The Ministry of Finance on February 16, 2015 released half-yearly fiscal operations statement showing a growth of 3.96% in the six oil and gas related taxes. Government collected Rs 59.9 billion as petroleum levy in first six months of the current fiscal year compared with Rs 51.6 billion over the same period last year, showing an increase over 16%. The collection on account of Gas Infrastructure Development Cess (GIDC), which was declared unconstitutional by the Supreme Court, went up by 159.6% to Rs 15.6 billion from Rs 6 billion over the corresponding period last year. And the windfall levy on crude oil was at Rs 8.7 billion.
In the first six months, the Finance Ministry said that total fiscal deficit stood at Rs 651.823 billion because of Rs 110.395 billion cash surplus provided by the four provincial governments. The fiscal deficit was worked out at 2.2% of GDP at the end of December 31, 2014. It is claimed that the total revenue in first six months of 2014-15 stood at Rs 1749 billion as against Rs 1684 billion of same period last year, just an increase of 3.86%. The tax revenue in six months is shown at Rs 1361 billion against Rs 1172 billion over the same period of last year, an increase of Rs 189 billion. On the other hand, total expenditure stood at Rs 2401 billion as compared to Rs 2225 billion in corresponding period of last year, up by Rs 176 billion, showing an increase of nearly 8%. This shows where the actual malady lies! There is no will to live within the given means and money for development is even less than one fourth of current expenditure.
After failure to recover even a single penny from hidden bank accounts at home or abroad, our Finance Minister on February 9, 2015 announced the third mini-budget since June 2014 on the dictates of the International Monetary Fund (IMF). The 'mini budget' levied 5% regulatory duty on more than 285 importable items, including furnace oil used in power generation, and increases in withholding tax rates on many items of import and services providers in respect of non-filers.
Opposition reacted strongly against the mini-budget and staged boycott of parliamentary proceedings on February 10, 2015. Leader of the Opposition, Syed Khursheed Shah, lamented that the citizens were suffering due to incompetence of the government. He was also critical of the government for taking important decisions without any form of debate or approval in the Parliament. Syed Khursheed Shah, on a point of order, said he had been raising this issue in the Parliament for the last many days but to no avail as the government was not giving importance to his demand to bring the matter of 10% GST increase on petroleum products in the House. He said it was shocking that the government had announced two times 5 plus 5 (10%) sales tax increases on POL products, violating Article 77 of the Constitution. The opposition leader also criticised enhancement of taxes on mobile phone card to 25% from 17%.
When the Finance Minister was imposing new regressive taxes, revelation came that as many as 338 clients of Swiss HSBC were associated with Pakistan, with 34% having a Pakistani passport or nationality. The maximum amount of money associated with a client connected to Pakistan was $133.5 million. In an investigative project dubbed 'Swiss Leaks,' the International Consortium of Investigative Journalists (ICIJ) claimed: "With approximately $859.7 million by 2006-07, Pakistan ranked 48th on the list of countries with the largest dollar amounts in the leaked Swiss files."
On May 9, 2014 and on August 1, 2014, the Finance Minister told Parliament of his firm resolve to recoup billions stashed in Swiss banks. He revealed that a team of FBR would renegotiate and upgrade agreement on Avoidance of Double Taxation with Switzerland for this purpose. Since then he never told the Cabinet, Parliament, media or nation what happened to his "efforts".
In a written reply to a question by Dr Arif Alvi of Tehreek-e-Insaf, Ishaq Dar told the National Assembly that "total amount of Pakistanis in Swiss banks was reported at $200 billion". He gave no basis for this. The Times of India of June 21, 2013, claimed that Pakistanis in 2013 had funds amounting to Swiss francs 1441 million [Rs 1.52 trillion]. It was claimed that this was the lowest level-less than half of the record high amount of over 3 billion Swiss francs [equivalent to Rs 4.18 trillion] reported in 2005. The Times of India further claimed that in terms of Pak rupee, "the total funds held by individuals and entities in Swiss banks were Rs 1.5 trillion as on December 31, 2012". The Times of India did not quote any source as was the case with Dar. It is now for Dar to explain to the Parliament and nation how he conveyed the amount at US $200 billion and what is the progress so far to retrieve these funds.
There is no doubt that substantial out-flows take place from Pakistan on daily basis. The Governor State Bank of Pakistan made a startling disclosure before a parliamentary committee on October 1, 2013 that $25 million in foreign currency was illegally flowing out of the country each day from airport-annually $9billion! "Investment flow from Pakistan to Dubai in 2014 in real estate stood second by injecting $2.06 billion with the maturity of 5,079 property transactions, according to www.Bayut.com, a leading portal of the United Arab Emirates (UAE).
According to a news report published on February 17, 2015, Pakistanis purchased properties in Dubai worth over 16 billion UAE dirhams during 2013 and 2014. Based on 2013 investment of 8.6 billion dirhams, total buying by Pakistanis in 2013 and 2014 stood at 16.1 billion dirhams, according to data of Dubai Land Department (DLD).The amount of investment in Pakistani rupees in two years, the report claimed, crossed over Rs 430 billion.
Since successive governments have failed to nab tax evaders and counter illegal outflows from the country, ordinary people have to pay the cost of their incompetence and apathy in the form of mini-budgets having more and more regressive taxes.On the one hand, regressive taxes are on increase-27% sales tax and 10% petroleum levy on POL products-and on the other, the government of Nawaz Sharif PML-N extended many concessions to mighty traders since coming in power-Taxation challenge, Business Recorder, March 28, 2014. They refused to come within retail tax net.
