Restructuring the tax system — III

While the FBR under the present economic team has performed excellently under the adverse conditions and despite heavy financial toll of Covid-19, especially in the midst of deadly second wave, it is a fact that the coalition Government of PTI in the Finance Act 2020 failed to give tax relief to the salaried class, especially with no raise in the pay and pension of government employees, substantial reduction in income tax and sales tax rates for businesses, removing and/or deferment of withholding and advance taxes so that they can survive and revive in difficult times.

FBR in Finance Bill 2020 proposed luxury tax on the rich owners of farmhouses and palatial bungalows in Islamabad Capital Territory (ICT) but it was withdrawn in the Finance Act 2020 after the rich legislators and their financiers opposed it. The PTI Government by withdrawing Tax on luxury houses in Islamabad Capital Territory, proposed in the Finance Bill 2020 conceded that it does not want to tax the privileged segments of society. The Senate also recommended its withdrawal without assigning any reason.

The PTI Government, while appeasing the rich, is bent upon extracting exorbitant sales tax, the incidence of which takes away a larger slice of the people with meagre incomes while the rich, mainly the unscrupulous traders and manufacturers, make more money by not only passing on the burden of it to the end consumers but also not depositing it honestly in the treasury—this results into their illegal enrichment. Had the PTI imposed ‘Tax on luxury houses in Islamabad Capital Territory’, it would have earned appreciation of masses, but it failed to do so as was done in 2014 by the PML-N by withdrawing Income Support Levy Act, 2013 levied to help the economically distressed classes but repealing it the very next year. For historical record, let us reproduce the salient features of the withdrawn ‘Tax on luxury houses in Islamabad Capital Territory’:

On residential buildings:

1. In case of two kanal to four kanal with covered area of more than 6000 square feet: Rs.100,000 per kanal

2. In case of five kanal or above with covered area of more than 8, 000 square feet: Rs.200,000 per kanal.

On farm houses having four kanal including area under farming

1. A farm house with a covered area between 5000 to 7000 square feet: Rs. 25 per square foot of the covered area per annum.

2. A farm house with a covered area between 7001 to 10,000 square feet: Rs. 40 per square foot of the covered area per annum.

3. A farm house with a covered area of more than 10,000 square feet: Rs. 50 per square foot of the covered area per annum.

   On farm houses having more than four kanal including area under farming

4. A farm house with a covered area between 5000 to 7000 square feet: Rs. 60 per square foot of the covered area per annum.

5. A farm house with a covered area between 7001 to 10,000 square feet: Rs. 70 per square foot of the covered area per annum.

6. A farm house with a covered area of more than 10,000 square feet: Rs. 80 per square foot of the covered area per annum.

The above tax was not applicable in the case of one self-occupied house of widows. It was to be collected by the Ministry of Interior through its attached departments and deposited in the Federal Consolidated Fund. It could have fetched substantial funds for helping the needy. It must be imposed through a Finance Supplementary (Amendment) Bill or a Presidential Ordinance extending amnesty for the rich developers and builders. FBR authorities deserve appreciation for proposing a progressive tax, but powerful vested interest both in the Senate and National Assembly and the rich financing them have proved that the PTI Government like its predecessors would not tax the rich for the benefit of the poor! The situation exposes the claim of PTI that its aim and agenda to come into power was to ensure socio-economic justice and establishment of an egalitarian society!

Compliance cost was increased in the Finance Act 2020 by reverting to quarterly withholding statements instead of half-yearly. Shockingly, the power of real-time data access or otherwise is given to FBR under Income Tax Ordinance, 2001, the Sales Tax Act, 1990 and the Federal Excise Act, 2005 through the Finance Act 2020 in the absence of Personal Data Protection Law in the country and no safeguards against hacking and leakages as well as abuse for self-aggrandizement.

In the Finance Act, 2020 if only 40% of taxes waived/forgone in fiscal year 2019-20 were reduced, there would have been a fiscal space of Rs. 600 billion for reducing rates of income tax and sales taxes hurting the lower-income groups, rather than continuing with high taxes and levying/enhancing existing ones, when economy, in deep recession, needs impetus for survival and revival absorbing tsunami of Covid-19 outbreak/lockdown. This is the true reality of the “no new tax” budget of the PTI Government!

The PTI Government could have done a number of positive things for resource mobilisation—tax and non-tax—as well as reducing cost of doing business in Budget for fiscal year 2020-21 as suggested above, but it decided to substantially increase prices of petroleum products on June 26, 2020 with disastrous consequences (Unconstitutional levy, The News, June 30, 2020 and The POL bomb, Business Recorder, April 5, 2019).

