Tax Reform Recommendations

by Huzaima & Ikram

As the national kitty is empty and economy is in doldrums, the real challenge for budget makers of the new government is to devise a comprehensive strategy to tap the real tax potential of the country, which is not less than Rs 8 trillion.

The FBR, despite using all kinds of negative tactics to achieve the target of Rs 2381 billion for the current fiscal year, has now conceded that it would hardly collect anything around Rs 1975-1985 billion.

On the one hand, the FBR has perpetually failed to collect the assigned targets while on the other its main reliance remains on indirect taxes, levied even under the garb of income tax, shifting the burden on the poor and favouring the rich.

During the last two decades, the FBR has been imposing all kinds of regressive taxes, blocking genuine refunds, raising fictitious demands and fudging figures, yet miserably failed to improve tax-to-GDP ratio, which at 9 per cent is one of the lowest in the world.

There is a consensus amongst all experts that economic viability of Pakistan depends on bringing tax-to-GDP ratio to 15 per cent at least. For this goal, some radical changes are required e.g. running the FBR through an independent board of directors comprising professionals, documenting economy through reduction in the exorbitant sales tax rate, facilitating businessmen to register with the FBR, making tax base equitable and enforcing simpler and fairer tax procedures to encourage compliance.

The main emphasis should be on investments and not tax collection as higher growth and enhanced productivity automatically yield more taxes.

Level playing field should be provided to all through transparent procedures and stringent accountability.

The Nawaz Sharif government should reprioritize its goals where tax incentives should be linked with industrial and business growth. There should be an end to issuance of Statutory Regulatory Orders (SROs) that promote and protect the cartels.

Clip_5Prevalent massive evasion in customs, income tax and sales tax can only be countered through implementing an integrated Tax Intelligence System (TIS) capable of recording, storing and cross-matching all inflows and outflows. For ensuring proper tax collection, the following measures are inevitable:

  • All in-bound and out-bound containers should be scanned/x-rayed to counter evasion of custom duties.
  • Anybody who pays sales tax and reports the same to the FBR should get refund of 10 per cent of the amount; to be paid directly in his bank account provided he files income tax return. In this way we can achieve optimum tax compliance and documentation.
  • The procedure for claiming refund should be simple, i.e. payer of sales tax should send invoices to the Central Tax and Refund Depository, which would authorise refund from the nearest branch of National Bank, after verification of genuineness of the invoice (by checking sellers’ registration number). In this way, the FBR can develop a data base regarding sales of all persons and then can cross-verify the same with the particulars declared by them in their sales/income tax returns. Non-filers can be detected. In this scheme, people may choose not to claim full credit of sales tax paid by them since they may not be able to justify the sources of their expenses. To overcome this hurdle, the government can announce immunity for three years from scrutiny of their expenses declared through sales tax invoices alone — it would go a long way to document the economy yielding more and more revenues in the coming years and bringing all people to tax net.
  • This scheme would encourage people to obtain sales tax invoice for each transaction, which is presently not being insisted upon as evasion of sales tax is mutually beneficial. If sales taxpayers are given the above incentive, they would insist on sales tax invoice and the government, without expending any money or making extra efforts will be able to expand the tax net.
  • Such schemes were successfully implemented in Taiwan, Turkey and Venezuela. In India, the government of Kerala has introduced five per cent sales tax for all retail sales with incentives to both the shopkeepers and buyers. The shopkeepers get a 10 per cent refund of tax collected/paid to the government and the buyers enjoy coupon of Rs 5 for every purchase of Rs 100. Every week a draw is held and coupons-holders win lucrative prizes. This scheme has boosted retail sales of shopkeepers who voluntarily get registered with the government. There has been tremendous increase in revenues of Kerala after this scheme.
  • The Nawaz government must remember that if taxation is viewed as being unfair or favouring some chosen ones, no reform programme can succeed and voluntary compliance will never improve.Special efforts and rational policies aimed at restructuring the tax system and restoring public confidence in the tax officials are needed. Even a good tax system will not work if the prevalent negative mindset of the tax official remains unchanged. There is an immediate need to improve both the system and the human fabric that controls it.

    The tax bureaucrats — sitting and retired — suffer from the all-knowing syndrome. They are, in fact, responsible for the existing pathetic state of affairs. They being defenders of the status quo can never bring positive, pro-growth and business-friendly changes in the existing oppressive tax system. Tax officials, thriving on oppressive system, ensure unchallenged control through complicated laws and cumbersome procedures — nowhere in the world delegated power is available to an executive authority to undo laws passed by Parliament through Statutory Regulatory Orders (SROs). This unconstitutional, undesirable, undemocratic and notorious practice should stop once and for all [‘Perils of tax breaks’, The News (Political Economy), February 17, 2013].

    The need of the hour is a low-rate but across-the-board harmonised sales tax coupled with automated, speedy tax refund system. The system should be fair and transparent and at the same time its enforcement should be strict and stringent — there should be no sacred cows. The tax base cannot be broadened unless all the goods and services, barring essential eatables, books, children’s garments, educational tools, are brought into the sales tax net.

  • All persons having income of Rs 500,000 or more should be taxed irrespective of source of income and must file returns electronically with declaration of assets and liabilities.
  • The FBR should publish directory of taxpayers every year so it can be seen how much tax is paid by high-ranking civil-military officials, judges, politicians, public office holders, rich professionals and businessmen and how much wealth is owned by them.
  • The government must take due cognizance of disparities and dichotomies in the existing tax system, remove them and ensure redistribution of wealth through progressive taxation rather than thriving on indirect taxes. Taxes collected should be spent for the well-being of public and not for the benefits of elites. Taxes, if spent for well-being of the public at large can make the State invincible and if squandered for the luxuries of elites — military-judicial-civil complex, landed aristocracy and politicians-turned-industrialists — are bound to lead to national disintegration, social unrest and economic disaster.

