“Mauritius Revenue Authority disburses all social payments, including negative income tax, special allowance, pregnancy allowance, children allowance, independence allowance, child support grant (CSG) top-up allowances and several others, numbering more than 30. All the payments are automatically ceding to the beneficiary's accounts. Out of a population of about 1.2 million, 500,000 people get one form or other of any subsidy or allowance—M. Sudhamo Lal, Director General, Mauritius Revenue Authority (MRA)
“The perks culture has also held real estate development hostage for decades as officials seek to reward themselves through plots. Government-sponsored developers such as the DHA and Coop societies dominate the real estate market, creating a plot culture and holding private real estate development hostage”—Take Tax Policy Back from Economic Hitman, Dr Nadeem Ul Haque, Vice Chancellor, Pakistan Institute of Development Economic (PIDE)
The tragedy with Muslim rulers and their bureaucracies is that they want to do everything without the involvement of the people. In a truly democratic dispensation, such programs of change are unthinkable without the active participation and support of the people for whom these meant. Since the rulers of the Muslim World have little respect for democratic culture and values, they try to impose Western models on their people without following their system to the core—Iqbal & Islamic Taxation Model, Huzaima Bukhari & Dr Ikramul Haq.
Our successive governments—military and civilian alike—have failed to convince the people that payment of taxes is their collective responsibility—failure to fulfill it leads to debt enslavement and political subjugation. The major reason for tax-defiant behavior is a lack of trust in government—abuse of taxpayers’ money for luxuries of the ruling elites.
The State of Pakistan has miserably failed to protect the life and property of its citizens including every other person for the time being within Pakistan in terms of Article 5(2) of its Constitution. In these circumstances, what one can talk about providing all children free and compulsory quality education as a fundamental right under Article 25A, healthcare, and civic amenities?
The populist argument against paying taxes, ‘why we should pay when in return we get nothing’, elaborated by Idrees Khawaja in Pakistan Happy Taxpayers and many times in these columns, needs public debate. The government’s yearning for “more and more taxes” has become a point of irritation for the citizens, who argue that more taxes alone is not an answer to existing fiscal maladies, as Ali Khizar highlighted in a recent write-up, Debt dilemma: fixing the fiscal flip:
“The central government debt increased to Rs48.4 trillion in August 2024, 21 percent higher than the same period last year….Over the past two years (July 22- Jun 24), public debt (both domestic and external) has risen by 45 percent, while the headline inflation index has increased by 49 percent, and GDP (at market prices) has grown by 58 percent. This shows that inflation has outpaced debt growth over the last two years…
It’s important to note that central public debt figures do not include substantial government unfunded pension liabilities, which stand at Rs11 trillion for Punjab alone. The total federal (including military) and provincial pension liabilities are estimated to be around Rs30–35 trillion, exceeding the country’s total external debt…
… There is little cause for celebration regarding the improved debt-to-GDP ratio, as it excludes all liabilities the state faces, and the reduction is primarily due to high inflation. As inflation subsides, the debt-to-GDP ratio may not continue to decline at the same pace… domestic debt servicing may not decrease as quickly as inflation because debt repricing takes time, and the SBP is likely to maintain high real positive interest rates….”
We all know that monstrous debt servicing of the federal government in coming days is not going to reduce to create the much-needed fiscal space. Since this is a perpetual challenge, the observation made by Dr Nadeemul Haq in 2020 is still valid: “Donor advocacy suggests that good policy is to leave expenditures and the structure of the economy alone and rely on imposing arbitrary taxes on milk, SMSs and the internet is good policy. It is not! Besides, why would you want to give wasteful setup more money without reforming it?”
According to the Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on August 31, 2024, was 193 million (79.44% mobile density), 135 million mobile broadband subscribers (55.61% mobile broadband penetration), 3 million fixed telephone subscribers (1.06 teledensity) and 138 million broadband subscribers (57.05% broadband penetration).
The legislature must stop taking advance income tax from mobile/broadband users having no taxable income as they are already paying 19.5% sales tax on services in their respective provinces and as federal excise in Islamabad Capital Territory. There should be free internet service in public places in all cities, as is the case in all the major social democracies of the West where such high tax rates apply.
The total cellular/broadband subscribers as on June 30, 2024, was 193 million (79.44% mobile density), 135 million mobile broadband subscribers (55.61% mobile broadband penetration), 3 million fixed telephone subscribers (1.06 teledensity), and 138 million broadband subscribers (57.05% broadband penetration).
FBR should have registered all individuals paying substantial advance income tax of Rs60,000 in a year but not filing tax returns. It was an effective way to bridge the huge gap, as suggested in Punishing The Non-filers! From July 1, 2024, the entire taxable population, and even those having no income or below the taxable limit, are paying advance and adjustable 15% income tax as filers and 75% as non-filers as prepaid or postpaid mobile/broadband users.
The legislature must stop taking advance income tax from mobile/broadband users having no taxable income as they are already paying 19.5% sales tax on services in their respective provinces and as federal excise duty in the Islamabad Capital Territory (ICT). There should be free internet service in public places in all cities, as is the case in all the major social democracies of the West where such high tax rates apply. The issue of reciprocity of high taxes prevalent in Pakistan was raised in a joint presentation before the Senate’s Standing Committee on Finance and Revenue on October 9, 2024. Responding to the missing link in our national tax policy, the Director General of Mauritius Revenue Authority (MRA) sent the message shared in the beginning. It needs the attention of all, legislators, policymakers, taxpayers, experts, researchers, academicians, media, and members of civil society.
