A fair tax system

In modern times, democratic governance models are universally longed and desired for political inclusiveness, transparency, accountability and for securing and protecting fundamental rights of their citizens.

Under such a system rights and obligations are precisely defined and protected, and all citizens are promised to be treated in accordance with the law. In the same vein, businesses, properties, and assets of citizens are protected from any undue and arbitrary charge and levy of tax burden except through an act of Parliament.

The framers of Pakistan’s constitution also accorded due protection to such rights under article 77 of the constitution, which laid down that the tax is to be levied by law only and that no tax will be levied except under the authority of an act of parliament.

The purpose of such constitutional guarantees is to create a trust and strengthen a sacrosanct bond between state and citizens, whereby loyalty to the state and obedience to constitution and law are secured by protecting fundamental rights including right to life, security, trade and business and rights to property and protection thereof.

In fact, the purpose of constitutional and legal protection is to create a fair tax charge and due liabilities on citizens in respect of their incomes and assets and not such charges and levies which look unreasonable, unfair, confiscatory and extractive and while discharging their liabilities, citizens should not feel like subjects of the state instead of honourable citizens of the state.

Therefore, charging tax on amounts which are otherwise not liable to tax, on one pretext or another, or through stretched fiction of law for purposes of enhancing revenue figures tends to erode the sacred trust between the state and taxpayer citizens; and, in the long run, stands in the way of developing a fair tax system.

While reviewing the existing tax provisions, we observe that tax chargeable on cash withdrawal on bank accounts maintained by households and students, senior citizens defy fairness. The banks have been legally ordained to compulsorily deduct advance income tax from aggregate amounts exceeding Rs 50,000/ in a single day from those whose names are not appearing as active taxpayers. The classes of persons mentioned here are not legally liable to file tax returns and be on the active taxpayers’ list.

Housewives and students, for example, have no independent source of income liable to tax. Similarly, a substantial number of pensioners are not liable to file tax returns and as such their names would remain off the active taxpayers’ list, which will make them suffer advance tax at the time of withdrawal of cash from their bank accounts. Although the provision is mandated by law, it appears to be a harsh provision, which creates a confiscatory tax charge on the vulnerable citizens who are otherwise not liable to pay any tax.

Another harsh tax provision relates to advance tax on telephone, mobile phone and internet bills. A telephone subscriber with a monthly bill exceeding just Rs1,000/ per month will suffer deduction of advance tax of 10 percent of the exceeding amount. In cases of mobile phones and internet, no exempt limit has been prescribed, meaning thereby that the amount of bill, however small that may be, will be subjected to tax @15 percent. Similarly, domestic consumer of electricity with bill above Rs25000/ has been subjected to advance income tax if his name does not appear on the active taxpayers’ list.

Similarly, there are some classes of income which are otherwise not liable to tax. However, tax is being charged on them in the form of what we call “for rate purposes”. This is done by adding the otherwise exempt income to the total income on which the relevant tax rate is applied to work out tax liability and subsequently, calculation of tax attributable to taxable income is worked out. By this method, some fraction of tax is charged and collected from classes of income otherwise not liable to tax. These are in fact confiscatory and extractive methods of calculations to enhance revenue, and are detrimental to the spirit of fair taxation.

A fair tax system is not all about making collection of heavy taxes from the citizens; but it should also cater to the timely deliverance of legal reliefs the taxpayers get from the tax statute or from the appellate authorities. The law provides that appeal effect to cases where direct relief has been provided to taxpayers by an appeal forum, the relief has to be transferred to the taxpayers within sixty days. However, compliance with the statutory obligation rarely happens and unfortunately, no monitoring mechanism has been developed to ensure compliance to such relief and beneficiary provisions for the taxpayers.

Additionally, delay in disposal of pending refunds is another critical area which casts a shadow on the fairness of the system. A refund application has to be disposed of in sixty days as per tax statute but, unfortunately, there is no mechanism in place to ensure that the refund issues are decided, and due refunds delivered to the taxpayers within the timeframe stipulated in law. Delay in issuing tax exemption certificates and various approvals particularly approvals of revision of returns, wealth statements and approval of Non-Profit Organizations and issues relating to change of jurisdictions take much longer time than stipulated in law and the inordinate delay causes hardship to the taxpayers and erode their confidence in the fairness and trust of the system.

Therefore, only a tax system resting on pillars of fairness and justice has the capacity to bridge a trust gap between the citizens and the state and which derives mandate from law and follows, in application and procedure, principles of good governance, equity, fairness, transparency; and which is consciously designed to give the same treatment to incomes and sources similarly derived and sourced and which is progressive and dynamic going forward.

Such a system which is intrinsically designed to accord as much priority to delivering lawful reliefs and benefits to the taxpayers and as passionate and dynamic to protect their interests ranging from beneficial approvals to credits, rebates, and refunds of money paid by them in excess to what was legally due to the state as interested in tracing income and source gaps, tax evasion and erosion of tax base.

In fact, a fair or judicious system contains a fewer legal and procedural approvals, tax exemptions, surcharges, penalties and super taxes and lays less emphasis on enforcement and more on voluntary compliance through systems-based tax friendly digital platforms, which are designed for facilitating digital and virtual presence and attendance of taxpayers before tax authorities rather than insisting on physical presence.

Such a system if designed would create a friendly environment for all the stakeholders, and would not only make statutory compliance smooth, timely and efficient but will also reduce the cost of doing business.

Copyright Business Recorder, 2025