For a fair tax system
Pakistan can reduce its fiscal deficit if a comprehensive programme, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation
By Huzaima Bukhari and Dr Ikramul Haq
According to a latest report by the US Central Intelligence Agency (CIA), Pakistan under the rule of General Pervez Musharraf is still a very 'high risk country' on a number of accounts. It notes with concern the ever-increasing military expenditure (4.5 per cent of GDP) and huge fiscal deficit (against revenue of $20.55 billion, expenditure is $25.65 billion and public debt is alarming high at 55 per cent of GDP).
The poor segments of society, since the takeover by General Musharraf in 1999, have been subjected to a number of taxes, whereas the rich still enjoy tax exemptions. What makes the situation more painful and shocking are the unprecedented non-development expenditures. In Budget 2006, the current expenditure demand for Prime Minister Secretariat alone was 538.751 million rupees, and that of its Inspection Commission 20.250 million rupees; Staff Household and Allowances of the President 290.244 million rupees; for NAB alone 797 million rupees and National Assembly 1005.933 million rupees, just to mention a few.
It is deplorable to note that for servicing domestic debts, the government requires 190.78 billion rupees, for the servicing of foreign debt 48.72 billion rupees, and for foreign loan repayment 56.35 billion rupees.
Do we still need any further proof to show that our rulers wasting national revenues and resources on non-development expenditures? They have yet to learn to live within means, the figures relating to domestic debt, its servicing and new loans of billions of dollars are simply horrifying. Due to wasteful expenditure on current account and deficit financing, there emerges an artificial lack of funds for investing in social projects benefiting the poor.
The Central Board of Revenue (CBR), through oppressive tax measures, managed to collect a record revenue of 713.4 billion rupees during the fiscal year 2005-06. There is every likelihood of collecting 900 billion rupees during the current year. However, these big figures fail to improve the burgeoning fiscal deficit which is still over 200 billion rupees.
During the fiscal year 2005-2006, the budgetary gap was 610 billion rupees and the revenue deficit was 175 billion rupees. Tragically, CBR has remained unsuccessful in improving tax-to-GDP ratio which is just 9.2 per cent. Twenty years back it was 18 per cent! Indirect taxes still account for 69 per cent of total tax collection. Tax-to-GDP ratio for direct taxes is hardly 3 per cent which is a disgrace for the policy makers and tax collectors. The most lamentable aspect of prevalent tax structure gives a free-hand to industrialists, importers, contractors and traders to charge the people an amount that is far more than what they pay as taxes. They are even passing on their income tax liability (personal tax) to clients/buyers, courtesy presumptive tax regime imprudently resorted to by CBR merely to show boastful collection. Incidentally, the high level of tax collection by CBR is mainly attributable to heavy taxes on imports and export.
It is a shocking fact that even under income tax, imports and exports are subjected to presumptive tax levy, though exporters may not have taxable income due to huge depreciation allowance after massive investment in plant and machinery. The State Bank of Pakistan has given a free hand to banks to exploit account holders and borrowers. Now these exploitative money lenders are showing extraordinary profits by denying due share to deposit-holders and are paying taxes in billions to CBR instead of distributing profits to deposit-holders with whom they, under the law are maintaining accounts on 'profit and loss sharing basis'. At present, importers, contractors, retailers and even service providers (except companies) are, in fact, passing on their tax burden to consumers and clients. This erratic taxation is at the expense of equity and those poor people who are the actual victims of tax highhandedness.
Fiscal policy in Pakistan has become a tool of oppression and the poor people are the real victims. Direct tax revenues have increased from Rs 40 billion in 1990-91 to over 270 billion this year, whereas in reality they have been turned into indirect tax through presumptive tax regime. In a federation like Pakistan, levying of taxes on goods and services within respective territories should lie exclusively with the provinces. Our federal government has even violated the constitutional command by levying taxes on services and property under the garb of Income Tax. This is the worst example of 'federal highhandedness' where the victims are the poor people of the less privileged provinces. The constitutional responsibility of distributive justice and social equality has been altered, only to show higher collection of tax in pursuit of fixed targets by the federation. The provinces have been made dependent by not extending due taxes rights and also being deprived of correct net tax proceeds in utter violation of formula given in the supreme law of the land. Resource mobilisation at federal and provincial levels should have been priority number one, but our rulers are looking towards foreign donors to construct big dams and are selling profitable national assets at throwaway prices to earn hefty commissions.
If we want to dismantle the present exploitative tax system and remove economic inequalities, the main strategy in the forthcoming budget must be to achieve the goal of reducing/eliminating the fiscal deficit to a level of 2 per cent to 1.5 per cent of the GDP, at any cost. Our revenue collection should not be less than 2 trillion rupees in the next financial year. There is no justification whatsoever to reduce development expenditure, which is already dismally low. Fiscal adjustment through reduction in development expenditure will not solve our problems. There is a dire need to reduce non-developmental, wasteful expenditure, but the real salvation lies in resource mobilisation. Broadening of tax net is the need of the hour without forgetting that those who enjoy exemptions and concessions should be brought into net. Existing taxpayers are grossly under-reporting their incomes, should be tackled with skillful policies (carrot and stick!) by gradually making them pay taxes correctly.
The rich and mighty who do not pay taxes are the real culprits. Exemptions and concessions that are prevalent in our tax laws (the whole of Second Schedule in the Income Tax Ordinance, 2001, most of the items of Sixth Schedule of Sales Tax Act, 1990, and innumerable SROs relating to Customs and Excise) should be done away with. There should be a level playing field for everybody. A wise step will therefore be to immediately abolish these exemptions and concessions instead of increasing incidence of taxes on the common people of Pakistan. The process of industrialisation, which alone can provide more jobs and sustainable growth, investment in unproductive sector like real estate and capital market should be heavily taxed and funds should be diverted to meaningful sectors by lowering corporate tax rates.
If the government removes all these exemptions and concessions, provides proper incentives for industrial investment, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing GST across the board (preferably with a low rate of 2 per cent at one single point), there will be no budget deficit, rather we will have surplus in three years. This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery (by not just dismissal from service but rather by making the system workable and just).
The present tax machinery is not only corrupt (part of the blame goes to the State as no reforms have been made to improve their economic lot and working conditions) but is also inefficient, incompetent and ill-equipped to increase the revenue. Radical changes are needed to:
(a) Revamp the entire tax apparatus.
(b) Improve both structural and financial conditions of tax machinery.
(c) Make CBR and independent Board answerable to Parliament. It should be an efficient, people-friendly and service-oriented organisation aimed at solving taxpayers' problems by giving them proper guidance and counseling and not harassing them for self-aggrandisement. There should be a complete change in the image of tax machinery, which is presently considered as corrupt, inefficient, exploitative, oppressive and a callous apparatus.
(d) It should be remembered that introducing irrational, harsh and unjust tax measures cannot broaden the tax base. Justice, fairness and equity, instead of fixing unreasonable budgetary targets should be the main concerns of our tax policy.
Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within a short span of time provided that a comprehensive programme, well-designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation. We need a fair and equitable tax system which should be managed by honest professionals, who are accountable by a select committee of Parliament, and are free from governmental controls.
The writers (
www.huzaimaikram.com) are leading tax advisers and authors of many books and articles on taxes in Pakistan.