Malice Towards None & All: Notes On Tax Reforms In The Budget

Malice Towards None & All: Notes On Tax Reforms In The Budget
There is broad consensus in Pakistan about the monstrous tax gap that successive governments, civil and military alike, have failed to bridge. We all know that this gap is not simply because of weaknesses in enforcement of the national tax apparatus, comprising of the Federal Board of Revenue (FBR) and provincial tax agencies. It is, in fact, largely due to bad tax policy. The federal budget for the fiscal year 2023-24, expected on June 9, 2023, will be followed by provincial budgets. In the case of Punjab and Khyber Pakhtunkhwa, in the presence of caretaker governments working beyond their constitutional mandate, there are critical questions of validity of budgetary exercise even through ordinances by the governors.

There is nothing in public domain till this day as to how the National Tax Council intends to share data of all taxpayers at national level or gradually moves towards a federalized tax structure. It is explained in detail elsewhere with an elaborate roadmap and implementation plan. This article seeks to provide pragmatic and viable proposals for the Finance Bill 2023, part of the federal budget 2023-24 for generating taxes of Rs. 14 trillion at federal level alone.

According to the Pakistan Telecommunication Authority (PTA), total cellular subscribers as on April 30, 2023 were 193 million (81.30% mobile teledensity). Out of these, 124 million had mobile broadband utility (52.47% mobile broadband penetration), 3 million fixed telephone line users (1.10% fixed teledensity) and 127 million broadband subscribers (53.80% broadband penetration). It is, thus, clear that not less than 120 million mobile users (many having multiple SIMs) have been paying advance, adjustable income tax of 15% from July 1, 2022 (earlier it was 12.5%).

Unfortunately, yet the Pakistanis are dubbed as tax thieves by stalwarts of FBR, successive governments and international lenders and donors.
The FBR must collect taxes where due and not in advance or from those not chargeable to tax.

The number of “active” income tax return filers as per Active Taxpayers List (ATL) on FBR’s website, was 3,772,669 as on May 29, 2023. According to Pakistan Economic Survey (2021-22), the labor force increased from 65.5 million in FY 2017-18 to 71.76 million in FY2020-21 and the number of employed persons increased from 61.71 million to 67.25 million during the same period. FBR must register at least 20 million individuals having income above taxable limits and register five million businesses liable to sales tax.

The incontrovertible fact is that presently the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users. If all file income tax returns, there will be a refund payable to at least 90 million, having no income or income below taxable limit, though costs to claim will be much higher than what is withheld.

The FBR must collect taxes where due and not in advance or from those not chargeable to tax. Sadly 75 paisas (one Pakistan rupee comprises 100 paisas) federal excise duty (FED) on cellphone calls exceeding 5 minutes was levied in the Finance Act 2021 in utter apathy towards the poor. It was also in violation of the Constitution of Pakistan as held by Sindh High Court in its judgement in the case of certain telecoms [(2023) 125 Tax 401 ((H.C. Kar)] endorsing Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.). FBR has challenged this order in the Supreme Court. Apart from the issue of constitutionality, it is a bad tax policy measure, impractical to implement for operators, anti-poor, and inconsequential to efforts of FBR to raise the desired revenue through already oppressive indirect taxes.

The relief given to small and medium enterprises (SMEs) as manufacturers up to turnover of Rs. 250 million in the Finance Act, 2021, should have been for retailers and others taxpayers as well, without any discrimination. Low-rate tax on broad base with simple compliance procedure can fetch Rs. 14 trillion at federal level alone. 

The coalition government of Pakistan Tehreek-i-Insaf (PTI) resorted to oppressive taxation during its rule from August 2018 to April 2022. Now its successor, the alliance government of Pakistan Democratic Movement (PDM), is doing the same. It is high time that we must stop taxing the less-privileged and downtrodden. Why are the poor still subjected to oppressive taxes like 75 paisas for cellphone calls exceeding 5-minute and 15% advance income on mobile and internet use from July 1, 2022? The rich and mighty are still enjoying tax-free perquisites and benefits worth billions of rupees.

Tax policy reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility.

The heavy taxation on electricity bills and a number of food items and items of daily use by the citizens is totally unjustified, when tax expenditure was around Rs 1.5 trillion rupees in each financial year since fiscal year 2020-21. Tax credits for senior citizens and special people that were available before the enhancement of tax rates by Finance Act, 2019 should have been restored by PTI or PDM, but both failed to do so even after the higher tax rates restored in 2018 on the dictates of International Monetary Fund (IMF). One hopes that fourth time federal finance minister, Muhammad Ishaq Dar, will consider it in the forthcoming budget.

While, the exporters of services from tax year 2022 are to be taxed at 1% (laudable amendment to bring it at par with exports of goods), it is not provided that how much credit would be taken in books. The definition of “imputable income” is available in the Income Tax Ordinance, 2001 and must be applied in the case of exporters of services provided that if they claim higher credit than the same, the actual working must be provided. In case of wrong claims, punitive measures should be provided.

Many self-acclaimed professionals, selected in committees and commissions, announced by the successive governments—civilian and military alike—to remove anomalies and technical issues (sector-wise etc.), have failed to even remove these obvious lacunae, what to speak of suggesting a pro-growth and investment-friendly tax policy helping in creating jobs from agriculture to high tech knowledge-based initiatives, rather than emphasizing on bricks and mortars. They must be reminded of a couplet from the great poet and thinker, Dr. Allama Muhammad Iqbal:

Jahan-e-Taza Ki Afkar-e-Taza Se Hai Namood
Ke Sang-o-Khisht Se Hote Nahin Jahan Paida

New worlds derive their pomp from thoughts quite fresh and new
From stones and bricks a world was neither built nor grew.   

Federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the ineffective, outmoded, colonial era institutions, including 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 the main factors for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free benefits and perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer. These columns repeatedly discussed and pleaded for radical revamping and restructuring of the entire tax system, through low-rate, broad-based and predictable taxes, single national tax agency and national tax court.

Tax policy reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable, or otherwise curing symptoms rather than addressing the causes.

The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), miserable failed to encourage people towards voluntary tax compliance. In 2020, the Federal Government obtained yet another loan of US$400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of PRR Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million. Following in the footsteps of the Federal Government, the Punjab Government also borrowed US$304 million from the World Bank for tax reforms, approved by Planning Commission on September 16, 2020. Like earlier programs, these are also bound to fail.

The only viable option for meaningful change is to replace the existing tax system with a low rate and predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. This is the time that the alliance government of PDM must invite all stakeholders to consider seriously the above model, if we have to make Pakistan a prosperous country and egalitarian state - an economic power with over 223 million people to have its say in global matters for a safer, just and peaceful place for humanity at large. Pakistan must forge alliances with all countries in the region, especially the Golden Ring countries, to protect its national interests and progress rapidly in all areas.

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)