Taxes and democracy

The reason why we have failed to establish social democracy is the unwillingness of the rich to pay taxes

By Huzaima Bukhari and Dr. Ikramul Haq

Our oppressive tax system that taxes the poor and exempts the rich is playing havoc with the socio-economic fabric of society. Behind the present chaotic socio-economic and political situation in Pakistan, amongst other factors, is an increasing gulf between the rich and the poor. It is shocking that with every passing day more and more people are being pushed below the poverty line -- their total number is now not less that 45 million in a country where rulers unashamedly waste billions of rupees on their personal security and comfort.

The greatest weakness of governance in Pakistan is denying the poor of their fundamental rights and socio-economic justice. During the last many months, due to persistent high inflation, the poor have lost whatever little purchasing power they used to have. Adding insult to injury, the government, instead of giving them any relief, has been resorting to unprecedented indirect taxes leading to further increase in their miseries. The worsening plight of the poor is not because of shortage in revenues or available state resources -- as propagated by the rulers to shift blame on others -- but is largely due to wasteful expenses on the part of the rulers and their hand-picked bureaucracy.

The reasons why we have failed to establish social democracy in Pakistan is the unwillingness of the rich -- controlling the state and its resources -- to pay taxes. A sustainable democracy and responsible government is not possible in a state where the politicians, high-ranking civil and military officials and the rich openly defy tax laws and contribute negligibly for the poorer segments of society. For example, those who matter in the land -- grab state lands in the name of rewards and what not -- have colossal wealth and incomes, but pay little income tax to the extent of salaried income and on retirement nothing, as pension is tax free.

Let somebody in the national parliament amass courage to ask for declaration of assets of all the serving and retired generals so that the nation knows how they get enormous wealth and how much tax do they pay. But before doing this the parliamentarians will have to start with themselves. First of all they should make public their declarations of taxes paid during the last ten years. Also, law should be passed requiring public disclosure of assets and liabilities of judges and high-ranking civil officials amongst others. Political parties -- as in India -- should be required to file tax returns otherwise would become liable to taxation. These acts, if taken, will be the first streaks of dawn of good governance, rule of law and transparency in Pakistan.

Annual declarations of assets and liabilities filed by the elected representatives before the Election Commission of Pakistan, drawing nothing more than ridicule in the print and electronic media, show how callous our elected representatives (sic) are towards fulfilling their tax obligations. What makes the situation more painful is unwillingness of tax authorities to issue them notices. By declaring meagre resources, the parliamentarians have admitted that they are enjoying extraordinary lavish living either at the expense of taxpayers' money or from ill-gotten wealth -- in both cases a state of shamelessness prevails. How ironic that the people who are elected and paid to enact laws and enforce rule of law are the worst tax offenders.

The absentee landlords, who dominate Pakistani parliaments -- not numerically but due to political clout -- collectively earn billions of rupees without any personal efforts. They thrive economically and politically on the tough labour of millions of landless tillers, who in some cases are their followers (murids) as well. These feudal lords, functioning under various names (pirs, sardars, waderas, khans, jagirdars, etc) individually earn millions of rupees by just leasing out their orchards. Interestingly, they pay no income tax on this income, which for their benefit is declared exempt under the Income Tax Ordinance 2001 as "agricultural income" (sic).

The parliament can amend the definition of "agricultural income" to tax such receipts. But, the strong lobby in parliament frustrates any such move under the pretext that it falls outside the competence of the Centre. It is a farce. Nowhere in the world income of orchards is classified as agricultural income as it does not arise from basic cultivation operations. Interestingly, the pirs get nazranas (gifts) from their poor murids as tax free receipts. But, the employees pay tax even on notional income if they get interest-free or concessional loans from their employers. Even a widow, earning below taxable income of Rs. 99,999 as profit from government saving scheme, is paying Rs. 9,999 as tax.

Will the top notches of the Federal Board of Revenue (FBR) ever tax the wealthy classes? The rich and mighty sell lands periodically and huge profits are claimed as tax-free capital gains arising out of disposal of immovable property, which cannot be taxed under the Income Tax Ordinance, 2001. This is merely an eyewash and blatantly wrong interpretation of law.

These profits are "adventure in the nature of trade" under section 2(9) read with section 18 of the Income Tax Ordinance, 2001 and, therefore, taxable. But the FBR officials are not inclined to tax them -- though it is their legal obligation -- perhaps from fear of prosecution or connivance in minting money for them. The big stock exchange mafia, managing funds of the mighty, every year easily gets exemption on capital gains. FBR lost tax of over Rs. 500 billion on this account alone in the last three years. In our society, the poor are forced to pay 16 percent sales tax on almost all items they consume, including branded salt, but the rich and mighty avoid and evade personal taxes with impunity.

Taxes play a vital role for the establishment of an egalitarian society, a true fruit of social democracy. In developed countries the rich are taxed at a high rate so that social services can be provided to all, especially to less privileged sectors of the society. In Pakistan, on the contrary, the poor have been burdened with more and more taxes. What makes the situation more painful is the fact that taxes collected are squandered by the rulers on their personal comforts and luxuries while the masses get nothing in return for what they pay to the state.

The state has miserably failed to discharge its basic obligation of protecting life and property of its people, what to talk of extending social services free of cost. Taxes collected are largely being used to provide for debt serving, defence, for the security and foreign tours of the rulers; besides regressive taxation the government resorts to borrowing money from wherever available to run day to day affairs.

Rulers of the day are not inclined to live like a common man and surrender all the perks and privileges they are enjoying at the cost of taxpayers' money. Rather, they are heavily burdening the masses with more and more indirect taxes. Incidence on the poor has increased by 32 percent during the last five years whereas on the rich it has decreased by 19 percent. The existing ill-directed, illogical, regressive and unfair tax system is widening the existing divide between the rich and the poor. The sole stress on indirect taxation (even under the garb of income taxation through presumptive tax regime on goods and services) without evaluating its impact on the economy and the life of poor people is a lamentable policy.

In the name of higher growth in tax collection, the economic and social fabric of society is being destroyed. Can democracy flourish in these circumstances? Democracy and taxes are interconnected as the concept of modern egalitarian state emerges from the sovereign right of the parliament to levy taxes and spend them for public welfare.