This is the second part of a two part series. You can read the first part here.
The biggest challenge on the tax mobilisation front faced by the Federal Board of Revenue (FBR) is bridging the monstrous tax gap through automation and the introduction of a tax intelligence system and not levying more taxes or enhancing the rates of the existing ones—Rationalising tax system, Business Recorder, July 19, 2020.
"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.
“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression "in lieu of", it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80-C and 80-CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income tax, the same is in consonance with Entry 52”—Supreme Court of Pakistan in Messers Elahi Cotton Mills and others vs Federation of Pakistan and others [ PLD 1997 Supreme Court 582].
The federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the country’s tax system to achieve efficiency, and equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily collectible indirect taxes, weak enforcement, inefficiencies, incompetence, and corruption are the main factors for low tax collection.
Tax reforms undertaken to date, have mainly been patchwork, and have 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 real causes.
The only viable option for meaningful change is to replace the existing tax system with a simple, low-rated tax on a broad base, pragmatic, and growth-inductive. With such a system in place, those who are not in 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 the welfare of society as a whole and incentivising growth and economic well-being of every individual.
The real dilemma of Pakistan is outdated, colonial-style administrative and judicial structures, elitism, cronyism, greed, and corruption on the part of predatory elites. The existing bureaucrats are parasites and since rent-seeking is accepted as a norm, even the private sector is neither a growth catalyst nor ready for innovations. We have crony capitalism for rent-seekers in the private sector—see a detailed study that quantifies the annual cost to the exchequer of pro-rich tax SROs.
There cannot be two opinions that FBR or any other tax collection agency needs to be run by a competent board. The NTA is also 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 costs, rather than operating under one window
We must undertake fundamental structural reforms to dismantle the elitist and rent-seeking economic system [There’s need for new tax model, Business Recorder, February 26, 2021]. By improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provisions (except on salary, dividend, interest, and payment to non-residents), and broadening the tax base, we can collect Rs34 trillion at the federal level alone. If we manage to collect tax revenue of even Rs25 trillion, our reliance on domestic and foreign loans will decrease significantly and diminish after a few years, provided we achieve a sustainable growth rate of at least 7% for a decade for which simplification of the tax system is a prerequisite [FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021, and FBR, tax potential and enforcement—II, Business Recorder, March 7, 2021].
The idea of restructuring of Federal Board of Revenue (FBR) presented in Need for National Tax Agency was later elaborated in various articles, Need for National Tax Authority, A Case for National Tax Authority—I, A case for ‘National Tax Authority’—II, and Case for All-Pakistan Unified Tax Service: PTI and innovative tax reforms’. The idea of the National Tax Agency (NTA) was also recommended by the Tax Reforms Commission in its final report submitted to the government in February 2016, which was marked confidential by Muhammad Ishaq Dar, the then-finance minister and now fourth Deputy Prime Minster and 39th Foreign Minister.
There cannot be two opinions that FBR or any other tax collection agency needs to be run by a competent board. The NTA is also 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 costs, rather than operating under one window. Presently, taxpayers have to deal with multiple tax agencies adding to their cost of doing business.
To promote voluntary tax compliance, people must get free education, quality healthcare, decent housing/transport plus social security, such as a universal pension, disability allowance, old age benefits, income support, and child support, just to mention a few, in lieu of paying due taxes as elaborated in There’s need for new tax model.
The available data confirm that the digital economy could be tens of billions of dollars in the next two decades. Are we ready to take benefit of it to eliminate our foreign debts and promote ICT goods and services to provide jobs to young IT-trained personnel? The answer is a big NO.
This anti-growth taxation should be abolished and the export of ICT goods and services not only should be given exemption but also bonuses as is the case in Bangladesh, Sri Lanka, and many other countries
Presently, the telecom sector is a conduit to fleece by the federal and provincial governments through exorbitant taxes! Ironically, Prime Minister, Shehbaz Sharif, has ambitious anti-poverty initiative(s), utilising telecom as a powerful tool in poverty alleviation, but Pakistan has among the highest taxed in Pakistan above 30 percent. This anti-growth taxation should be abolished and the export of ICT goods and services not only should be given exemption but also bonuses as is the case in Bangladesh, Sri Lanka, and many other countries.
As suggested many times in these columns, if FBR registers all the unique mobile users, we can easily collect Rs18 trillion (income tax Rs12 trillion and sales tax Rs6 trillion) in just one year even before integrating the informal economy to reach Rs34 trillion. FBR will have to take the following steps:
- After compulsory registration of all unique mobile users, send them a text message giving username and password to upload (in the case of non-filers) or update their profile (on the basis of filers) on FBR’s website answering just four questions:
> Dependent or head of family. If the head of a family, mention the 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 returns and sales tax statements should be facilitated to file simple and easy one-pager tax return having declaration of gross sales or receipts, as the case may be, made available both in English and Urdu. For those living in areas where the internet is not available, the help of a Post Office nearby can be taken or a person having 3G/4G service from any mobile company can fill simple declaration mentioning the identity of the person who entered data on his behalf.
- It will help in the documentation of all households and their earning levels at the national level by matching family-tree data available with NADRA.
- Individuals earning below the 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 the respective governments where they live.
- Those not registered as voters will be entered into the voters’ list with the help of the Election Commission of Pakistan to become voters.
Based on the above, FBR will have a ‘National Socio-Economic Registry’ of all households. The requirement of the Financial Action Task Force (FATF) of comprehensive data of all and their risk evaluation from the standpoint of anti-money laundering (AML) and countering of terrorist financing (CFT) will also be met. Prime Minister, Shehbaz Sharif, must take special interest in this proposed scheme and order FBR to register all active mobile users and pay refunds to all having no income or income below taxable limit for money collected from them during the last 5 years that was advance and adjustable income tax as pre-paid or post-paid mobile users.
In case it is done, we will have data of all households in Pakistan for tax purposes, already verified through a biometric system. It will also help in planning initiatives under the Benazir Income Support Programme (BISP) and all programs related to the enhancement of skills, vocational training, etc in a transparent and targeted manner. Undoubtedly, it will be a great leap forward to making Pakistan an economically viable and a welfare state.
NOTE: This is the second part of a two part series. You can read the first part here.