In the present circumstances, in the forthcoming federal budget, the need for a fair and simple tax system, as elaborate in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, 2016] and referred to in PIDE Policy Viewpoint [16:2020] Doin
In the present circumstances, in the forthcoming federal budget, the need for a fair and simple tax system, as elaborate in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, 2016] and referred to in PIDE Policy Viewpoint [16:2020] Doing Taxes Better: Simplify, Open & Grow Economy, has assumed renewed importance and relevance. In this second part of this three-part series, we are presenting a plan that can help to overcome the Covid-19-economic-toll challenge through the Finance Bill 2020. It is an excellent opportunity for the federal and provincial governments to take some right measures to not only help the needy but also ensure return to a vibrant economy after partial and ultimately full withdrawal of lockdown caused due to the Covid-19 pandemic. The most essential step towards this is simplification of the tax system, guaranteeing ease of doing business, reducing cost of doing business, providing a level-playing field and free and independent market operations. The governments should also focus on improving human capital, tapping resources and generating employments. For all these, dismantling and reconstructing the oppressive, inefficient and unproductive tax system is a prerequisite.
The existing system imposes higher taxes but yields lower revenues. Only 2,000 companies pay 75% of total taxes. The standard sales tax rate is 17% but effective rate in 2016 was not more than 3-3.5% as report of Tax Reforms Commission. The situation in 2020 may have improved, but it still not more than 7%-8%. Refunds of billions of rupees of sales tax and income tax were unlawfully withheld to show higher figures in the past many decades-Of unpaid refunds and figure fudging, Business Recorder, November 9 & 14, 2018.
Out of about tax returns of 2.5 million filed for tax year 2019 until now, one million shows nil income or income below taxable limit. It is a farce in a country of 220 million populations where 95 million unique mobile users are paying advance, adjustable income tax of 12.5% alone, but filers are 2.63% of this single withholding tax regime. According to data of 2018 compiled by Pakistan Electric Power Company (PEPCO) as on June 30, 2018, there were 3,028,054 commercial and 339,853 industrial electricity users paying advance income tax under section 235 of the Income Tax Ordinance, 2001 but all of them are not filers. For K Electric the number of commercial and industrial users is 463,670 and 20,647, respectively. Out of these how many filed income tax returns and sales tax statements is not disclosed by Federal Board of Revenue (FBR) on its website or in its Year Book 2018-19 or any other documents. FBR has recently closed audit of 310,000 cases, selected merely on account of late filing of returns. The reason for closure, assigned by FBR, is "lack of capacity" [FBR: audit closure, capacity & legality, Business Recorder, May 8, 2020]. Either this lack of capacity is due to shortage of officers or absence of proper training/skills or pressure from political masters is again not disclosed by FBR or the coalition Government of Pakistan Tehreek-i-Insaf (PTI).
The field officers complain about shortage of manpower and necessary facilities. They further complain that approval of head of FBR is required even for a visit/raid to any business premises or to seek details of a bank account. In other words, they allege that purposefully on the pressure of business community, the PTI Government, like its predecessors, has rendered the audit toothless as they can neither impound record, nor get third party information. Their claim needs to be confirmed or refuted by the Government. On the other hand, businessmen accuse tax authorities of abuse of powers, highhandedness and harassment for self-aggrandisement. In this agonizing scenario, can the PTI Government collect taxes fairly and fearlessly when the system is too complex and needs simplification? The PTI Government must give due weightage to a recent study of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economy , if really interested in reviving the economy and achieving growth leading to more revenues.
According to FBR Year Book 2018-19, sales tax collection in FY 2019 was Rs. 1,459.2 billion against previous fiscal year collection of Rs. 1,485.3 billion (negative growth of 1.8%). The overall net collection of Sales Tax Domestic (STD) was Rs. 648.9 billion against Rs. 661.1 billion in the previous year (negative growth of 1.9%). Sales tax on imports (STM) during fiscal year 2018-19 stood at Rs. 810.4 billion against Rs. 824.2 billion in fiscal year 2017-18 (negative growth of 1.7%)-see detailed analysis in FY 19: FBR's dismal performance, Business Recorder, December 6 & 11, 2019.
