“At present, Pakistan’s public debt is almost 600 percent of tax revenues and development spending is significantly less than interest payments.”, says Unlocking Pakistan’s revenue potential by Ms. Serhan Cevik, Country Report 16/2 (January 2016), IMF.
Achieving revenue targets by keeping the rich and mighty outside the ambit of personal income tax according to their actual ability to pay is the real dilemma of Federal Board of Revenue (FBR). The stalwarts sitting in Ministry of Finance and FBR are totally indifferent towards a fair, simplified, low-rate, broad-based, growth-oriented tax system. Their single-minded, target-oriented approach is the root cause of prevalent fiscal crisis. They want to stick to narrow tax base with higher taxes, rather than broadening tax base with lower rate of taxes. Fiscal consolidation should be as growth-friendly as possible. Tax-base-broadening reforms are identified as growth-oriented if aimed at reducing distortions in economic decisions, saving, investment and consumption, increasing output and improving social welfare.
Unfortunately, this is not the vision of our economic managers. It is tragic that in a country where billions are spent for the luxuries of the elites — militro-judicial-civil complex and ruling-predators — over 60 million live below the poverty line. Tax evaders are buying plots and luxurious bungalows, but the high-ups of FBR express their helplessness in taxing them — rather begging them, through amnesty schemes to pay just a few thousands more and get everything whitened. The definition of ‘business’ given in section 2(9) of the Income Tax Ordinance, 2001 covers even speculative transactions being ‘adventure in the nature of trade’ and yet the apex revenue authority is sitting idle causing colossal loss to the national exchequer. It is not taxing buying and selling in real estate as adventure in the nature of trade but wants capital gains tax on it which is a provincial subject. Our tax-to-GDP ratio can rise to 20 per cent in one year if we tax absentee landlords, real estate developers, beneficiaries of State lands under section 13(11) of the Income Tax Ordinance, 2001 and confiscate assets created out of untaxed money by deleting section 111(4) of the Income Tax Ordinance, 2001.
Pakistan’s tax potential at federal level alone is Rs. 8 trillion, says Unlocking Pakistan’s revenue potential, Country Report 16/2, January 2016, IMF. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collected from them at the prevalent tax rates would be Rs. 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000 is added, the gross figure would not be less than Rs. 3000 billion. FBR in 2016-17 collected less than Rs. 1500 billion as direct taxes (which included almost 40 per cent of indirect taxes in the garb of income taxation).
The government is not making any effort to improve productivity and economic growth. Resultantly, Pakistan is facing a dilemma: neither can it afford to give any meaningful tax relief package to the common people, trade and industry [due to huge fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. Regressive taxation, non-realisation of actual tax potential and wastage of whatever is collected is our real predicament. The existing unfair and unjust taxation is destroying Pakistan’s trade and industry by levying exorbitant sales tax, blocking undisputed refunds under one pretext or the other, making excessive tax demands which in 99 per cent of cases do not stand the test of appeal and resorting to all kinds of negative tactics and highhandedness to meet budgetary targets. These actions of the tax machinery are detrimental for economy, social justice and growth of business and industry to generate much-needed employments — we need annual jobs of 2 million for young people alone.
According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collected from them at the prevalent tax rates would be Rs. 1650 billion
The way forward is introduction of simplified, lower, certain and predictable taxes — details can be found at http://primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf. In this study, a complete roadmap has been given that can accelerate economic growth and yield revenues of Rs. 8 billion for the government, much more than what is being presently collected.
Income taxation at the moment is highly complex and fragmented. According to various estimates, our tax base is around Rs. 40 trillion (after taking into account informal economy). Flat-rate, broad-based taxation of just 10 per cent, with strong enforcement system, will yield Rs. 3 trillion under income tax from individuals and around Rs. one trillion from corporate entities (to be taxed at the rate of 20 per cent).
Presently, collection of sales tax is related to a few commodities. This is confirmed by the fact that petroleum products alone contribute around 44 per cent of the total sales tax domestic collection. Against the prescribed rate of 17 per cent, the effective sales tax rate for total domestic sales is not more than 5 per cent. If we introduce simplified sales tax at the rate of 8 per cent, collection will be around Rs. 3 trillion.
Customs collection in Pakistan faces serious issues of smuggling, under invoicing, over invoicing, misdeclarations and valuation rulings etc. These are not only causing a loss to national exchequer but also hurting open markets. The rationalisation of customs revenue is not possible through narrow bases (10 items contribute more than 80 per cent receipts), in the presence of hundreds of statutory regulatory orders (SROs) and numerous valuation rulings — all leading to complexity and leakages. There are presently four tariff slabs with the peak of 20 per cent and floor of 2 per cent. A single rate of 5 per cent for all items will eliminate the menace of smuggling, arbitrary and/or favourable valuations, complicated registration processes as well as the SRO-ridden system. It will bring revenues of Rs. one billion. Since there will be no sales tax on import stage or any withholding income tax, the industry and trade will flourish.
The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email: email@example.com; Twitter: @drikramulhaq
Published in Daily Times, November 12th 2017.