Every year before the announcement of annual federal budget (which is nothing but an official ritual as it brings no positive change in the life of a common man) plethora of tax proposals are received by the Central Board of Revenue (CBR) from trade and professional bodies, tax bars and industry's representatives.
These are given no serious thought by the all-knowing CBR's tax bureaucrats, who have only one concern: how to achieve revenue targets through highhandedness, wickedly drafted amendments and onerous tax regulations.
Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth.
The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry and direct foreign investment during the last few years. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today.
It is impossible to enhance revenues with stagnation in economy, and over-taxing such economy, as has been done in Pakistan, can destroy the revenue system as well.
The priority of our rulers, military and civil alike, on achieving revenue targets, fixed ambitiously every year in utter disregard of how economy will behave, is the main problem. By fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where neither it can 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 retrogressive tax measures).
This is a vicious circle in which our policymakers are now trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive place where investors find satisfactory conditions to live and invest.
In a country where there is no security of life or property, notwithstanding the availability of host of tax benefits and other incentives, investors will never come forward.
The CBR, apex administrative revenue authority, has been single-handedly destroying Pakistan's trade and industry by withholding undisputed refunds payable to the taxpayers, making excessive tax demands and resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets.
The actions of the tax machinery are detrimental for business and industry.
The successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line. 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.
There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest. I am, therefore, not proposing cosmetic changes in the new Income Tax Ordinance 2001, Sales Tax Act 1990 or the Customs Act of 1964 (this has already been done by trade and professional bodies in the form of annual budget proposals submitted to CBR).
This article suggests some key areas where paradigm shifts are needed in structural and operation level to ensure not only more tax revenue for the State but also social equity and fairness so that honest taxpayers are not disillusioned by the benefits CBR has been extending to their dishonest friends in trade, business and industry.
PROVISIONS FOR COUNTERING TAX EVASION: It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scare, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains.
What is more tragic is that this social evil inherent in tax system gets doubly compounded as it necessitates greater and greater tax burdens on those who are law-abiding.
The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life.
The honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are not paying anything with the connivance of their friends and mentors in tax machinery.
The unholy alliance between the tax evaders and corrupt tax officials has to be eliminated as a first and the foremost step if we want to initiate any meaningful change in tax system.
Every now and then the State announces a tax immensity scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals. Such schemes are a spank for the honest taxpayers (proving them the most foolish for paying the taxes).
An extortionist in Karachi of Lahore can decriminalise his ill gotten money through such a scheme but the poor businessman who paid it due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return! The situation needs to be corrected.
The facilitation of whitening the untaxed money should be restricted ONLY for genuine business investors to bring capital back into formal sector by paying some percentage as tax (as kafara) and not for the criminals, corrupt and unscrupulous elements in society.
The Government must announce Compulsory Public Disclosure of Assets Scheme requiring the following to make their assets and liabilities public:
-- High ranking civil and military officials.
-- All the MNAs and MPAs.
-- Judges of the superior courts.
-- Businessmen/Directors of all the companies who availed loans exceeding Rs 5 million from any financial institution.
-- Professionals like lawyers, doctors, chartered accountant, engineers, journalists, consultants etc.
The above privileged classes of society shall act as an example for others. Their declarations will inspire the common people to pay their taxes honestly. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures.
This war must start from the mighty classes as suggested above. The people of Pakistan have a right to know how these mighty sections of society amassed immense wealth without paying taxes.
POSITIVE CHANGE IN TAX POLICY: There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment-oriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily to be understood and hassle-free from implementation perspectives.
The recent efforts of the government to reform the tax system through IMF-World Bank loans, recruitment of new members on market wages and relying on the reports of so-called foreign experts have not yielded any positive results or acceptability from the taxpayers.
It remains a closed door, bureaucratic exercise with no meaningful dialogue with the taxpayers, public pressure groups and tax experts who matter in the subject.