Though FBR has about 200,000 registered persons under Sales Tax Act, 1990 but tax comes from about 40,000 people. Shockingly, out of 360,500 industrial connections as on June 30, 2018, only 18,000 were registered under sales tax regime. Out of 3,491,724 commercial electricity users as on June 30, 2018, less than 350,000 filed income tax returns though tax of Rs. 33.832 billion was paid with bills as per FBR Year Book 2017-18 and figure for fiscal year 2018-19 was Rs. 35.5 billion as per FBR Year Book 2018-19. Allegedly, National Database & Registration Authority (NADRA) and banks are not ready to share data with FBR and utility companies are not ready to indicate on bills Computerized National Identity Card (CNIC) of actual user. The successive governments showed no inclination to provide necessary resources for improvement of the system. This has never been the priority or even consideration of any political party in power, but they conveniently shift blame on FBR. Then, there is elite capture of policies that we have been discussing repeatedly in these columns.
One of the many maladies in the tax system is cumbersome withholding tax system contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services. It is operationally inefficient, anti-business, complex, time-consuming and costly and must be abolished except for payroll [tax on salary], dividends, interest, and all payments to non-residents if chargeable to tax as per rate given in the Income Tax Ordinance, 2001 of relevant tax treaty.
The agenda of simplification of tax codes and revamping of tax administration can improve tax compliance. No agenda for reform will succeed unless there is substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools. The present structures of the federal and provincial tax bodies have failed to achieve these objectives. Therefore, the fundamental challenge is providing a simple tax codes administrated by an efficient and competent administration, which is presently non-existent.
Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Tax reforms certainly do not mean mere alteration of tax laws or making cosmetic changes here and there. Meaningful tax reforms are 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) on the same lines as highlighted in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, 2016] and the Legislature must pass Data Protection Law as is the case with Skatteverket and all other fully digitized tax agencies, for example, Canadian Revenue Agency. Canada id a federation like us but has single national revenue agency.
The issue of fragmentation of taxes and multiple collection agencies was discussed in detail in 'Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms' [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged in any of its papers/reports related to Pakistan Raise Revenue Project, the contribution of local writers and presented the same ideas as its own recommendations. For example, it may be noted that we gave the idea of National Tax Agency first time in 2013 in this newspaper ['Need for National Tax Agency', Business Recorder, November 1, 2013] then in Tax proposals-VII: Need for NTA, Business Recorder, May 22, 2015 and Need for "NTA", Business Recorder, November 27, 2015. It was suggested that the FBR or any other tax collection agency need to be run by a competent board as a short-term reform measure before all of these finally merged into a single national tax authority [NTA]. The NTA should not only collect taxes at all tiers of government but should also disburse benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitisation) can be a great step towards e-government model for the country that is presently non-existent. The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth studying/adopting after debate and suggesting modifications suiting our peculiar requirements. This was later elaborated by us many a time in various articles and in a paper, Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute, April 2016] and in Need for National Tax Authority, Business Recorder, October 20, 2017, 'A case for 'National Tax Authority', Business Recorder, November 30, 2018 and December 2, 2018.
Our idea of NTA was also included by the Tax Reforms Commission in its final report submitted in February 2016 [which was marked confidential and till today is not made public despite our repeated requests]. Now it has been accepted by the top management of FBR as reported in Reforms body allows: FBR to utilise data integration identifying taxpayers, The News, May 16, 2020 as under:
"The FBR officers had proposed that the restructured tax authority after inclusion of provincial taxes may be appropriately named 'Pakistan Revenue Board' instead of Pakistan Revenue Authority.
The cabinet had approved the recommendations of the Institutional Reform Cell of Prime Minister's Office, presented in its report on "Reorganising the federal government," hereinafter, referred to as task force report. Though, the cabinet did not approve abolishing the FBR and replacing it with the Pakistan Revenue Authority, the FBR was placed in the list of autonomous bodies in the report. This segment should be removed initially to place the FBR as an executive department.
There is a divergent opinion stated by the World Bank as the World Bank project report "Pakistan raises revenue" also envisages the FBR as a semi-autonomous revenue authority. In this backdrop, the Para-F of the proposed plan of restructuring of FBR as envisaged in the minutes of the meeting held on October 3, 2019, outlined the establishment of the Pakistan Revenue Authority as an autonomous body. After detailed dialogues, the stakeholder input was sought from consultative committees".
The issues faced on fiscal front and how to deal with them, especially in budget for 2019-20 were discussed in detail in a serious of articles, written under the title, 'Avant-garde budget proposals', published in four parts in Business Recorder on May 10, 17, 24 & 31, 2019. These and many other articles, e.g. 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, PTI and tax reforms, Business Recorder, August 17, 2018 and Wither tax reforms, Business Recorder, August 2, 2019, are available for fundamental structural reforms giving concrete proposals, road-map with timelines. The issue is whether the federal and provincial governments are really inclined for making tax system simple, open and allowing economy to revive and grow or not.
