay income tax/sales tax for tax year 2019 to 2021 under a self-assessment scheme, every year 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 three years' time, while the 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.
5. Simplified, low rate (8%) harmonised sales tax on goods and services with no exemptions.
6. Simplify Customs tariff with 'One-Chapter One-rate'. TVs, air conditioners, cars exceeding 1000CC and luxury items (to be identified consulting the stakeholders), tobacco, liquor should be taxed at a higher rate.
7. Radiographic scanning of all inbound and outbound containers to plug revenue leakages. Stringent measures to counter under-invoicing etc.
8. 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.
9. Advance ruling and alternate dispute resolution for non-resident and resident taxpayers within one month of applying it.
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 20% of the amount paid. He/she should send invoices to FBR, which can authorise and remit refund after verification of genuineness of the invoice (by checking sellers' registration number). In this way, FBR 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.
II. Advance tax/refunds/compensation/recovery
In Pakistan, under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), the following three specific characteristics were the hallmarks of advance tax system:
1. Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;
2. Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and
3. 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 and 10% compensation should be paid for amount retained as advance tax including collected/deducted through withholding regime.
Presently, refunds of billions are struck. This issue needs urgent resolution. Refunds should be paid 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:
1. 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.
2. The officer responsible for incurring compensation should be made liable to pay the amount from his salary.
3. There should be zero tax regime for exporters to avoid refund accumulation.
4. The recovery should be only after the 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.
III. Independent Tax Justice System
The main reason behind the reluctance of ordinary people to file tax returns and submit their record for scrutiny is due to lack of faith in FBR and the justice system. A reliable tax judiciary ensures that demands arising out of legitimate tax assessments are collected expeditiously. 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. An efficient tax judiciary resolves disputes quickly, quashes demands which are not legally sustainable, and thus segregates serious tax demands from the frivolous ones. This in turn ensures that taxpayers cannot resort to dilatory tactics for paying these genuine and legitimate tax demands which have received judicial approval. A good tax judiciary thus helps removing impediments from collection of genuine tax demands by the State, which, once again, results in greater resource mobilisation. For making tax justice system effective and independent, it is imperative to:
1. 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 should work under direct supervision of the Supreme Court. Appeals against its decisions should go directly to the Supreme Court.
2. Members for National Tax Tribunal should be recruited in the same manner as judges of High Court. The salary structure of Chairman, members and staff of Tribunal should be at par with the Judges and staff of the high courts.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)