The mighty trading class resisted implementation of SRO 608 requiring them to get registered under the Sales Tax Act and place electronic registers at their shops. This huge untaxed sector invests in Dubai and elsewhere and Chairman FBR shows helplessness. He told the Senate's Standing Committee on Finance on January 9, 2015, that "government has been making efforts to reach an arrangement with foreign countries, especially Switzerland and the UAE, for information sharing, to know about the wealth of Pakistanis in their banks as well as properties and other assets purchased by them but we are facing difficulties in this regard". The Committee members inquired from the Chairman why letters were not written to big businessmen and politicians to show their foreign properties and wealth in their tax returns. The Chairman said that problem for the tax officials was that assets and properties abroad were kept benami.
The failure of FBR on all fronts is well-established. It has failed to effectively pursue the matter of seeking information from Switzerland and UAE to catch the tax evaders. Secondly, its main emphasis of collection is on regressive taxes. The collection in 2013-14 of nearly Rs one trillion under the head sales tax was mainly due to extraordinary surge in imports and raising sales tax rate on POL products-share of it alone in sales tax collection was 43%.
Rich are making huge investment in real estate at home and abroad and avoid tax by using the open licence given under section 111(4) of the Income Tax Ordinance, 2001. The undeniable fact is that FBR is not taxing the rich 15 million and income distribution disparities are rapidly widening. Shahid Javed Burki in 'Provincial Rights and Responsibilities' [Journal of Economics, September 2010] opines that "about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy." He further says that "some 15 million can be regarded as rich, another 25 million as belonging to the upper middle class, another 65 million fall in the category of the lower middle class; the remaining 65 million are desperately poor."
In the current fiscal year, number of tax returns filed, even after many extensions, are less than 820,000. Track record of FBR shows remote possibility of collecting even Rs 6 trillion in the next three years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess and provide some relief to the poor as well as trade and industry. Under the given scenario, fiscal mess will continue.
Pakistan's tax potential at federal level alone is about Rs 7 trillion. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000 is added, the gross figure would not be less than Rs 4500 billion-FBR collected only Rs 884 billion as direct taxes in 2013-2014.
Out of total direct tax collection, FBR received Rs 578,413 million (62.5%) from withholding agents. In this area as well, there is massive leakage with the connivance of tax officials-the withholding agents collect/deduct taxes and do not deposit in the government treasury, or the payer and the payee join hands to deprive the exchequer of billions of rupees with the connivance of corrupt tax officials.
Another shocking fact admitted in Year Book 2013-2014 is the dismal performance of FBR field officials in collecting income through their own efforts by employing forensic audit techniques, using third party information or utilising data collected by FBR over a period of time, about the rich and mighty who do not even bother to file tax returns. Figures contained in FBR's Year Book 2013-2014 show that out of total collection of direct taxes at Rs 884 billion, collection on demand was just Rs 80,582 million. It was Rs 89,427 million in 2012-13. This alone confirms the pathetic state of affairs prevailing in FBR where officers are getting double salary and honorariums.
Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50% of actual potential [joint study of Andrew Young School of Policy Studies at Georgia State University and World Bank]. FBR in 2013-14 collected Rs 1002 billion as sales tax, Rs 139 billion as federal excise and Rs 241 billion as customs duties. Collection under these heads should have been at least Rs 2500 billion. Target of Rs 7 trillion is achievable provided the mighty segments are properly taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.
If existing tax gap is bridged, our revenue collection can reach Rs 7000 billion (Rs 3500 billion direct taxes and Rs 2500 billion indirect taxes) which could change the entire fiscal scene and fate of the nation. By collecting this amount, we can easily meet current expenditure, development and public welfare outlays-government requiring no internal or external borrowing would be able to retire debts in a few years as done by the Hungarian government. However, the dream of making Pakistan a self-reliant economy can never be realised unless the mighty State Oligarchy is divested from its control over the resources and exploitative tools. Against the potential of Rs 7000 billion, FBR was assigned the target of only Rs 2810 billion in the budget 2014-15 which is now slashed to Rs 2691 billion and it collected only Rs 1361 billion in the first six months of the current year that included unpaid refunds and advances of billions of rupees.
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 in democratic countries. In Pakistan, our governments-civilian and military alike-have gradually and deliberately moved away from progressive to regressive taxation. The mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as meritorious awards and rewards), industrialist-turned-politicians and greedy businessmen are paying meagre personal taxes whereas the poor people are subjected to pay sales tax of 17% to 29% and sometimes federal excise duty in addition. The incidence of regressive taxes on the poor is making their lives a misery beyond imagination.
The present tax policies are detrimental to 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 rich 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 challenges on economic front, namely, resource mobilisation, reduction in wasteful expenditures, curtailing fiscal and trade deficits and infrastructure development.
The growth of economy, equitable distribution of resources and emphasis on welfare of the masses-providing them jobs, decent life and universal entitlements-alone can guarantee the progress and prosperity of any State. Presently in Pakistan, taxes are collected from the poor and are utilised to extend extraordinary benefits to militro-judicial-civil complex and businessmen-cum-politicians. If all benefits, concessions and free perquisites given to militro-judicial-civil complex are replaced with a taxable consolidated pay package, government can cut down huge wasteful expenditure and the life of common man can be improved immensely by allocating adequate resources for meeting their social needs, especially that of the underprivileged sections.
(The writers, authors of many books and partners in law firm, Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences)