Even the partial acceptance of such suggestions leads to an avalanche of mindless changes in the tax codes having no meaningful impact on the much-needed industrial expansion and economic growth of the country. The entire process itself is faulty as in a true democratic set-up, tax proposals are prepared through parliamentary processes, and are implemented after a thorough public debate while in Pakistan, it remains purely a bureaucratic exercise. It is high time that structural reforms must be introduced to ensure fair taxation, rapid growth and creation of new jobs.
There is a consensus in Pakistan that the ill-directed, illogical, regressive and unfair tax laws, regulations and highhandedness of tax agencies at federal and provincial levels are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets from the existing taxpayers, without reforming the tax system and evaluating its impact on the economy, is a self-defeating exercise. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today. It is impossible to enhance revenues without achieving sustainability in economic growth. Overtaxing economy, as has been done in Pakistan, can destroy the revenue system as well.
Private sector regards the problem of dealing with government revenue agencies a major constraint to its business operations and growth prospects. On the eve of each year's budget exercise, many constructive suggestions made by experts and stakeholders are ignored with impunity by self-acclaimed wizards sitting in the Ministry of Finance and FBR. For example, issue of restoration of circle system that was raised way back in 2008 in these columns and then repeated many a times, but never considered by the policymakers for reasons best known to them.
On income taxation side, the policy of appeasement, despite vehement opposition from many quarters, is prevailing and perpetuating. Giving a free hand to tax evaders to whiten their money through section 111(4) of the Income Tax Ordinance, 2001, section 9 of the Protection (sic) of Economic Reforms Act, 1992, tax amnesties, increasing exemption limits, raising deductions, lowering tax brackets and serving the rich and mighty has eroded the income tax base substantially over the period of time.
FBR has been running after small fry to broaden its tax net. For example, a person with a car, telephone, etc, has to file a return whether he has taxable income or not. Such an exercise generates tremendous infructuous, unproductive and wasteful workload without any significant gain to the revenue. It strengthens the view that the government, failing to tackle hardened tax evaders (for example, sharks in stock exchanges and real estate market), is unduly harsh on salary and wage earners. A feeling goes around that they are made to bear the major burden of taxes. The consequence is that ordinary people who generally think of themselves as honourable and honest citizens end up in participating or advising others to avoid paying taxes or filing returns!
Present income tax law is a most undesirable piece of legislation. Direct tax system intends to achieve the twin aims of maximizing revenue as well as achieving socio-economic justice. Our tax system is achieving none of these. Even after levying all kinds of oppressive taxes and expanding the scope of withholding taxes to an insane level, the federal government has failed to bridge the ever-increasing fiscal deficit that is leading towards a greater debt burden. At present, 65 percent of tax revenues are going towards debt servicing alone.
Provinces are also critical of inefficiencies on the part of the Federal Board of Revenue (FBR) due to which their share in the divisible pool is insufficient to meet their annual budgetary requirements. Since the share of every province in federal taxes under the National Finance Commission (NFC) depends on how efficiently taxes are collected by FBR, it is important that the centre and federating units actively participate in tax collection apparatus/processes/efforts. No serious debate has ever been initiated on the issue as to how we should increase the size of the cake for both the centre and provinces.
The most important factor that discourages compliance with intricate tax laws is the extremely complicated and cumbersome nature of procedure involved in being registered with the revenue authorities. Even the corporate and educated class finds it difficult to follow and observe the simultaneously applicable innumerable legal obligations, what to talk of the ordinary man on the street.
If a survey is conducted with respect to merely the advance tax provisions (almost 70 in number), it would reveal how a person is supposed to be aware of so many avenues where either tax is being withheld or he is himself paying income tax and the consequences of these taxes, the credit of which he may or may not be allowed to take while filing his return. In the first instance, a highly meticulous record of all such transactions that invoke taxes would have to be maintained and secondly, an even higher level of grasp over the law would be required to apply it.
The tax system that will work smoothly for Pakistan must be a flat rate with no compliance hassles. All taxes should be merged into one single tax with complete assurance to the masses that they would be free from any kind of harassment; and money collected would be spent towards their welfare.
The agenda of fair taxation cannot succeed if wastage of public funds and its abuse by the rulers continue unabated. The quid pro quo for paying taxes is as important as the system employed for collecting them. Where the public is blamed for not paying their due share, public authorities are equally, if not more, responsible for indulging in corrupt means.
The provinces should also work for better and efficient tax collection. Presently, they are isolated and rely on distribution from the divisible pool whereas FBR collects much less than the actual tax potential of Rs 8 trillion. The responsibility to collect revenues should be joint giving a participative sense to all federating units.
The need of the hour is establishment of automated Tax Intelligence System. This system should send quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations. Without this deterrence, even the simple tax system will not work. Nowhere in the world is proper collection of taxes possible without a strong enforcement apparatus.
The tax base with respect to direct tax vis-à-vis fair distribution of incidence can be achieved by imposing 10 percent flat rate tax on net income of individuals and reducing corporate tax rate to 20 percent. This kind of simple taxation would induce voluntary compliance provided citizens are aware that competent tax machinery exists.
All existing indirect taxes should be replaced both at the federal and provincial levels with Harmonised Sales Tax (HST).
According to the available data, the total number of persons having taxable income of more than Rs 400,000 is between 10 to 12 million and tax base is around Rs 50 trillion (after taking into account informal economy). Flat rate taxation of just 10 percent with strong enforcement system will yield Rs 5 trillion under income tax alone. If amnesty for earlier years is given, not less than further Rs 2 trillion can also be collected.
As far as sales tax is concerned, it has been emphasised time and again by us that Pakistan needs lower rate harmonised sales tax (HST). More details can be seen in our paper, Towards Flat, Low-rate, Broad and Predictable Taxes, available at http: //primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf
All existing indirect taxes should be replaced both at the federal and provincial levels with Harmonised Sales Tax (HST). There are now multiple tax collection authorities, rendering the life of businessmen miserable since they are unable to comprehend complex laws without having to pay heavily to professionals.
If the present indirect taxation is replaced with HST as in a comparable federation like Canada, it would not only improve revenue collection but would also help alleviate sufferings of taxpayers who have to deal with multiple tax authorities. In the Pakistani milieu if 5% HST is levied, it would yield at least Rs 3 trillion giving substantial fiscal space to both federal and provincial governments.
It is imperative to abolish the present tax laws and enact new ones. Collection of taxes should be through a single National Tax Agency (NTA). National and provincial assemblies should pass a law agreeing on establishment of NTA responsible for collecting all taxes imposed by the federal and provincial governments. This would facilitate people to deal with a single revenue authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under the Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
The NTA should consist of officers and staff representing the federation of Pakistan as in taxes, both the centre and provinces have equal stakes. If the size of the pie grows, every federating unit will get more and the Centre will also have more money at its disposal. For NTA, an all Pakistan Tax Service should be established. Recruitment for All Pakistan Tax Service must be independent of the present Central Superior Services structure. Competent people having knowledge in accounting, law, IT and administration should be selected through a special board, comprising members from the existing Federal and Provincial Public Service Commissions.
(The writers, authors of many books and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty Members at Lahore University of Management Sciences)