The repressive tax policies of successive governments have pushed millions of people below the poverty line. Whatever is collected from the poor — rich and mighty do not pay taxes in this Land of Pure — is wasted ruthlessly or plundered with impunity by corrupt politicians and state functionaries.

The government will have to reverse this trend. Collection of taxes matters but the real importance lies in their spending. For strengthening democracy and economic progress, it is imperative to tax the rich, make powerful civil-military bureaucrats accountable to people and ensure equality to all.

In governance, everything is interlinked and interdependent — nothing worthwhile can be achieved without law and order, efficient justice system ensuring rule of law, infrastructure, encouraging business environment and investment in human resource.

A budget by the rich, for the rich

And then the Nawaz Sharif government announced its budget which  failed to tax the rich and give relief to the poor.

An ideal budget for Pakistan is one that deals justly with all economic classes within the society. It must focus on welfare programmes — to help those lagging behind, enabling them to move up economically. It must resent the sight of rich families staying at the top and impose on them high taxes in order to redistribute wealth and income in the society. All our budgets, including the latest one announced by Ishaq Dar, are designed for benefitting the affluent classes — these can be safely be called “budgets of the rich, by the rich, for the rich”.

“No relief for the poor” was the instant reaction of most of the Pakistanis after hearing the budget speech on the evening of June 12, 2013. There is consensus amongst experts that “the tilt of the budget is towards the rich.

Due to uneven rates, the tax liabilities of the lowest income group having annual income of Rs400,000 to Rs500,000 will be increased by 22 per cent when compared with the liabilities of this year. The move by the government is contrary to the claims of taxing the rich to overcome the economic crisis as it has increased the tax burden on the salaried class by a third, while the tax burden on the non-corporate business class — also known as association of persons — has grown three-fold.

If the government desired to generate revenues in an equitable manner, it should have reintroduced wealth tax to target 700,000 families that have been identified by NADRA and FBR as affluent but avoiding taxes.

Nawaz Sharif won with a clear mandate at a time when “everybody knows that Pakistan is in serious economic crisis. As such, the country was prepared to accept a ‘harsh’ budget, but the government has attempted to present a populist budget — one that would have been presented if elections were round the corner.

Statutory Regulatory Orders (SROs) are a major source of revenue loss, but this matter has been swept under the carpet by placing it with a committee to be headed by the chairman of FBR — the very organisation that has vested interest in the whole SRO business.

The Economist (May 27-June 2, 2006) published two studies showing how the Nordic countries have achieved social mobility and economic justice by taxing the rich to raise money for a welfare state. The studies say that “these countries help the children of the poor to do better than their parents.” One might expect social mobility and economic flexibility to go together — in fact, to be two sides of the same coin.

Our budget makers are not inclined towards promoting social mobility taking tough redistribution policies, particularly benefitting those who are at the bottom. There is no desire to follow the Nordic countries where a more supple and less class-ridden education system runs from top to bottom. Education in Pakistan is not only very expensive and a flourishing business industry but it is also pathetically poor in quality and class-ridden. If we judge our economic policies in the perspective of Article 3 of the Constitution, it can safely be concluded that Budget 2013 is totally oblivious of redistributive fiscal policies and social welfare programmes for social mobility.

The finance minister, in his budget speech, noted that “incidentally, the three main subjects of human development, namely education, health and population welfare have been devolved to the provinces under the 18th Constitutional Amendment. However, the responsibility for higher education, regulatory responsibilities and international coordination remain with the federal government. I would like to mention the following initiatives that will be undertaken for the promotion of this sector:

A sizeable allocation of Rs18 billion has been made for the Higher Education Commission, which will support development plans of different universities all over the country. It may be noted that on the current side also a hefty allocation of Rs39 billion is made for HEC. Thus a combined outlay of Rs57 billion will be made for higher education.

The enrollment in higher education will increase from 1.08 million students in 2012-13 to 1.23 million students in 2013-14, showing an increase of 14 per cent in the population of students pursuing higher education.”

The honourable minister forgot that in areas administered by the federal government, law and order and education is still their responsibility. We know the pathetic law and order situation in these areas — especially blowing up of the female schools by the miscreants. The federation has not bothered to develop these areas. In his budget, Dar has proved that education is at the lowest level in our state policies. He ignored the command of Article 25A which says: “The State shall provide free and compulsory education to all children of the age of five to sixteen years in such manner as may be determined by law.” Can the worthy finance minister tell how much allocation is made to fulfill this Constitutional obligation for Federally Administered Tribal Areas (Fata), Islamabad and other areas falling under the control of the federal government?

Our education system, if there is any, is worthless. The federal and provincial governments do not realise that it is not only spending more money on education that matters but how to use the entire system as an effective tool for social mobility. There is a complete lack of understanding of this perception on the part of our politicians and the result is that poor segments of society are condemned to remain mired in abject poverty and their children have no chance to move up as education is either not available to them or is of no practical use. Budget 2013-2014 is lacking this perspective is yet another routine exercise of balancing the books (that too by window dressing).

Pakistan needs meaningful redistribution policies that can uplift the downtrodden. There is nothing in this budget towards this goal — like all previous ones, it is a disappointing document.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 239 other followers

%d bloggers like this: