In the Supreme Court of Pakistan, Suo Motu Case No. 2 of 2018 re ‘Maintaining of Foreign Accounts by Pakistani Citizens Without Disclosing the Same/Paying Taxes,’ is still pending for adjudication. It started on February 1, 2018 and after many hearings, appointing of committees and seeking assistance from a number of leading lawyers and experts in fiscal, business and finance, remains unconcluded till today. The last hearing in this case was held on January 14, 2019 as per website of Supreme Court of Pakistan.
The purpose of the suo motu case, as per order dated June 12, 2018, reported as PLD 2018 Supreme Court 686, was retrieving looted wealth and untaxed assets stashed abroad, exposing and punishing the culprits. On the contrary, the culprits were offered unprecedented immunities and amnesties and assured complete confidentiality through unconstitutional laws, first by the government of PML-N, and then again by the coalition led by the Tehreek-i-Insaf (PTI).
The immunity laws of 2018 & 2019 were not only ultra vires of the Constitution of the Islamic Republic of Pakistan, 1973, but also promulgated during the pendency of Suo Motu Case No. 2 of 2018 and Constitution Petition No.72 of 2011, filed by Muhammad Ali Durrani, former Senator and federal minister, attached with it, involving many common issues, no action is taken on till today.
Tackling the twin menaces of black money and tax evasion has always been a challenge and failure in Pakistan. The study, ‘What is hidden, in the hidden economy of Pakistan? Size, causes, issues and implications’, by Ahmed Gulzar, Novaira Junaid and Adnan Haider, shows that corruption and tax evasion are not only causing an expansion in the size of the informal economy, but also hampering the growth rate, thereby adding more to economic uncertainty, income inequality and poverty. Successive governments in Pakistan—military and civilian alike—instead of dealing with these issues have been pardoning and appeasing tax evaders through various laws and amnesty schemes.
The ever-growing informal economy, which is ironically called ‘The Secret Strength of Pakistan’s Economy,’ has grown to the extent that tax gap is now over 200%. The real tax-to-GDP ratio, if we take into account the monstrous size of unreported (untaxed) economy, will be much less than claimed at 9.2 percent in the fiscal year 2022-23.
The situation this year is going to be worse, as debt servicing is expected to reach Rs. 8.5 trillion against the budgeted figure of Rs. 7.3 trillion. This is all happening when the accumulated size of the informal (untaxed) economy is around Rs. 1000 trillion.
The Federal Board of Revenue (FBR) in fiscal year 2022-23 collected Rs. 7.169 trillion against the original target of Rs. 7.4 trillion. After the transfer of Rs. 4.223 trillion to provinces, the net federal government’s income of Rs. 4.656 trillion was not enough to meet the expense of debt servicing of Rs. 5.696 trillion alone, what to speak of bridging the burgeoning fiscal deficit that reached 7.7% of GDP.
The situation this year is going to be worse, as debt servicing is expected to reach Rs. 8.5 trillion against the budgeted figure of Rs. 7.3 trillion. This is all happening when the accumulated size of the informal (untaxed) economy is around Rs. 1000 trillion. If even flat rate of 10% is offered to all those who have failed to pay income tax in the past, in just one year, additional income tax collection can be of Rs. 10 trillion!
Pakistan, where annually over US$15 billion escapes taxation and is siphoned off outside the country, nearly one third of population lives below the poverty line and millions of mothers and children remain undernourished. Yet, there is no will to crack down on black money stashed at home and abroad.
Raymond Baker in his book, Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System, alleges: “Like Bhutto, offshore companies have been linked to Sharif, three in the British Virgin Islands by the names of Nescoll, Nielson, and Shamrock and another in the Channel Islands known as Chandron Jersey Pvt. Ltd. Some of these entities allegedly were used to facilitate purchase of four rather grand flats on Park Lane in London, at various times occupied by Sharif family members. Reportedly, payment transfers were made to Banque Paribas en Suisse, which then instructed Sharif’s offshore companies Nescoll and Nielson to purchase the four luxury suites.”
Pakistan is once again ruled by Sharifs at the centre and Punjab, with the support of Asif Ali Zardari, now a second time President of Pakistan. While the National Accountability Bureau (NAB) has failed to prosecute them, none of them sued Raymond Baker for allegations made in the book.
It is very disheartening for common Pakistanis to see their sweat and blood earnings end up landing in offshore havens especially by those who are entrusted with the sacred responsibility of running the state or by those who are responsible for protecting the homeland.
In view of the huge size of untaxed economy in Pakistan, a paradigm shift in policy is needed to replace the entire taxation system for fiscal stabilization.
