Before announcing its sixth budget amid much criticism, the Pakistan Muslim League-Nawaz (PML-N) government announced yet another tax amnesty scheme, along with lowered income tax rates for individuals. Apparently, these steps are supposed to help in widening the tax net.
Can this measure help take Pakistan out of the debt-trap? Will it help in overcoming our burgeoning fiscal and current account deficits? These are issues that remain to be addressed. As usual, the strategy is to persuade rich tax evaders into whitening untaxed assets at nominal rates. In his press conference, Prime Minister (PM) Shahid Khaqan Abbasi did not announce any major policy initiatives for fundamental reforms in economic structure that can solve pressing issues like resource mobilisation, fiscal and current account deficits, low exports, rising imports, low forex reserves, gargantuan debts, expensive energy, and chronic unemployment.
The present government wasted five years, paying no heed to the many reasonable suggestions for the reconfiguration of the tax system to raise revenues of Rs eight trillion at the federal level and Rs four trillion at provincial levels. The plan to raise revenues through lowering of tax rates can only succeed through strong enforcement. Unfortunately, no action has been taken towards reforming the Federal Board of Revenue (FBR), hence the benefits of lowered tax rates will be marginal at best. Instead, devising a comprehensive policy and implementation plan having short-term, medium-term and long-term goals and objectives for self-reliance and export-oriented growth and social justice for all segments of society, the government has taken the easy way out, luring the rich and mighty not only to whiten tainted money, but also earn three percent by investing in ‘Dollar Bonds’.
Enforcement of tax laws without any fear or favour should be the first and top most priority of the federal and provincial governments
Amid a global squeeze on tax evasion, money laundering and blatant outflows of capital, Switzerland’s 11 largest banks, which house nearly $7 trillion of the world’s total offshore liquidity stock of $42 trillion, has remitted $3 trillion so far to the various countries. Since 2009, the US and EU have consistently pressed Switzerland and other tax havens to allow international tax administrations to track illegal funds parked in their secretive banks. Pakistan has yet to take any concrete measures in this direction. Now it will be seen how many Pakistanis will avail the new amnesty scheme and repatriate the considerable funds stashed abroad.
Creating an efficient tax system that is meant to serve the masses and not enrich the already wealthy classes, who hold the present socio-political system captive is not one of the PML-N’s concerns. Such a system alone can ensure the government has sufficient money for infrastructure development in all sectors. Raising a revenue of Rs eight trillion at the federal level, which is not difficult, can help in eliminating the fiscal deficit, reducing debt servicing and retiring costly debts. The availability of sufficient funds for the impoverished social sector is much needed. Optimal collection by FBR increasing the share of provinces under NFC Award alone can help in accelerating development in backward areas, ensuring social sector delivery, adequately and efficiently.
Enforcement of tax laws without any fear or favour should be the first and top most priority of the federal and provincial governments if they want to rescue the country from the present economic quagmire. This, coupled with expending taxes for the benefit of the masses and desisting from wasting funds on white elephants — monstrous public sector enterprises sleazing with inefficiency and corruption — which are just meant to show the electorate that the government did get something done during its tenure. This would promote tax culture and restore people’s faith in the tax system. Voluntary tax compliance can be improved through a strong deterrent system alone, where the compliant taxpayers are respected and rewarded, while evaders are exposed and punished under the law. Our tax apparatus is doing exactly the opposite! Premier Abbasi and his economic team have not concentrated on these fundamental issues.
At present, both the federal and provincial governments are not collecting taxes according to our real tax potential. Our tax potential at the federal level is Rs eight trillion. If agricultural income tax and other provincial and local taxes are also collected efficiently, the total figure at the national level would be Rs 12 trillion. This level of collection can change the entire economic landscape.
No less than 10 million Pakistani individuals have an annual income of Rs 1.2 million or more. If all of them file tax returns, collection at the new proposed rates will be Rs two trillion. If income tax collected from corporate bodies is added, the gross figure would amount Rs four trillion. The FBR collected only Rs 1.344 trillion as income tax during the2016-2017 fiscal year. Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50 percent of actual potential. In the fiscal year 2016-17, FBR collected Rs 1.329 trillion under the head sales tax, Rs 198 billion under federal excise and Rs 497 billion as customs duties. The cumulative collection of Rs 2024 as indirect taxes is pathetically low. It should have been at least Rs 4000 billion.
For harnessing the full tax potential at federal, provincial and local government levels, a National Tax Authority (NTA) is the need of the hour. Through consensus and democratic process, all the parliaments can enact laws to establish an autonomous NTA that would facilitate people in dealing with a single revenue authority rather than multiple agencies at the national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interests (Article 153) and its control can be placed under National Economic Council (Article 156).
The following measures at the federal and provincial levels can increase the tax-to-GDP ratio from the present 11 percent to 20 percent. Firstly, income tax at reduced rates as announced by PM Abbasi should be linked with Alternate Minimum Tax. Liability should not be less than 2.5 percent of the individual’s net worth for the closing date of the said tax year.
Secondly, the tax gap should be bridged through effective enforcement, especially through integrated automated tax intelligence systems, capturing all inflows and outflows.
All exemptions and concessions should be withdrawn, except for genuine charities (waqf, trusts, and non-profit organisations) and new industries that are raising 90 percent of capital through public offers and creating jobs, out of which at least 50 percent ought to be for women.
Furthermore, substantial property tax should be levied on the rich who own palatial houses, farm houses and other such extravagant real estate properties. Similarly, there ought to be special taxes and duties on expensive vehicles, wasteful expenditure and luxury items.
The upper class’s agricultural holdings also need to be taken into account. Presumptive agricultural income tax of Rs 5000 per acre should be levied on irrigated agricultural holdings above 25 acres and Rs 2000 per acre on un-irrigated holdings above 50 acres provided that it should not be less than 10 percent of produce.
To aid the poor, a low-rate harmonised sales tax of only 10 percent should be applied on all kinds of goods and services. To encourage inflow of cash, exporters of goods and services should get the entire tax back once export proceeds are received through banking channels.
The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email: firstname.lastname@example.org; Twitter: @drikramulhaq