Malice Towards None & All: Taxes, Jobs, & Growth

A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country. This ought to be coupled with spending taxpayers’ money for the welfare of society and incentivizing ...

Malice Towards None & All: Taxes, Jobs, & Growth

The Laffer Curve, by the way, was not invented by me; it has its origins way back in time. For example, the Muslim philosopher Ibn Khaldun wrote in his fourteenth-century work The Muqaddimah: It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessment”—Dr. Arthur B. Laffer, known to have invented Laffer Curve, has made this observation in his book, Return to Prosperity: How America Can Regain Its Economic Superpower Status (2010), coauthored with Stephen Moore, senior economics writer for the Wall Street Journal 

The biggest challenge on tax mobilisation front faced by Federal Board of Revenue (FBR) is bridging monstrous tax gap through automation and introduction of tax intelligence system and not levying more taxes or enhancing the rates of the existing ones”—Rationalising tax system 

“With 80% of the taxpayers neither reviewing data being captured against their name nor verifying the data, the data is merely a figment of people's imagination. Until and unless we have the ability to establish a digital platform for data capture, cross verification, and analysis, all steps for a better tax system will remain illusive”Amin Dawood Saleh, CFA, FRM

Thirteen years ago, Dr. Arthur B. Laffer and Stephen Moore suggested in Return to Prosperity that lower taxes are essential to economic growth, as well for debt reduction and retirement, lean governments with lower expenses, rational trade, monetary and fiscal policies and other conducive environment (ease of doing business and cost of doing businesses) to bring back the investors—all we need in Pakistan today. Had our successive governments adopted these measures, we could have higher growth, mainly through export-led and import-substitutive industries, leading to better tax collection, manageable fiscal deficit and long-term, low-interest loans for creating income-yielding assets, infrastructure improvements and above all having trained human capital.

Unfortunately till today our economic managers have missed the most vital issue of lowering of taxes, which under our peculiar circumstances is essential to kick start the economy and move towards higher growth and adequate jobs. However, this is not possible, unless we bring inflation down, leading to substantial decrease in State Bank of Pakistan’s exorbitant discount rate. Our tax rates and cost of compliance are too high to attract local and foreign direct investment that is a prerequisite for sustainable high growth.

The Pakistan Institute of Development Economics (PIDE) estimated in the early days of Covid-19 outbreak (March 2020) that “56 percent of the workforce” falls under “vulnerable employment. The study noted: “This includes 80 percent of the people employed in agriculture, 75 percent in wholesale and retail trade, 50 percent in hotels and restaurants, 60 percent in real estate and business, and 40 percent in transport and communication sectors”. In Covid-19 and Pakistan: The economic fallout (June 2020), the author warned: “The increase in poverty and unemployment will fuel political and social unrest; this, in turn, could destabilise the government and threaten whatever democratic progress Pakistan has made so far”. This prediction proved to be a reality within two years.  

Small and medium enterprises (SMEs) offering substantial jobs have been suffering, even prior to the Covid-19 endemic, due to sluggish economic activities, high utility bills and exorbitant discount rate by the State Bank of Pakistan (SBP). The SMEs need massive tax reduction, especially zero income taxation for employees earning up to Rs. 100,000 per month, waiver of advance income tax and over 60 withholding tax provisions contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services.

Unfortunately, nobody in Pakistan talks about raising non-tax revenues by suggesting some out-of-box measures. Somebody needs to tell the caretaker Prime Minister and Finance Minster that the iniquitous prescription of erratic and oppressive taxes will not solve our problems especially in the prevalent circumstances. The federal and provincial governments need to generate and spend more money for infrastructure improvement to create more employments and ensure higher growth, on competitive basis contracts should be given to private sector to complete public projects in time. This would kick-start the economy.

Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their machinery, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. Expensive state lands, lying in the center of cities and occupied by elites, should be leased out for industrial, business and commercial ventures. It will generate substantial tax revenue as well (through public auction imposing 5% income tax as full and final tax will generate billions) and facilitate rapid economic growth.

The federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the country’s tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are main factors for low tax collection.

We must undertake fundamental structural reforms to dismantle the elitist and rent-seeking economic system that runs this country. By improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provision (except on salary, dividend, interest and payment to non-residents) and broadening tax base as suggested, we can collect Rs. 16 trillion at federal level and Rs 4 trillion at provincial levels.

If we manage to collect tax revenue of Rs. 20 trillion, our reliance on domestic and foreign loans will decrease significantly and diminish after few years, provided we achieve sustainable growth rate of at least 7% for a decade for which simplification of tax system as a whole is a prerequisite.

There cannot be two opinions that Federal Board of Revenue (FBR) or any other tax collection agency needs to be run by a competent board as a short-term reform measure before all of these are finally merged into a single national tax authority. This body, whatever may be the name, should not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programs, otherwise tax compliance will remain a distant dream.

People must get free education, quality healthcare, decent housing/transport plus social security, such as universal pension, disability allowance, old age benefits, income support, child support, just to mention a few, in lieu of paying due taxes as suggested in There’s need for new tax model.

The National Tax Agency (NTA) can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 of the Constitution read with the Fourth Schedule by federal and provincial parliaments). This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption and creating unnecessary compliance cost, rather than operating under one-window. Presently, taxpayers have to deal with multiple tax agencies adding to their cost of doing business.

It is imperative to make a change in the Income Tax Ordinance, 2001 in the Finance Bill 2024 of compulsory registration of taxpayers by FBR and payment of refund without application through bank account of a person; those having no bank accounts should be paid through mobile wallet. Once, this amendment is made, FBR should register 120 million unique mobile users as taxpayers without any further delay. If FBR registers all the unique 120 million mobile users, it can achieve the collection of Rs. 16 trillion (income tax Rs. 9 trillion and sales tax Rs. 6 trillion). FBR will have to take the following steps. 

After compulsorily registration of all unique 120 million mobile users, send them text message giving username and password to upload (in the case of non-filers) or update profile (on the basis of filers) on FBR’s website answering just four questions:

  • Dependent or head of family. If head of family, mention number of dependents.
  • Self-employed or salaried person [salaried person to write name/address of employer].
  • Self-employed to mention the nature of businesses or profession and address (or addresses if multiple places are used) where business is conducted and profession is exercised.
  • Annual net income from all sources and gross receipts.

Those having taxable income but never filed income tax return and sales tax statement should be facilitated to file simple and easy one-page tax return having declaration of gross sales or receipts, as the case may be, made available both in English and Urdu. Those living in areas where internet is not available, help of Post Office nearby can be taken or a person having 3G/4G service of any mobile company to fill simple declaration mentioning the identity of the person who entered data on his behalf.

It will help in documentation of all households and their earning levels at national level by matching family-tree data available with National Database and Registration Authority NADRA

Individuals earning below taxable limit should be paid income support (negative tax) till the time they are provided vocational training and employment rather than being kept as beggars for life. Special persons with any disability or disabilities must be taken care of by respective governments where they live.

Those not registered as voters will be entered in the voters’ list through the help of Election Commission of Pakistan (ECP) to become voters. 

On the basis of above, we will have a ‘National Socio-Economic Registry’ of all households.

The only viable option for meaningful reforms is to replace the existing tax system with a simple, low-rated tax on a broad-base, that is more pragmatic and growth-inducive. With such a system in place, those who are not into the tax net or who avoid true disclosures would be encouraged to pay their taxes voluntarily, honestly and diligently. It will create incentives for better compliance and lead to accelerated economic growth. 

A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)