The frequent disclosures coming from external sources, the Panama to Swiss leaks, are a matter of great embarrassment for our investigative agencies and FBR. It is a testimony of the fact that our so-called watchdogs and financial institutions have perpetually failed to identify and curtail the flight of capital. We need a strong commitment, capacity-building and transparent mechanism to address these challenges otherwise our economy will keep on suffering and the gulf between the ruling elites and common people will keep on widening.
Successive governments, fully aware of the fact that majority of the offshore companies of Pakistanis were registered in British Virgin Islands (BVI), yet did not take any initiative to sign a Tax Information Exchange Agreement (TIEA) with BVI similar to the one signed by India way back in 2011. Till today, no effort has been made for invoking the Swiss law (Foreign Illicit Assets Act (FIAA) of 18 December 2015) for return of proceeds of kickbacks lying in Switzerland, about which order of the Supreme Court [Para 177 to 179] of Dr. Mobashir Hassan and other v FOP and others PLD 2010 SC 265 remains in the field for the last 14 years.
In view of the huge size of untaxed economy in Pakistan, a paradigm shift in policy is needed to replace the entire taxation system for fiscal stabilization. The equation is simple. Federal government needs at least Rs. 20 trillion of revenue (for meeting all development and non-development expenditure), for which determination of a fair tax base is imperative. The current complex system, only favours a few thousand officers and their staff along with people having money power and who can blatantly flout the law.
A simple flat rate tax that is neither burdensome nor difficult to implement is the solution, but it would deprive the bureaucracy and some vested-interests of illegal enrichment. Nonetheless, the government has no option but to dismantle the existing, outdated and anti-growth tax system, if it is serious to overcome the twin malaises of fiscal deficit and debt burden.
The tax system that will work smoothly for Pakistan, keeping in view our peculiar socio-economic circumstances and mind-set of masses, must be a flat rate with no compliance hassles. Multiple taxes should be merged into a single levy, and simplified with complete assurance to the masses that they would be free from any kind of harassment; and money collected would be spent towards their welfare.
The agenda of fair taxation cannot succeed if wastage of public funds and its abuse by the rulers continue unabated. The quid pro quo for paying taxes is as important as the system to collect tax. Where the public is blamed for not paying their due share, public authorities are equally, if not more, responsible for indulging in corrupt means taking cover of complicated procedures that eventually lead to poor collection of revenue.
The tax base with respect to direct tax vis-à-vis fair distribution of incidence can be achieved by imposing 10% flat rate tax on net income of individuals or 2.5% of tax on net wealth of Rs. 100 million whichever is higher and reducing corporate tax rate to 20%. This simple taxation would induce voluntary compliance provided all the citizens are aware of the fact that competent and effective tax machinery exists having a tax intelligence system that can easily detect tax avoidance.
The optimum collection of taxes fairly and without hampering growth should be the focus of tax administrative reforms. For this purpose, establishment of NTA and installation of automated Tax Intelligence System are prerequisites.
Without this deterrence, no system will be unworkable. Nowhere in the world is proper collection of taxes possible without a strong enforcement apparatus. However, the apparatus should be friendly and firm—friendly, to the extent of educating and guiding the people for fulfillment of their tax obligations, and firm to the extent of punishing willful defaulters.
As far as sales tax is concerned, Pakistan needs harmonized sales tax (HST), which should be single-digit. All tax collections should be through a National Tax Authority (NTA) which should replace all existing authorities at both federal and provincial levels. This would facilitate people to deal with a single revenue authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalized under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
The provinces should also feel responsible for better and efficient tax collection. Presently they are isolated and rely heavily on distribution from the divisible pool whereas the FBR annually collects less than the assigned revenue target. The responsibility to collect revenues should be joint and several giving a participative sense to all federating units.
The NTA should consist of staff representing the federation of Pakistan, as both the centre and provinces have stakes in collecting taxes at optimal level. If the size of the pie grows, every federating unit will get more and the Centre will also have sufficient funds at its disposal. For NTA, an all Pakistan Revenue Service (PRS) should be established. Recruitment for PRS must be independent of the present Central Superior Services structure. Competent people having knowledge in accounting, law, IT and administration should be selected through Management Board of NTS.
The optimum collection of taxes fairly and without hampering growth should be the focus of tax administrative reforms. For this purpose, establishment of NTA and installation of automated Tax Intelligence System are prerequisites. The system should be able to send quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations. At the same time, the State must demonstrate with actions and not mere lip-service that there is prudent spending of public money through a transparent process enjoying the confidence of the people.