The following steps are essential for preparing a national data for better fiscal management as well as providing comprehensive social protection system making Pakistan a progressive and egalitarian State.
* All individuals having taxable income or below taxable limit should be facilitated to file simple tax returns [no wealth statement]. Those unemployed or earning below taxable limit should be paid income support [negative tax] as social protection plan. Return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create data bank at national level of all households-about 37 million as per last census, now may little more. Their earning levels will determine who need to pay tax, and who should be entitled to social benefits.
* All the governments-federal, provincial and local-should join hands and prepare data of all citizens determining not to extort taxes/levies etc but also to ensure that they get complete social security, health insurance, pension, and for those not employed food stamps and at the same time empowering them to come out of poverty trap by imparting skills and creating job opportunities giving tax incentives to private sector and through public projects, aimed at improving infrastructure and better social delivery system at grass root level.
* All entities-individuals, association of persons/firms/companies/artificial juridical persons-should be offered to pay income tax/sales tax for any tax/assessment year/tax period for any past lapse under National Tax Clemency Scheme. They should be encouraged and facilitated to pay past liabilities and thereafter would not face any penal action-prosecution, penalties, additional tax, default surcharge etc.
* The State must not offer any amnesties/immunities-these are incentives to the dishonest and penalising the honest taxpayers. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit.
* In the next three years' time, the businessmen instead of being overburdened with advance/heavy taxes/duties/other charges should be facilitated by improving all indexes of 'Ease of Doing Business' that must also include reducing cost of doing business. They should pay flat-rate tax on gross receipts/turnover as discussed in first installment of this series. They should also be given tax credits/incentives for compulsorily investing in human resource so we have trained and qualified workforce in all areas-providing employment and paying them decent/livable wages. Special tax benefits should be provided for offering jobs to women workforce.
* We must encourage and offer all possible facilities and incentives to all kinds of entrepreneurs, especially Small & Medium Enterprises (SMEs) to concentrate on growth and productivity.
* In three years, after achieving consensus through consultation with all stakeholders we should have National Tax Agency manned by members of All Pakistan Unified Tax Services having professional expertise in all related fields. This Agency would be in a position to communicate to all citizens what their income/expenditure levels are-it will determine tax obligations as well as who needs income and social support from the State.
* After national debate and taking input from all stakeholders national and provincial legislators should go for simple, predictable and low rate taxes-there should be income tax on all incomes including agricultural income to be under the exclusive domain of federal government and harmonised sales tax on goods and services to be given exclusively to the provinces-it will create fiscal consolidation and make federal and provincial governments self-reliant.
* We must abolish multiple taxes and collect local taxes e.g. property, vehicle taxes etc to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
* For reducing fiscal deficit to the level of 6% of GDP, it is imperative for both the federal and provincial governments to
• (i) curtail unproductive and wasteful expenses by 30%
• (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc through public auction for specific activities to generate employment/boost economic activity
• (iii) taxes at all levels-federal, provincial and local-should be made simple, low rate, broad-based, payable with ease as the Punjab Government recently decided to abolish around 50 taxes.
Tax revenues have a critical role in municipal self-governance in all successful social democracies. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or those for which they are responsible for under the law. Take the example of Finland where the most important levy is municipal tax, which amounted to almost 44 billion Euros in 2019-Pakistan collects less than 30 billion Euros as taxes both at federal and provincial level!
If a country of 5.4 million people (Finland) can achieve this level of taxation at municipal level alone, then we a nation of over 220 million can do much more, but only if there is the will. One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. We have the resources but system for self-governance as in vogue in Finland and elsewhere in the world is non-existent, despite the clear command under Article 140A of the Constitution. Resultantly, power is not with the people but in the hands of the privileged few and mainly bureaucracy even at local government level.
Economic equality and prosperity, peace and social tranquility can never be achieved unless taxation system is reformed completely. It needs partial decentralization where taxes are collected for education, health care and social welfare services through municipalities working on the principle of self-governance ensuring that revenues are spent for the benefit of public and not the powerful segments of society alone. In the third and last installment, we will discuss the ways and means to tap the real revenue potential of the country vis-à-vis implication of Article 160(3A) of the Constitution inserted through the Constitution (Eighteenth Amendment) Act, 2010 [commonly called "18th Amendment"] and National Finance Commission (NFC) Awards, including the 10th one notified by President on May 12, 2020.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)