-- Why do they resist imposition of progressive taxes like inheritance tax, gift tax, wealth tax etc, but not feel ashamed in imposing exorbitant sales tax on petroleum products and many items of daily use, knowing very well that these are consumed by the general masses?
-- Why not subsidize the poor and make good the loss by levy of wealth tax on the rich?
-- Why not monetize all the perks and perquisites of government employees, judges and those working in state-owned corporations and ask them to live amongst the common people rather than in fortified (cordoned off) GORs and palatial houses?
-- Why not curtail unnecessary and extravagant expenses of privileged classes to fill up the void?
-- Why not reduce the number of ministers/state ministers/advisers instead of following policy of appeasement and doling out public offices as if this nation was not burdened enough by worthless and incompetent bureaucrats?
Federal Board of Revenue and provincial tax authorities are not collecting taxes diligently. There exists huge tax gaps at all levels. According to data prepared by National Database & Registration Authority (Nadra) there are 3.5 million individuals (ultra rich) having income levels attracting tax of at least Rs 1,800 billion per year. If we add another 1.5 million falling under different income brackets (from Rs 1.5 million to 6 million per year) the estimated collection should not be less than Rs 1,200 billion. In the case of corporate bodies and other non-individual taxpayers, collection should be around Rs 1000 billion. This means that total income tax collection should not be less than Rs 4,000 billion. According to FBR's Year Book 2017-18, out of total income tax collection of Rs 1528.5 billion, 68.5% (Rs 1047 billion) came from withholdings provisions, Rs 335.79 billion received as advance tax (21.9%), Rs 41.64 billion came with returns (2.7%) and Rs 1.31 billion under 'Tax Arrears Settlement Incentive Scheme (TASIS) 2008' (.08%). FBR's own efforts (collection on demand) yielded only Rs 102.82 billion (6.7%)-from arrears Rs 17.69 billion (1.2%) and from current demand Rs 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They pay tax at source as non-filers but are not inclined to file tax returns knowing that amnesties will be there to bail them out. This is the real dilemma faced by Pakistan. The ultra-rich are not sharing the burden of taxes due from them. In the West and USA, the top 10% rich contribute immensely towards income tax collection.
Tax base under indirect taxes (sales tax and excise) is also extremely narrow. About 82 percent of entire sales tax and federal excise duty comes from the top 100 companies. In fiscal year 2017-18, total collection of sales tax (import) was Rs 814.6 billion, out of which share of petroleum products alone was Rs 264 billion (32.4%). In sales tax (domestic) total collection was Rs 676.6 billion out of which share of petroleum products was Rs 283 billion (41.8%).
We need a paradigm shift in our entire tax system. In our peculiar milieu, a simple, fair and broad-based tax with lower rates will work provided it has a fool-proof enforcement capacity. There should be 10% income tax on all kinds of incomes earned by individuals (with alternate minimum of 2.5% on net wealth exceeding Rs 20 million), 20% on companies and other entities. We should impose 8% sales tax on all goods (for exporters 0% tax). This system will fetch tax of Rs 8 trillion (Rs 4 trillion income tax, Rs 3 trillion as sales tax and Rs one trillion from customs by levying 5% duty on all items). The exporters importing raw material or buying local goods should get refund of taxes paid once export proceeds are realised through banking channels.
Pakistan has one of the lowest tax-to-GDP ratios in the world. 90% tax collection is through withholding agents or voluntary payments as advance tax or payments with returns or at import stage. Sadly, 'revenuecracy' wants to levy more taxes, demands more funds to run the monstrous machinery, but have no plan, or even desire, to bridge the huge tax gap. They are keen to retain higher rate of taxes on narrowed tax base rather than imposing lower taxes on broader base. In this scenario, the frustration of Prime Minister with FBR is fully justified. We need an autonomous National Tax Authority (NTA) that is efficient and free from any outside pressures (Case for National Tax Authority, Business Recorder, November 30, 2018).
If existing tax gap is bridged, our revenue collection can reach Rs 8000 billion (Rs 3000 billion direct taxes and Rs 5000 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-'Learn from Hungarians', Business Recorder, August 16, 2013. However, the dream of making Pakistan a self-reliant economy can never be realized unless the mighty sections of society are taxed as per Article 3 of the Constitution which 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".
Based on above facts and figures, proposed revenue target for the coming fiscal year (2019-20) of Rs 5500 billion is not at all ambitious. This is achievable provided the enforcement capacity of tax machinery is enhanced through data integration [see details in Automation of Revenue Collection, Business Recorder, February 1 & 7, 2019] and mighty segments, identified above, are taxed according to their capacity, The number of tax filers are substantially increased, equitable and rational policies are devised with the backing of the masses, tax machinery is completely overhauled and all exemptions and concessions available to the privileged sections of society are withdrawn. If taxes are collected to the extent of real potential, Pakistan can become a self-reliant economy and easily move towards an egalitarian State. This is the only way to get out of the present quagmires of "debt prison" and political enslavement.
One hopes that in the coming budget, to be presented on June 11, 2019, first under the present regime, mindless changes in tax codes and procedures will be avoided as these cannot improve tax collection. The real weakness of tax system lies in poor enforcement that includes inefficiency and corruption. Tax codes are ruthlessly amended each year through Finance Bill and in between, by way of Supplementary Bills and/or statutory regulation orders (SROs)-this is not a solution but part of the problem. The need of the hour is complete re-engineering of the system and long due structural reforms, which are deferred year after year in the name of short-term compulsions.
(The writers, lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)