In the absence of a well-designed tax policy, the agenda of tax reform will remain lopsided.
The civilian government should not allow the IMF-World bank nominated finance minister and his henchmen to make any legislative and administrative changes through the budget 2004-2005 till the time a transparent tax policy is evolved by the elected representatives of the people through debate and consensus in the Parliament.
Such a policy then should be announced to secure support of all those who are affected by it before its actual implementation.
Over the period of time our tax system has become oppressive, unjust and target-oriented.
There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy and not mere achieving of targets set out unreasonably on the dictates of foreign donors.
Our potential is much higher than these targets, which we can never be achieved with the present incompetent, inefficient and corrupt tax machinery.
We should get ourselves free from the figure game of the IMF and World Bank. The existing tax policies have failed to reduce the fiscal deficit, and on the contrary are destroying our industry and business.
If we manage to formulate a rational tax policy and implement it through consensus and not coercive measures, there is every possibility to get rid of IMF in a short span of time.
However if we will keep on following their prescription, we will neither realise the fixed targets, nor achieve the cherished goal of self-reliance through resource mobilisation. Our annual tax potential is not less than Rs 600-800 billion provided the tax base is made equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn.
EQUITY PRINCIPLE: If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to public exchequer and vice versa.
The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability-to-pay principle views tax policy issues in isolation to incidence of public expenditure.
Many regard this principle as the most equitable and just method of taxation. It is emphasised primarily for its redistributive role. We in Pakistan have completely deviated from this principle, which is constitutional obligation of the government.
We have to follow Quranic injunctions in this regard which unambiguously and unequivocally commands us to spend in Allah's way whatever is surplus after the fulfilment of one's legitimate needs [2:219].
There is no room of concentration of wealth in a true Islamic society.
The existing tax system itself is a worst expression of colonial heritage. It is highly unjust.
It protects establishment and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes.
The common man is paying an exorbitant sales tax of 15% (18% in case of non-registered persons and as high as 23% on certain items notified by CBR) on essential commodities but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes, courtesy exemptions they have extended un to themselves, as they are the rulers, but not taxpayers.
It is painful to note that present structure of presumptive taxation has complicated the poverty problem of Pakistan.
According to a study of Asian Development Bank, the tax system of Pakistan, which was progressive till 1990, was converted into regressive regime in 1991 with the introduction certain withholding provisions in the Income Tax Law (most of which retained even in the new law promulgated in 2001) and VAT-type tax in the Sales Tax Act, 1990.
The result is that during the ten years' period (1991-2000), the tax burden on the poorest households was estimated to have increased by 7.4 percent, while it declined by 15.9 percent for the richest households.
This study of ADB is eye-opener for the target-oriented CBR's stalwarts (sic) that in the frenzy of showing higher figures to their foreign masters they have put extra burden of taxes on the poor of Pakistan.
History will never forgive them for this senselessness and treason with their own people.
The determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system.
This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax world-wide.
In Pakistan we have moved from this policy to unequal sacrifice rule where the mighty civil and military bureaucrats (now they are part of the landed aristocracy by getting State lands as awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled on the directions of the IMF to pay GST of 15% (it is as low as 2 to 4 % even in Japan and Singapore which are affluent societies) and ever rising costs of public utilities and POL products.
This is in direct violation of Quranic injunctions and the government must immediately take note of it and try to remove these dichotomies.
The taxes should be for the welfare and benefit of public at large and to make the State invincible, and not for the luxuries of the rulers and State functionaries.
BENEFIT PRINCIPLE: According to this principle, an equitable tax system is one under which tax payments are based on the amount of benefits received from government services.
In other words, the cost of government services should be apportioned among individuals according to the relative benefits they enjoy. Clearly, implementation of the benefit principle presupposes determination of the incidence of public expenditure before deciding distribution of tax burden.
Thus it encompasses issues of both tax and expenditure policies.