There is no disagreement over the fact that our internal and external debt will keep on rising unless the government goes for all-out reforms. Voicing this concern, Dr Nadeemul Haque in ‘Reform or face fundamental ascendency’, emphasised, “the state must first provide the social contract i.e. good law and order and security of life. It must dismantle the rent-seeking that protects the rich… Rent seeking relies on three main components: state subsidies, licensing, and regulation; special perks and privileges for ministers and army and civil service employees and a land distribution system that allows the poor man’s land to be acquired for the elite, especially the army and civil service”.
A landlocked country Uzbekistan with a population of 36.5 million having a GDP of $115.4 billion is spending 7% of it in social security—our is only 0.5% of GDP. It successfully met the challenge of one of the policy tools for the establishment of a Single Registry for Social Protection (SRSP), a system that integrates all information management functions along the delivery chain, principally focused on social assistance schemes. We suggested the same in "Simplification of Taxes for Growth—III" (Business Recorder, April 2, 2021), but till date, no attention has been paid by the Federal Board of Revenue (FBR) and other stakeholders.
It needs to be mentioned that Uzbekistan in October 2019 completed the development of the SRSP modules. It launched its pilot project in the Syrdarya region to cover three means-tested social benefits for low-income families: (i) childcare benefit for children up to two years (ii) benefit for families with children up to 14 years and (iii) material support for low-income families. Following the successful pilot of the SRSP, the Uzbekistan Ministry of Finance in May 2020 developed a plan to roll out the SRSP across the country in a phased manner. It was fully implemented in a phased manner between September and December 2020.
It is time that all those involved in various programmes under the Benazir Income Support Programme (BISP) study the single registry social protection model of Uzbekistan, a country with much less human and material resources than us. According to a report, “Over the past three years, the SPSR provided social allowances to more than 1.6 million families with children to overcome the challenges caused by low income, especially during the pandemic. The reformed child benefits have been administered via Single Registry since September 2021”.
An equitable tax system is one under which tax payments are based on the benefits received from government services. In social democracies, this is called the “benefit principle” which presupposes the determination of the incidence of public expenditure before deciding the distribution of tax burden.
The rich and the mighty not only evade taxes but also get unprecedented tax-free benefits and thrive at taxpayers’ expense as beneficiaries of the State’s resources. The government’s kitty is empty because of the unwillingness of the rich to pay taxes and, the colossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural resources and improving human capital
Is taxing nearly 120 million mobile/broadband users having no taxable income a good tax policy? Of course, not when there is negligible spending on SRSP. This is also against Article 4 of the Constitution: “The State shall ensure the elimination of all forms of exploitation and the gradual fulfillment of the fundamental principle, from each according to his ability to each according to his work”.
Tax policy should be aligned with the above command of the Constitution and as done by a small country like Uzbekistan. Once people see the tangible benefits of the taxes paid, tax compliance improves as shown in Restructuring of the tax system: a blueprint, (Business Recorder, May 7, 2021).
Even the World Bank-IMF funding and “guidance” (sic) has failed to bring the desired results—debt burden is increasing monstrously, fiscal deficit is beyond control, food inflation is crushing the poor. Taxes are evaded and avoided at a massive scale (confessed on October 10, 2024, by the Federal Finance Minister and the FBR Chairman), and whatever is collected is mercilessly wasted by those who matter in the land.
The rich and the mighty not only evade taxes but also get unprecedented tax-free benefits and thrive at taxpayers’ expense as beneficiaries of the State’s resources. The government’s kitty is empty because of the unwillingness of the rich to pay taxes and, the colossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural resources and improving human capital. In these circumstances, we cannot collect even what Uzbekistan achieved: taxes rose from 26.1% of GDP in 2021 to 29.7% in 2022 (ours was only 10.1% in 2022, down from 11.1% in 2021), and 7% spending on social security whereas we remained below one percent.
We cannot increase the tax-to-GDP ratio to a respectable level of 25% keeping in view the size of the population unless we achieve inclusive growth of 7 to 9 percent for a decade. It is possible only if under 10th National Finance Commission (NFC) Award the federation and federation units agree on a single national tax agency and tax absentee landlords (total contribution of agricultural income tax (AIT) was 0.06% of GDP.
The National Assembly enjoys exclusive power to levy AIT in ICT under Article 142(d) of the Constitution but it still has per acre tax under the Tax on Agricultural Land Ordinance, 1996. The rates are ridiculous: on land exceeding five acres, if used for fruit orchard or growing vegetables/flowers (Rs300 per acre). For irrigated land, exceeding five acres (Rs50 per acre) and for unirrigated (Rs25 per acre). However, the National Assembly inserted the following proviso to section 111(1) of the Income Tax Ordinance, 2001 through Finance Act, 2013:
“Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law”.
Why is the FBR not enforcing income tax on judges, generals, and political parties? Since the tax year 2019, no tax directories have been published - they should be released without any further delay. The agricultural income must also be shown in a separate column in these tax directories so that it can be seen whether declarants have been paying tax to provincial authorities and if not FBR should invoke the proviso to section 111(1) of the Income Tax Ordinance, 2001. It will expose many and the inefficiency of provincial governments to collect this tax from those declaring it in the income tax return.
The provincial assemblies have already secured an extension of six months to enforce new agricultural income taxation at par with federal personal and corporate income tax rates in exchange for signing National Fiscal Pact as a condition of IMF’s 25th Extended Fund Facility (EFF) Programme worth $7 billion for 37 months, approved by its Executive Board on September 27, 2024. Pakistan earlier committed with the International Monetary Fund (IMF) that all provinces will enforce AIT with effect from January 1, 2025!