The Finance Bill 2012 presented by Dr Abdul Hafeez Shaikh amid worst ever pandemonium n the Parliament on 1 June 2012, confirms how unprecedented tax concessions have been secured by the ashrafiya. Not a single tax was levied on the rich and mighty to bridge the fiscal deficit of over Rs 1400 billion. On the contrary, the shameless borrowing from banks and elsewhere is to continue to push the nation in dark 'debt prison'. There is no inclination whatsoever to make Pakistan a self-reliant economy. The budget 2012-13, as all earlier budgets of this government, favours the rich and taxes the poor to the extent of extinction.
In his book Pakistan: Economy of Elitist State, Dr Ishrat Husain has observed that in sharp contrast to the East Asian model of 'shared growth', based on rapid economic development coupled with a rapid reduction in poverty and more equitable distribution of the benefits of development in Pakistan, the elitist model confers political and economic powers to a small coterie of elite (parasites)i. While commenting upon Dr Ishrat's work, Dr Khalil Ahmad of Alternate Solutions Institute, in his recent book, Pakistan Main Riasti Ashrafia ka Urooj (Rise of State Elitism in Pakistan), published in February 2012, has also concluded that Pakistan is presently owned and exploited by 'state elites' whereas it should belong to all.
There are no two opinions that the ruling trio - mighty military complex and its civilian cronies, corrupt politicians and unscrupulous businessmen - imposes its will on members of parliament in all matters. The entire budget making process is an epitome of apathy of parliamentarians towards the masses of this country, who vote them into power with the hope that they would do something for their socio-economic uplifting or at least provide them basic essential services - housing, transport, education and health, to say the least. Even the Standing Committees on Finance of both the Houses do not know what policies and tax measures would be presented. Hafeez Shaikh even did not bother to give them any briefing before, during and before the presentation of the budget.
The worthy members of national assembly (MNAs) never bother to ponder about the impact of regressive taxation on the ailing economy and its devastating burden on the poor of this Land of the Pure. Time and again, we have been emphasising that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation which is only possible if the Parliament performs its Constitutional role, implements flawless process of accountability and ensures good governance. Theoretically, the Cabinet is answerable to the Parliament! But the stark reality is that MNAs merely run after ministers for personal favours and gains.
In the coming days, the coalition government will get the Finance Bill 2012 passed in utter haste ignoring suggestions and amendments by Opposition and Senate, disregarding all norms of parliamentary process and transparency, as it did last year. The treasury benches in Parliament will once again prove nothing more than rubber stamps as far as formulation of budget and approving of tax measures by FBR are concerned.
In every civilised and democratic society, it is the sole prerogative of elected members to initiate the process of law-making and devising of national policies after taking public input. It is the prime rule of a democratic process that no law or policy should be made unless a thorough debate is held in the parliament. In Pakistan, the rulers, military and civilian alike, always try to bypass parliamentary processes and then complain about lack of "democratic behaviour and culture" on the part of the opposition. Every year, budget-making exercise is entrusted to bureaucrats sitting in the Ministry of Finance and Board of Revenue while the Parliament conveniently restricts its role to a silent approver.
Due to non-participation of public representatives in budget-making, the financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances as their tax policies are narrowly based on collecting taxes at source, without bringing mighty sections of society within the tax net or collecting what is actually due from them.
Sole stress on indirect taxation [even under the garb of income taxation through presumptive tax regime on a number of transactions] without evaluating its impact on the economy and life of the poor masses is a serious cause for concern. According to official figures, the contribution of income tax (although major portion of it is now composed of indirect levies or expenditure taxes) as percentage of GDP is continuously declining; it was merely 1.9% in 2010-11, 2.2% in 2009-10, 2.6% in 2008-09, 2.9% in 2007-08, 3.0% in 2006-07, 3.01% in 2005-2006, whereas in 2004-2005 it was 3.15% [YEAR BOOKS 2004-05 to 2010-11 of FBR and Economic Surveys].