Our successive governments have failed to convince the people that payment of taxes is their collective responsibility. All the civil and military governments alike were engaged in wasteful expenditure, never bothered to live within their means and failed to even protect the life and property of the people, not to talk of providing them basic needs of health, education and civic amenities. Are they justified to ask people to make sacrifices when the life style of the rulers is Shahana (Emperor like)?
Tax policy should be used as a tool of distributive justice. The Government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty.
These welfare-oriented schemes may also include subsidised/free medical and educational facilities, low-cost housing, and drinking water facilities in rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of the taxes paid, there will be better response to tax compliance.
Taxes cannot be collected through harsh measures and irrational policies. The rulers and tax bureaucrats have to demonstrate by their actions a clear inspirational model for the taxpayers to believe them and to pay taxes honestly and diligently.
TAXPAYERS' BILL OF RIGHTS: The Government, before imposing any new obligations on the taxpayers at the instance of IMF, must restore the confidence of the taxpayers by immediately promulgating a Taxpayers' Bill of Rights, as was done by a number of countries including USA and UK in 1980s.
The provisions of the Bill must:
-- safeguard and strengthen the rights of taxpayers;
-- ensure equality of treatment;
-- guarantee privacy and confidentiality of their declaration;
-- provide right to assistance by State in tax matters;
-- ensure that tax collectors should act as a facilitators;
-- facilitate elderly taxpayers, low income taxpayers, retired people and the like assistance by the tax department as they cannot afford services of the consultants.
-- guarantee unfettered right of appeal through an independent tax appellate system; and
-- provide facilities for independent judicial review of disputes with tax authorities.
ASSIGNMENT OF TAX: Assignment of a tax means transfer of taxation power form a higher level to a lower level government.
Taxation power includes the following: right to levy the tax, collect the tax, and appropriate the proceeds from the tax. Thus, there can be three interpretations of assignment of a tax.
Firstly, higher-level government may levy and collect a tax but handover the entire proceeds to lower level governments. Secondly, the higher-level government may levy a tax but allow the lower level governments to collect it and retain fully the proceeds therefrom.
Finally, the higher-level government may transfer a tax to lower level governments, a situation which defines assignment of a tax in its strictest sense.
Our tragedy is that on the one hand we have too many taxes in the country (federal, provincial and local, although the last two only generate a negligible nation's revenue) and on the other the benefits of revenue collection are not reaching the poor masses.
The few rich are the real beneficiaries of every luxury that is available. Fiscal gap is increasing every year despite IMF-World Bank's bitter prescriptions bringing more miseries for the common people of Pakistan.
We have utterly failed to reform our tax system, a process initiated as early as 1990s.
The Pakistani nation is one of heavily and cruelly taxed nations of the world. They are liable to over 50 local and provincial taxes and levies.
These exclude federal taxes and levies. What makes the situation more painful is the fact that the system of taxation is unfair, complex and costly, which punishes the honest and detracts savings and investment.
The various taxes applicable at local level are in different situations are:
LOCAL TAXES: Export tax, district tax, union council tax, market tax, road cess (on sugarcane), road light tax, fire tax, local metropolitan tax, trade licence fees, water tax, conservancy tax, ground rent and tax on vacant plot.
NOTE: These are only important ones at the local level and list by no means is exhaustive.
LEVIES: Import registration fee, export registration fee, drug registration fee, drug manufacturing licence fee, stamp duty, Zakat and Ushr, fuel adjustment charge, group insurance, cost of living allowance, workers compensation, fee for deposit and registration of trade marks, patent fees, registration fee of trademarks, patent fee, registration fee of joint stock companies, share transfer fee, airport tax, foreign travelling tax, travel by air, toll tax, trade profession calling, abiana on agriculture, royalties, tax on duty-free shop, market committee tax, and advertisement tax on TV.