We have a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes. The Prime Minister, if really sincere to reform tax system, must convert FBR into a modern National Tax Agency. The issue of fragmentation of taxes and multiple collection agencies needs to be resolved as a first priority to provide ease of doing business and reducing cost of doing business otherwise we will never progress and come out of devastating economic effects of Covid-19 endemic.

Pakistan needs a new National Tax Agency [NTA] as explained 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 it in any of its papers/reports related to US$ 400 Pakistan Raise Revenue Project, while presenting the same concept. For example, it may be noted that the idea of NTA was given way back in 2013 in Need for National Tax Agency, Business Recorder, November 1, 2013 and then in Revamping tax system, The News, December 7, 2014. It was not only elaborated in Tax proposals—VII: Need for NTA, Business Recorder, May 22, 2015 and Case for “NTA”, Business Recorder, November 27, 2015 but its draft law was given in Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, April 2016]. It was also included by the Tax Reforms Commission in its final report submitted to the government in February 2016 [which was marked confidential by PMLN and till today is not made public even by the PTI Government despite repeated requests].

It was suggested that the NTA must be run by an independent and competent Board and its members should be selected by Joint Committee of Senate and national Assembly. The NTA should not only collect taxes at all tiers of government but also disburse benefits like social security, food stamps, universal pension, healthcare coverage and income support etc. The linkage of database of various bodies with NTA (complete digitisation) has been emphasised time and again as 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.

The issues faced on fiscal front and how to deal with them have been discussed in detail in a number of papers and articles such as: ‘Avant-garde budget proposals’, Business Recorder, May 10, 17, 24 & 31, 2019, 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. Unfortunately, till today, these are not considered by PTI Government and never discussed or quoted by IMF or World Bank.

Surprisingly, the World Bank, IMF and FBR ignored the proposals presented in various articles mentioned above for generating revenue of Rs. 8 trillion at federal level alone [Flawed tax reforms agenda, Business Recorder, November 15 & 21, 2019 and ‘Raising Rs. 8 trillion’, Daily Times, November 12, 2017] enabling Pakistan to overcome monstrous fiscal deficit, get rid of loans, achieve rapid economic growth and provide social services to all citizens.

The IMF in its first review of December 19, 2019 [Country Report No. 19/380] has admitted that “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”. This fact of oppressive and narrow-based taxation was highlighted repeatedly by us in various articles and viable solutions were offered to make it fair and broad-based, but FBR and IMF paid no heed to these. The World Bank in 400-million Pakistan Raises Revenue Project has also made no reference of these, though many proposals have been endorsed without any acknowledgement of published work by local writers.

It is time that the Prime Minister must concentrate on the principle of reciprocity—in return for taxes he must establish a system to provide the citizens facilities of quality education, health, housing, transport, clean drinking water, sewerage etc by implementing Article 140A of the Constitution.

Our existing tax system extends extraordinary tax-free perks and perquisites to the powerful segments of society, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are pushed to become what Frantz Fanon called, ‘The Wretched of the Earth’. Due to pro-rich policies, wealth is concentrated in a few hands and there is no devolution of administrative, political and fiscal powers as ordained in Article 140A of the Constitution to ensure delivery of social services at grass root level.

The successive civil and military governments cannot absolve themselves from failure on fiscal front by shifting blame on WB/IMF alone. They never bothered to undertake fundamental reforms to improve productivity for higher and sustainable growth, instead kept on imposing regressive taxes as discussed in our book, Tax Reforms in Pakistan: Historic & Critical View. (available free at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf.

The recently launched ‘Tax Payers Alliance Pakistan’ (TPAP), a voluntary network of Pakistani taxpayers to act as a pressure group of professionals, business owners and individuals, in a pre-budget maiden Press release, reminded the Government that Pakistan needs a low-rate, broad-based and equitable tax system as well as the federal and provincial governments must demonstrate transparency and end undue and wasteful expenditures—details at https://primeinstitute.org/tax-payers-alliance-pakistan-tpap/.

We need a simple, fair and predictable tax system: 10% tax on individuals (with alternate minimum of 2.5% on net wealth exceeding Rs. 10 million), 20% on companies and other entities, 5% sales tax (for exporters 0% tax). Low-rate customs duty (One Chapter, One Rate, say 2%) on all items and federal excise duties on luxury items and on health-hazard products like cigarettes, beverages etc. This will fetch us tax of Rs. 8 trillion [working available in towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020).

(Concluded)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2021