In the face of declining direct tax-to-GDP ratio, Hafeez Shaikh and FBR stalwarts are making tall claims about "impressive" (sic) 25% increase in taxes that was directly the result of rise in imports - the contribution of POL products alone stood at 43%. A brazen misrepresentation of figures is committed by the Ministry of Finance and FBR in Economic Survey and Budget documents. In fact, FBR has conveniently ignored the quantum of taxes collected at source on goods, contracts, supplies and rent, which being full and final discharge, are in substance indirect levies, even in some cases, encroachment on the rights of provinces.
Reliance on indirect taxes that constitute 75% of total collection proves beyond any doubt that the tax system is emphatically contributing to rising poverty as people who earn enormous income and possess immense wealth are not being subjected to income taxation in Pakistan. Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated and nullified. It is pertinent to mention that in 2011, the government of Sweden collected taxes at 53% of GDP, almost twice as high as the total tax revenue of America and Japan, with both collecting around 25% of GDP. In the Euro area, tax revenue, on average, reaches 40% of GDP. In contrast we have collected taxes at 8.4% of GDP.
The present tax policies of the government are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The ability-to-pay principle is regarded as the most equitable and just method of taxation and emphasised upon primarily for its redistributive role. In Pakistan, our rulers have completely deviated from this principle, which is in fact, a constitutional obligation of the government. The existing tax system protects the establishment and exploitative elements that have complete monopoly over economic resources. There is no political will to tax the privileged classes. Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental policies, meeting trade deficits, fiscal deficits and balance of payments, in addition to numerous others. One of the factors responsible for the present situation is the accelerating speed with which black money is being generated.
FBR is directly responsible for this phenomenon as its mafia-like operations has helped the people to avoid tax on incomes by paying it "due share". Through the infamous system of SROs [Statutory Regulator Orders], FBR's top officials provide "legal" ways and means to mighty sections of the society (ashrafiya) to amass huge wealth that is now threatening the State's very survival. It is worth mentioning that even before presenting the Finance Bill, 2012, FBR issued notification 569(I)/2012 on 26th May 2012 saying that government officials in Grade 20-22 will pay just 5% tax on monetized transport allowance. This benefit of reduced rate taxation, blatantly bypassing the Parliament, portrays how bureaucrats hoodwink the nation and cause exchequer loss of revenue through SROs. Needless to say it is discriminatory and violative of Article 25 of the Constitution as private sectors employees for the same allowance are subjected to normal rate of taxation.
Reduction of duties for cartels possessing enormous money has been extended by using executive authority in the form of SROs. Pakistan is a unique country where the executive authority can conveniently undo laws made by the Parliament under so-called delegated powers which gross violation of Article 162 of the Constitution of Pakistan, which reads as under:
"162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: - No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression "agricultural income" as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President."
Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President but interestingly, this power has been delegated unconstitutionally to an executive authority by the Parliament. How can Parliament delegate a power which it cannot exercise itself without the prior sanction of the President? By delegating powers under tax codes, the Legislature has violated Article 162 of the Constitution.
We have repeatedly pointed out this brazen violation of the Constitution requesting Supreme Court to take suo motu action under Article 189. It is sad to note that till today our pleadings have fallen on deaf ears. We were expecting that Bar Councils, taxpayers, tax advisers, civil society, and businessmen would raise their voices on this issue, but till today there is complete silence from their side. No wonder any dictator-military or civilian-can play havoc with the supreme law of land as he knows that those who claim to be champions of rule of law keep mum when it suits them. We remain the lone fighters against this flagrant violation of constitution that has serious ramification for the federation as a whole. History will never forgive those who have deprived the smaller provinces from exercising their constitutional right of fair and equitable fiscal jurisdiction.
The common man is subjected to exorbitant sales tax and federal excise duty of 16% (tax incidence is 35% on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities [even salt sold under brand names is subjected to 16% sales tax] but the mighty sections of society such as generals, high-raking bureaucrats, judges getting plots from the State are not paying any wealth tax/income tax on their colossal assets/incomes. The same is the case with big industrialists and landed classes that get concessions and exemption through SROs.
