Pakistan Tehrik-e-Insaf in its tax policy unveiled on 24 August 2012 proposed concrete and rational measures for revenue generation in Pakistan. These tax measures, if implemented, can change the fate of Pakistan. One of the main reasons why democracy has failed to take root in Pakistan is monopolisation of resources by the ruling trio - indomitable military complex having control over many businesses and state lands, feudal aristocracy enjoying political clout and businessmen-turned politicians on the hunt for bank loans and their subsequent write-offs.
Empowerment of the have-nots, imparting of education and skills to all without any discrimination is the main agenda of PTI, which distinguishes it from traditional political parties. Unless an agenda of change is implemented, there is no hope for any betterment in the socio-economic structure of Pakistan in the foreseeable future. PTI in its economic and tax policies has rightly emphasised the need for institutional reforms to achieve sustainable economic growth and substantial tax collections.
Presenting of polices and plans by political parties is an essential element of electioneering, but in Pakistan the 'traditional election winners' give it no importance. They are confident that their 'subjects' will cast vote not on issues but follow the centuries-old traditional pattern of yielding before the rich and mighty as their rulers and undatas (bread-providers). It will be important to see whether PTI succeeds to bring a change in the voting pattern or not. This is the most pivotal question.
There is no doubt that once in power PTI will face a tough challenge to change the existing unjust, exploitative economic system - where few own the resources. With the help of masses, this resistance can be overcome. It is now the choice of the masses to bring into power a party that is capable of changing the system that favours the rich and deprives the poor from upward socio-economic mobility. If they side with the status quo parties, the blame cannot be shifted to PTI. It is perhaps the best chance for the people of Pakistan to vote for change.
Pakistan is ruled and controlled by a few who pay less than 2% in terms of personal taxes despite holding 95% of national wealth and assets. Since they are not ready to pay taxes due from them and bent upon looting the wealth of nation through corrupt practices, Pakistan is moving towards complete economic collapse. In 2011-12, we had monstrous fiscal deficit of more than Rs 1.5 trillion, internal and external debts touched the alarming levels and inflation remained in double digits. It is shameful that Pakistan's tax-to-GDP ratio is just 8.7%, whereas debt-to-GDP has crossed the critical level of 65%.
Present tax system of Pakistan negates the basic precept of democratic dispensation requiring that those who possess more economic power (income and wealth) contribute more towards national exchequer - progressive taxation being the most equitable and just method is emphasised upon primarily for its redistributive role. In Pakistan it is the other way around. The rich are thriving on the expensive of money collected - rather extorted - unjustly from the poor.
Article 3 of the Constitution of Islamic Republic of Pakistan says: "The state shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability to each according to his work". The ruling trio, mentioned above, enjoys complete immunity from this principle. The existing tax system, contrary to the Constitution, protects the rich and mighty - the establishment and exploitative elements have complete monopoly over economic resources and the poor are dying of hunger and diseases. Since the privileged classes are not ready to pay taxes and share resources with the masses, the incidence of tax is mainly on the less privileged classes and the poor. What makes the situation more tragic is the fact that whatever is collected, the major part of it goes for debt servicing, defence and meeting the luxuries of rulers - in the end nothing is left to provide even for fundamental services of health, education, transport and housing for the masses and government borrows money for running day to day affairs of the state.
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 world-wide. In Pakistan we have moved from this policy to regressive taxation 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. On the contrary, the poor are compelled to pay sales tax on goods and services (levied under federal and provincial laws) at the exorbitant rate of 16%. This is absolutely criminal and blatant violation of Article 3 of the Constitution.
We keep on hearing in media that Pakistanis do not pay taxes. This is half truth. The fact is that it is the rich and mighty who do not pay income tax. As on 31 July 2012, we had about 110 million active mobile users who had been paying both income tax and sales tax but only 1.3 million filed income tax declarations for tax year 2011 - if we exclude statements filed by persons falling under presumptive taxes and salaried individuals, the total number of returns was less than 600,000. Majority of mobile users may not have taxable income 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 and Federal Board of Revenue (FBR) is least bothered to assess their taxable income by computing their known expenses - utility bills. At least 20 million people should have filed returns on the basis of available data from companies providing utilities.
If out of the population of 180 million, 10 million individuals have taxable income of Rs 1.5 million (this is a very conservative estimate), the total income tax collection at the current rate from them should be Rs 3750 billion. If we add income tax from corporate bodies, other non-individual taxpayers and individuals having income between Rs 500,000 to Rs 1,000,000, the gross figure would be nearly Rs 5000 billion. During fiscal year 2011-12, total net collection of direct taxes was Rs 731.9 billion (in 2010-11 just Rs 602.5). This shows a whooping gap of over Rs 4000 billion.
Similarly, in sales tax, federal excise and custom duties, due to rampant corruption, the total collection is only 20% of actual potential. In 2011-12, total sales tax collection was Rs 803.9 - showing highest growth of 27.8% - mainly because of increase in prices of oil products and other commodities. Federal Excise Duty (FED) registered a decrease of 11.2 percent - collection was Rs 122 billion against Rs 137 billion in 2010-11. Collection of customs duty was Rs 218.2 billion, showing 18% growth over Rs 184.9 billion in 2010-11. Total indirect tax collection of Rs 1114 billion in 2011-12 was pathetically low. It should have been at least Rs 3500 billion.
As shown above we can easily collect Rs 8500 billion (Rs 5000 billion direct taxes and Rs 3500 billion indirect taxes). It will also restore a judicious balance between direct and indirect taxes relieving the poor and middle class from undue burden of taxes. Without introducing any new taxes, we can easily collect Rs 8 trillion that would change the entire fiscal scene.
After tapping the real tax potential, there would be enough funds for current and development expenses, retiring debts and initiating projects for public welfare. This level of collection alone can help us to achieve the cherished goal of becoming a self-reliant nation free from all kinds of foreign political and economic subjugations.
The dream of making Pakistan a self-reliant and egalitarian State can never be realised unless the mighty sections of society pay personal taxes. At the same time the tax policy must be a tool for industrialisation - taxing the unproductive sector to divert money towards productive sectors.
Above all, it is necessary to provide socio-economic justice to all the citizens - progressive taxation ensures redistribution of income and wealth by 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 if we have to progress.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Professors at Lahore University of Management Sciences)