PROVINCIAL TAX: Property tax, betterment tax, surcharge on property tax, additional surcharge on property tax, professional tax, motor vehicles tax, entertainment tax, cotton fee, paddy development fee, excise enactment, hotel tax, marriage hall duty, duty on hospitals, licence fee on motor vehicle dealers, licence fee on video dealers, social security, education cess, capital gain tax and electricity duty.
Tax culture cannot flourish in Pakistan unless taxpayers get quality service and facilities in return, which unfortunately do not exist at present. A basic change in our three-tier tax system-central, provincial and local that is fraught with multiplicity and complexity-- is needed.
Replacement of the current tax system with a fair, simple and transparent one will certainly increase economic growth and national productivity. If we really want to progress only four local/provincial taxes - payroll tax, municipal tax, property tax and stamp duty - should replace the 50-odd taxes which are at the moment destroying our development as entire population is suffering at the hands of corrupt tax officials.
The federal highhandedness in tax matters (by using both federal and concurrent lists) has destroyed the financial and economic rights of the provinces.
The provinces have the exclusive right to levy taxes on goods and services within their respective physical boundaries, but the Federal Government blatantly encroached upon their undisputed right by levying tax on goods and services in 1991 (a process which is persisting till today) under sections 80C, 80CC and 80D of the repealed Income Tax Ordinance, 1979. Such taxes are no more taxes on income (which the federal government is empowered to levy under item 47 of the Federal List) but tax on goods and services.
It is a great tragedy that this argument was not addressed in the Supreme Court when the constitutionality of these provisions was challenged and the matter only revolved around academic discussions over the concept of income.
If the Federal Government can treat even tax on goods and services as tax on income, as upheld by the apex court per incuriam, then what will be sanctity of division of fiscal powers provided in the Constitution of Pakistan?
Generally, the purpose of tax assignment is to augment the resources of lower level governments.
The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower level government to levy the tax assigned to it. Not only this, the lower level government may not have powers to alter the basic structure of the assigned tax.
It may enjoy flexibility in fixing the tax rates within a minimum and maximum rage prescribed by the higher-level government.
There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal and taxing powers between federation and the provinces.
The true provincial autonomy can only be guaranteed if assignment of tax principle is followed in letter and spirit. By just electing some people under the local body elections and asking them to dislodge the District Management, provincial autonomy cannot be extended.
Let the provinces have exclusive right over their resources and finances. Let us transfer taxes to local governments so that grass root democracy and funds for public services can be guaranteed.
BUOYANCY AND ELASTICITY OF TAX REVENUE: Tax revenue may change through automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of the existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action.
Changes in the tax yield resulting from modifying tax parameters (bases, rates etc) are called discretionary changes. Variations in the tax yield flowing from the combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax.
It is computed by dividing percentage change in tax yield by percentage change in national income.
The Pakistani experience in this regard has been very disappointed as admitted in the following paragraph by official document ie Economic Survey 2002-2003:
"Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan tax system is still characterised by a narrow and punctured tax base, over reliance on distortionary import-related taxes, high taxes on the one hand and tax concessions and exemptions on the other, and weak tax administration.
The combined effect of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other.
Such a tax system has severely hampered resource mobilisation efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure".
Buoyancy estimates assess the overall success of government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income.
In the absence or weakness of elasticity attribute of the tax system, a government will have to revise tax rates and tax bases every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws, reduce administrative efficiency and are also politically inexpedient.
This is what happened in Pakistan for the last 50 years. It is the high time that we must have a paradigm shift in out tax policy to avoid these kinds of negative effects.
Therefore, tax structure should be so redesigned as to impart reasonable degree of elasticity to the tax system.
Taxation is a potent instrument to shape and influence the socio-economic polices of a country.
It is, therefore, imperative for us to formulate a nationally acceptable tax policy keeping in view our own peculiar conditions and not by taking dictates from the IMF and other donors, who are suggesting what suits to their vested interest. Our Tax policy must take into account:
-- Present stage of our economic development.
-- Objectives of economic policy.
-- Priorities of economic policy continually change with the changing economic, social, and political milieu.
