In fiscal year 2018-19, total payment, as per budget documents, on account of debt servicing, was Rs 1,987 billion against the budgeted figure of Rs 1,620 billion. Allocation for the current fiscal year is Rs 2,891 billion, 78 percent higher than last year! If FBR achieves reduced target of Rs 5,503 billion (original fixed in budget was Rs 5,555 billion and after request from government, IMF agreed for reduction to the tune of Rs 233 billion against the demand of Rs 300 billion), after transfer to provinces under 7th National Finance Commission (NFC) Award of Rs 3,200 billion, net tax collection available to the federal government will be Rs 2,300 billion, which is short by Rs 591 billion of debt servicing of Rs 2,891 billion!! This shows the gravity of the fiscal crisis faced by Pakistan and aptly highlighted by Prime Minister in his address to FBR's top notches on November 13, 2019. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government, military and civilian alike, to broaden the tax base through lowering of rates and effective enforcement.
It is an undisputed fact that FBR has perpetually and miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, including many introduced by the present government through the Finance Act, 2019 [Taxes, prosperity and welfare, Business Recorder, August 9, 2019, Rationalising tax system, Business Recorder, July 19, 2019 and The Money Bill, Business Recorder, July 5, 2019].
It is strange that in the three-year plan approved by Prime Minister, nothing is available about simplification of taxes. Whenever there is a demand or debate about simplification of tax codes, ease of compliance, facilitation of taxpayers and improvement in tax administration, the worst resistance comes from top notches of FBR, who think they are the ultimate wizards and nobody else has a right to talk about tax base-broadening reforms aimed at accelerating economic growth, promoting investment, boosting up savings and ensuring fiscal consolidation. FBR now headed by a renowned chartered accountant must go for these and tell the self-acclaimed wizards to read 'OECD Tax Policy Studies No. 19', the crux of which is:
"Fiscal consolidation should be as growth-friendly as possible. In general, tax base-broadening reforms are identified as growth-oriented reforms. To the extent that they reduce distortions to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare".
Unfortunately, PTI after taking power has forgotten what it promised to masses during election campaign, and ignored what was suggested to it in various articles [Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018 and PTI and tax reforms, Business Recorder, August 17, 2018].
As explained in 'Overcoming fragmented tax system', Business Recorder, October 19, 2018], Pakistan needs a paradigm shift in tax policy and revamping of entire tax administration-establishment of a tax authority that is capable of generating sufficient resources for the federal and provincial governments, It should be the top priority of the government. Through democratic process, all the provincial parliaments can vide Article 144 of the Constitution of Islamic Republic of Pakistan jointly establish autonomous tax agency, comprising specialists in all the required areas. Taxpayers should be facilitated rather than forced to comply at multiple levels and that too at very heavy costs.
For effective running of FBR and other tax agencies at various levels, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with a rational tax policy. Tax reforms or three-year-plan approved by Prime Minister are meaningless without an efficient tax administration and investment-conducive tax policy - see details in 'PTI and tax reforms', Business Recorder, August 17, 2018.
It is high time that Imran Khan instead of taking advice from the IMF and the World Bank imposed advisers and input from FBR's top hierarchy (they are part of problem and not solution), reverts to forgotten comprehensive tax policy it unveiled on August 24, 2012. In the said policy, PTI proposed concrete and rational measures for revenue generation in Pakistan. These tax measures have been totally ignored after coming into power, courtesy the influence of advisers imposed by foreign lenders, old-DMG-babus and FBR's Revenuecracy. If the said policy is implemented, it can change the fate of Pakistan. The details of the said policy can be seen in PTI agenda not a tough sell, Business Recorder, August 31, 2012.
The main emphasis of the PTI government is still not on low-rate taxes on the broadest possible tax base, taxing the rich and mighty through alternate minimum tax and property tax according to the size of the house/office. Along with these measures, it is vital to bridge the monstrous tax gap which according to official claims is not less than 80%, the collection of which is essential as it can wipe out the entire fiscal deficit. This is, however, not possible unless federal government, after consultations with provinces, introduces harmonised sales tax on goods and services and establishes a single agency to monitor all inflows and outflows and document all the transactions relating to acquiring of assets. We have been advocating for it since long but nobody has seriously considered it, not even the PTI government until recently.
The main challenge before the PTI government is to optimize tax collection without hampering business growth and investment clime. It requires massive structural reforms, abolition of the existing complicated tax laws and procedures. New simple tax codes/procedures should be enacted in English and with versions in Urdu and local languages-details in 'Need for National Tax Authority', Business Recorder, October 20, 2017.
Tax agencies should be equipped with modern Tax Intelligence System sending quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations. For promoting tax culture, it is equally important that there should be prudent spending of public money for welfare of masses through a transparent process. This perspective is still missing, not even made a part of the long-term planning approved by the Prime Minister.
(Concluded)
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
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