Bringing non-taxpayers into the tax net is the only option to come out of the economic blind alley
By Huzaima Bukhari and Dr. Ikramul Haq
In the wake of statements on tax reforms by Finance Minister, Abdul Hafeez Shaikh, while in Washington and interview of Governor State Bank of Pakistan, Shahid Kardar, with Reuters early this month, the country is in the grip of heated debate on how existing revenues should be increased. Member Inland Revenue, Federal Board of Revenue (FBR), in a series of Press statements during the week stressed that "the real challenge confronted by the country is to revamp the tax system to survive as a successful nation".
While FBR is keen to introduce new taxes, without first ensuring the enforcement of existing ones, powerful businessmen have warned that if wealth tax is re-imposed, they would openly protest and counter this move with full force. Hafiz Shaikh, Shahid Kardar, Nadeem Ul Haque, during parleys with IMF and World Bank, tried their best to convince donors to give more loans to Pakistan as the government was sincere and serious in keeping the fiscal deficit within agreed limit and imposing necessary tax measures for this purpose.
However, IMF-World Bank teams were annoyed with the present state of affairs and dismal performance of FBR even after receiving millions of dollars from them for Tax Administration Reforms Programme (TARP). Hafiz, Kardar and Nadeem want reforms, but are helpless before the crafty tax bureaucrats.
For the last many years, FBR is struggling to improve tax-to-GDP ratio but has utterly failed despite resorting to all kinds of highhandedness in blocking genuine refunds, data manipulation, harsh tax policies and unjust withholding taxes. Tax-to-GDP ratio dropped to 9 percent in 2009-2010 from 12.5 percent in 2001-2002. FBR works in protecting tax evaders while squeezing the last drop out of those who pay due taxes. This unholy alliance between FBR and tax evaders is depriving the nation of billions of rupees.
FBR enjoys unlimited discretionary powers under various tax codes. Tax machinery is not subjected to pecuniary damages for blatantly unlawful acts. Those who neither file returns nor pay any tax are friends of tax collectors but large taxpayers are compelled to pay what is not even due at times. They are forced to spend millions to get relief in courts.
Even when obnoxious orders are declared unlawful by courts, no action is taken against delinquent officers. The FBR clout is so strong that it escapes any kind of accountability. The stalwarts of FBR thwart imposition of progressive taxes and plead oppressive taxes. It is an established fact that since 1991-92, the incidence of regressive taxes, shamelessly levied on the poor, has been increasing manifold -- making the powerful sections richer and richer.
Progressive taxes like wealth tax, estate duty, capital gain on immovable property and gift tax were abolished to benefit the rich. This has distorted the entire tax system, created income inequalities, widened the rich-poor divide and retarded economic growth.
When regressive taxes -- sales tax and presumptive taxes under income tax code -- were imposed in 1990 and 1991, our fiscal deficit was just Rs80 billion. After 20 years, our fiscal deficit has soared to nearly Rs900 billion, proving beyond any doubt that irrational taxes do not bridge fiscal deficit; rather they push a nation towards debt enslavement and economic collapse. Irrational tax measures have always played a decisive role in destroying civic society and paving the way for anarchy and chaos. This is exactly what the rulers want for Pakistan.
Low tax-to-GDP ratio is the main challenge faced by our economic and tax managers. The size of Pakistan’s GDP in 2008-09 was estimated at Rs13 trillion but revenue collection was less than Rs1.2 trillion. Figures of collection vis-à-vis tax-to-GDP ratio in 2008-09 is given in Table A and for 2009-10 in Table B. Pakistan stands 155th amongst 179 nations in terms of tax-to-GDP ratio based on US think-tank Heritage Foundation’s 2009 Index of Economic Freedom.
Mr. Kardar in his interview with Reuters said that he was worried by a "structural shift" of incomes towards the untaxed sectors. He added that "with this shift of incomes away from the taxpaying sectors to non-tax paying sectors, the tax-to-GDP ratio was structurally destined to be hovering around lower levels". According to Governor State Bank, economy has shown signs of improvement but quick steps are needed to broaden the tax base to benefit from the growth in untaxed sectors, such as agriculture.
In the Finance (Supplementary) Act, 1977, passed and enforced during the Bhutto regime on January9, 1977, for the first time a great revolutionary step was taken to tax the feudal lords by levying normal rates of income tax on agricultural income from assessment year 1978-79 as computed under the Sixth Schedule.
This Act and Land Reforms Act, 1977 annoyed the ruling classes and Military-Mullah alliance decided to do away with Bhutto. The rest is history -- these laws were overturned by military dictator General Ziaul Haq to protect rich landlords, which included mighty generals as well who by that time had grabbed thousands of acres of State lands under one pretext or the other. Since the rich and mighty have been avoiding taxation in Pakistan since 1977, 2 percent of population has accumulated 80 percent of national wealth without paying any personal taxes whereas total number of persons living below the poverty line is now 65 million.
The country is piling up huge debts -- external debt till 2015 will increase to US $75 billion from present figure of US $55 billion. The domestic debt is increasing at an alarming rate -- it is now over Rs. 5 trillion.
Achieving revenue targets by keeping the rich outside the ambit of personal taxes is a criminal act. Our revenue potential is not less than Rs4000 billion but FBR is not even collecting half of it (In the nine months of current fiscal year it collected merely Rs1019.8 billion).
The collection will never go to optimal level unless all the untaxed sectors are brought into tax net and leakages are plugged. Massive non-compliance testifies to the complete failure of FBR, yet its stalwarts get promotions, rewards and what not.
On the one hand tax collections are miserably low and on the other no efforts are in sight aimed at improving productivity and economic growth. Resultantly, Pakistan is facing a dilemma: neither can it afford to give any meaningful tax relief package to the common man, trade and industry (due to huge fiscal deficit) nor can it achieve a satisfactory level of economic growth (due to retrogressive tax measures).
The writers, tax lawyers, teach at Lahore University of Management Sciences (LUMS)
Table A: Tax-to-GDP ratio in 2009-2010
Nature of Tax Collection (Net) Tax / GDP
(In million Rs.) Ratio (%)
Direct Taxes 443,548 3.39
Indirect Taxes 717,602 5.48
Surcharges 18,071 0.14
Surcharges 1,161,150 8.87
With surcharges 1,179,221 9.01
Source: FBR Year Book 2008-2009
Table B: Direct & indirect tax collection
for FY 2009-2010
Nature of Tax Collection (Net) Tax / GDP
(In million Rs.) Ratio (%)
Direct Taxes 528.6 4.32
Indirect Taxes 800 5.18
Total Taxes 1328 9.50
Source: FBR Quarterly Report April-June 2010