It is tragic that in a country where billions of rupees are being made in speculative transactions at stock exchanges and in the real estate sector, tax-to-GDP ratio is one of the lowest in the world [consistently below 10% for the last 10 years] and the government is least bothered to tax undocumented economy and benami (name-lender) transactions¡ªrather, generously give amnesties to tax evaders and looters of national wealth. The mighty sections of society are widely engaged in these transactions while rulers of the day, getting due share from them, are not at all inclined to tax them. The present tax policies of government are violative of Constitutional provisions that require the State to provide social justice to all.
The existing tax system protects the ashrafiya and exploitative elements that have monopoly over economic resources - those who own 95% of national resources are paying less than 2% of overall tax collection. This shows why there is no political will to tax the privileged classes. Unfair taxation and inequitable distribution of resources is the root cause of our multiple socio-economic ills. State policies induce massive tax evasion (section 111(4) of the Income Tax Ordinance, 2001 is a permanent tool for whitening of untaxed money).
Determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from this positive policy to unequal sacrificial rule where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as meritorious awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes whereas the poor people are compelled to pay sales tax and federal excise duty of 16%. The incidence of regressive taxes on the poor is making their lives a misery beyond imagination.
Pakistan has about 118.5 million mobile usersii who pay both income tax and sales tax but even then only 1.3 million taxpayers file income tax returns - if statements filed for presumptive taxes are excluded, the actual number is below 750,000. Majority of mobile users may not have taxable income (Rs 350,000, raised to 400,000 from tax year 2013) yet they are burdened with undue liability. On the contrary, many rich people just pay a fraction of income tax (withheld at source) on their actual taxable incomes without bothering to file their income tax returns - in Pakistan less than 250,000 non-salaried return filers admitted that their annual income was more than Rs one million!
If out of total population of 180 million, we have 10 million individuals having taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection from them at the current rate for tax year 2012 should have been Rs 3750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 100,000, the gross figure would be nearly Rs 5000 billion. FBR collected only Rs 560 billion as income tax plus Rs 20 billion as other direct taxesiii during fiscal year 2010-11 and figure for this year would be around Rs 665 billion. This shows a whopping tax gap of over 600 percent. Similarly, in sales tax, federal excise and custom duties, due to rampant corruption, the total collection is only 20% of actual potential. In fiscal year 2010-11, FBR collected Rs 633.4 billion under the head sales tax, Rs 137.4 billion under federal excise duty and Rs 180.8 billion under custom duties. Total indirect collection of Rs 951.6 billion was pathetically low. It should have been at least Rs 3500 billion.
If tax gap is bridged, the total revenue collection of Pakistan would be Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes) which would change the entire fiscal scene. We would have enough money for current expenditure, development and public welfare outlays - government would retire debts in just a few years and we can easily become a self-reliant nation free from political subjugation. However, this dream for Pakistan can never be realised unless the mighty sections of society (ashrafiya) are taxed according to their ability to pay. Tax policy must be used as tool for rapid industrialisation and creation of job opportunities. It is imperative to tax the unproductive sectors to divert money to productive sectors and ensure redistributive charter of tax system - taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich. This trend must be reversed before it is too late.
i. The main theme of the book rests upon the premise that the respective roles of the state and the market have been reversed in the case of Pakistan, with the result that benefits are reaped by the elite classes only. As the market has remained non-competitive in structure and distortion was rampant in the country, its economic development did not achieve the efficiency and productivity gains that the country ought to have attained in relation to its potential, compared to other countries. The instruments of state were also directed to provide benefits to the same small group, rather than apply correctives to the inequalities inevitably created by market forces. The small elitist minority continues to enjoy the unjust accumulation of wealth in the midst of widespread poverty and underdevelopment.
ii. As per official website of Pakistan Telecommunication Authority.
iii. FBR Year Book 2010-11 [Page 11]
iv. FBR Year Book 2010-11 [Page 6]
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Tax and Pakistan), are Adjunct Professors at Lahore University of Management Sciences)