It is necessary for us to use the forthcoming budget as a tool for CHANGE and not as protector of status quo. In taxes, we need to bring some fundamental structural and operational changes.
Mere amendments here and there will serve no useful purpose. New tax strategy should entail the following three components:
RESOURCE MOBILISATION AND GDP GROWTH: The first and foremost objective must be to raise resources for public authorities for administration and development.
Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idly or squandering them on luxury consumption.
According to Roy Gobin, "the revenue criterion is usually the dominant consideration, since governments in developing countries have become increasingly aware of the active role which budgetary measures can play not only in initiating and promoting growth but also in maintaining political power. Not only are higher revenue levels needed, but also tax yields should be increased at a faster rate than income, if infrastructural investments and social welfare expenditures are to be financed without generating unacceptable inflationary pressures and/or increasing reliance on foreign assistance."
The revenue performance is in fact the best and optimal use of resources. Since the composition of investment is an important determinant of growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing high tax rates on luxuries and other low priority items (such as motor cars, air conditioners, and jeweller), the government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors.
Conversely, offering tax concessions or even subsidies can encourage production of necessities of life and employment-oriented industries (The IMF is suggesting just the opposite and we are following their prescription at the cost of national interest).
DISTRIBUTIVE JUSTICE: Distributive justice or economic justice is an important function of tax policy. Economic justice relates largely to distribution of tax burden and benefits of public expenditure.
It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, and racial and religious tolerance in a society. Tax policy is a democratic method to influence the distribution of income and wealth on desired lines.
The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by low-income groups.
In Pakistan we are moving from progressive taxation to regressive taxation, on the dictates of foreign donors.
It is a dangerous step that is bound to force us to civil strives, as our society is already divided on economic, geographical and religious divisions.
The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies.
So the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively.
The performance of the Pakistani tax managers is highly disappointing as fiscal deficit remained high during the last decade and the revenue targets fixed annually were revised downwards many a times and even then the same could not be achieved. The Tax-GDP ratio remained dismally low.
The second equally important function is: To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends.
In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has transferred the burden of taxes from the rich to the poor.
STABILISATION: Initial developmental efforts are generally marked by inflationary tendencies in an economy. Inflation, if uncontrolled, may thwart all development plans and bring misery to the poor.
A reasonable degree of price stability should be a primary concern of a government's economic policies. The overall level of economic activity in an economy depends upon aggregate demand, relative to capacity output.
At times, the level of aggregate demand may be insufficient to secure full employment of labour and other factors of production. At other times, aggregate demand may exceed available output at full employment level.
Government intervention in both the cases becomes essential to correct such disequilibria in the economy.
The evaluation of our existing tax system with reference to the foregoing objectives is a difficult task because various other policies (like public expenditure policy) may be geared to achieve the same objectives. The Task Force on tax reform, headed by Mr Shahid Hussain, did not concentrate on these questions rather than confined itself to superficial aspects of tax system just suggesting a few changes here and there.
The IMF is insisting for the implementation of his recommendations that hardy touched the fundamental issues faced by our tax system. To what extent the redistributive objective has been served and what was the relative role of tax policy in it is a difficult question to answer.
Moreover, the various objectives of tax policy may not always work harmoniously. Rather, they are often in conflict with each other if not mutually exclusive.
Since the tax system of a country grows out of the interaction between political judgment and economic rationale, the process of compromises and trade offs is influenced by political expediency and economic logic, the former, in most cases, having the upper hand.
In fact, political requirements and economic thinking change with time, giving new directions to tax policy. As Richard Bird has observed, "Tax reform is, therefore, a never-ending process, not something that can be brought about once and for all and then forgotten."
One hopes that in the new budget, to be announced in the second week of June 2004, mindless and isolated changes will be avoided to further destroy our tax system unless tax policy imperatives discussed above are given due consideration.
The change mania without proper direction can be counterproductive or even disastrous.
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