There is a national consensus that the existing exploitative, outdated, regressive, ill-directed and unfair tax system is stifling economic growth and widening the rich- poor divide. It needs to be replaced with an equitable, fair, pragmatic and investment-inductive system, run by an efficient, competent tax administration. Tax laws should be simplified, easily comprehensible and hassle-free from implementation perspectives. It is hoped that Tax Reform Commission in its final report will not only make this suggestion but would also present drafts laws/amendments to achieve this long overdue goal.
By this time, the government and Federal Board of Revenue (FBR) must have realised that oppressive taxes cannot reduce revenue deficit-sustainable economic growth alone is the key to yielding more revenue, employment and prosperity for all. At the moment the government is not collecting enough to meet even the current expenditure. The Chairman FBR, in a recent roundtable discussion, Tackling the tax crisis in Pakistan', hosted by the Chevening Alumni Association in collaboration with the British High Commission, conceded that "even for the current expenditure the country had to borrow money." The unrelenting huge fiscal deficit and rising quantum of debt are the direct results of wasteful expenditure by the rulers and non-payment of taxes by the powerful classes. It was revealed during the roundtable discussion that "65 percent of the members of the Parliament and more than half of the federal cabinet did not pay their income tax."
It is an undeniable fact that FBR has failed to improve the tax-GDP ratio to the desired level. Even during the roundtable discussion, the Chairman FBR did not enlighten the participants as to what action his organisation had taken against the powerful tax defaulters sitting in the Parliament or supporting political parties. FBR has never, and will never, understand that irrational taxation always paves way for more poverty, anarchy and economic retardation-this is exactly what we are facing in today's Pakistan.
Regressive taxation [even under the garb of direct taxation through presumptive/minimum tax regimes] without evaluating its impact on the economy and lives of poor masses and lack of political will to tax the rich and the mighty, remains our dilemmas-not scarcity of resources or narrow tax base as wrongly propagated by the rulers. Equity demands higher taxes from those who have higher income and wealth, but in Pakistan since the first martial law, all taxation policies have decreased tax burden on the rich by abolishing progressive taxes like gift tax, estate duty, capital gain tax, wealth tax etc. After the 18th Constitutional Amendment, these are devolved to provinces, but the lobbies of rich and mighty, dominating provincial assemblies are hesitant in levying these taxes as they would directly hurt them.
We cannot increase our tax-to-GDP ratio unless the following steps are adopted:
-- Simple harmonised sales tax and income tax regimes to facilitate the people to pay their taxes without any fear and in return the masses must get universal entitlements eg health, education, housing, transport, clean drinking water and other amenities.
-- Establishment of a single tax collection agency (National Tax Agency) at the national level as is the case in Canada (Canadian Revenue Authority) to relieve the taxpayers of highhandedness of many.
-- Absentee landlords and so-called pirs (spiritual leaders) should be taxed heavily as they earn millions by exploiting landless tillers (haris) and mureeds (followers).
-- Capital gains arising from movable and immovable assets should be taxed at the normal rate.
-- Confiscation of all assets created out of untaxed money.
-- Abolition of all kinds of tax exemptions and tax amnesty schemes.
-- Deletion of provisions facilitating whitening of black money eg section 111(4) of the Income Tax Ordinance, 2001.
-- Reintroduction of progressive taxes eg wealth tax, gift tax, and estate duty by the provinces.
-- Stringent provisions to counter money laundering, tax evasion and rent-seeking.
We can easily generate taxes of Rs 12 trillion at federal and provincial levels by adopting the above measures. This will help the State to meet all current expenses and earmark substantial funds for development and special programmes for the poor and needy. The dire need in today's Pakistan is to achieve higher economic growth and also reduce inequalities through a policy of redistribution of income and wealth. In many democratic countries, lower tax rates for companies but higher rates of income taxes for rich individuals, capital transfer taxes and wealth taxes are some of the means that are adopted for achieving these ends.
Pakistan's policymakers should also study recent Declaration of the Independent Commission for the Reform of International Corporate Taxation (ICRICT). This was initiated by a broad coalition that includes ActionAid, Alliance-Sud, CCFD-Terre Solidaire, Christian Aid, Council for Global Unions, Global Alliance for Tax Justice, Oxfam, Public Services International, Tax Justice Network and the World Council of Churches-it is also supported by Friedrich-Ebert-Stiftung. The Declaration notes with concern that tax abuse by multinational corporations (MNCs) increases the tax burden on other taxpayers, violates the corporations' civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country's reliance on foreign assistance.
The Declaration emphasises that MNCs should be taxed as single firms doing business across international borders. This is essential because multinational corporations often structure transfer pricing and other financial arrangements to allocate profits to shell companies. Tax havens facilitate abusive tax practices with enormous negative effects on the global community. Greater transparency and access to information are critical first steps to stop tax abuses. Every individual and country is affected by corporate tax abuse, and therefore the debate over tax avoidance by MNCs should be widened and made more accessible to the public. It further says that inclusive international tax co-operation is essential to combat the challenges posed by multinational corporate tax abuse. Pakistan, facing tax evasion and unlawful transfer of money to tax havens by looters of national wealth must join this initiative (ICRICT) as early as possible.
At the same time, the existing highly unjust tax system should be dismantled and replaced with an equitable one. The existing system protects the rich and mighty having monopoly over economic resources. The poor people are paying an exorbitant sales tax of 17% to 36% (in many cases even 45% on finished imported goods after customs duty, regulatory duty, sales tax, mandatory value addition and income tax at source etc) 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.
Instead of collecting agricultural income tax and property tax from the rich, the provincial governments are resorting to sales tax on more and more services thus increasing the cost of doing business for the recipients, who shift this burden in most of the cases on the masses. The provincial tax authorities are now showing same kind of highhandedness for which FBR has earned notoriety.
For achieving the cherished goal of establishing an egalitarian State and self-reliant economy, proper taxation of the privileged classes-ruling the country for the last many decades, is the need of the hour. They are the culprits-they do not pay due income tax and have amassed enormous wealth most probably, parked abroad. Many of them are beneficiaries of huge loan write-offs as well. Some are even guilty of plundering and wasting public money. Yet National Accountability Bureau (NAB) decided to acquit them through "plea bargain" process, thus making few bucks as well as for self-aggrandisement. All such elements should be debarred from participating in elections after a thorough probe by a high-powered Commission giving them a chance to justify the sources of enormous assets kept at home and abroad and the amount of tax paid on them.
The State has become so callous that the people living under the poverty line are subjected to exorbitant sales tax of 17 to 35 percent on petroleum products. For social justice and pro-people economic development, instead of levying indirect taxes on the masses, the government should through progressive taxation, discourage certain activities which are considered undesirable, for example, special excises on luxury and semi-luxury goods. Such measures will act as deterrents in avoiding a spill-over of these items that create disturbance in society as a consequence.
People are dying of hunger after massive floods, but the President, Prime Minister, governors, chief ministers, the army of ministers, state ministers and privileged members of military and civil are wasting millions on their "security", personal comfort, lunches, dinners and foreign visits. So, the issue of more taxes and improving tax-to-GDP ratio should not be discussed in isolation as is being done in the media these days. These issues must be interlinked with socio-economic justice as envisaged in Article 3 of the Constitution that requires that "The State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability to each according to his work".
The government's insatiable desire to extort more and more taxes from the masses must be debated in the correct perspective-it should be asked why it is not collecting and retrieving due taxes from the rich and mighty and allowing the MNCs to continue tax abuse. Why is it not interested in withdrawing extraordinary tax-free perks and benefits given to militro-judicial-civil complex? They should be given a market-oriented 'Consolidated Pay Package' in cash on which tax should be levied as paid by private sector employees. Palatial buildings since colonial days used by them as residences and now worth billions of rupees should be auctioned to get enormous funds for providing housing to ordinary mortals of Pakistan. Army of servants, fleets of vehicles, free utilities available to them should be funded by them from their market wages as done by high-paid bank employees. Before demanding more (undue) taxes from the masses, the rulers first of all need to convince the people that they are serious to utilise these taxes for their welfare and to end inequalities and ensure fair and equitable distribution of resources.
(The writer, lawyers, authors and partners in Huzaima, Ikram and Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)
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