“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 & others v Federation of Pakistan & others [ PLD 1997 Supreme Court 582].
Budget 2025 for fiscal year 2024-25 is in the making amidst very difficult times when we are faced with industrial stagnation, the challenge of economic revival, and fiscal consolidation. It is expected to be presented on June 2 or 5, 2025. The traditional approach adopted for decades in Pakistan for balancing the books, levying more oppressive indirect and high-rate taxes for containing (unsuccessfully) the fiscal deficit, and mere number games here and there will have to be abandoned in totality.
There is a need to take concrete measures in the Budget 2025 to drastically cut all kinds of non-productive and wasteful expenses and generate extra revenues (tax as well as non-tax) of trillions by broadening the base without hampering the struggling economy, and leasing out lucrative government-owned properties. The daunting challenge for budget makers is how to facilitate businesses in moving towards higher, inclusive, and sustainable growth.
The biggest challenge on the revenue 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 refraining from levying more oppressive indirect taxes or enhancing the rates of the existing ones, including income taxation. The World Bank, in its report, Pakistan Revenue Mobilisation Project, has aptly noted:
Pakistan’s tax revenue potential would reach 26 percent of GDP if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower-middle-income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, i.e., the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent, respectively), and it is larger for the GST/GSTS than for income tax (65 percent vs. 57 percent, respectively).
While extra revenue (tax and non-tax) generation is very important to meet the growing needs of the federal and provincial governments, these are also urgently required to help nearly 60 million Pakistanis identified as chronically poor in the latest Multidimensional Poverty Index [MPI] 2024.
The central points of federal budget 2025 and provincial budgets to follow should be achieving the long-delayed and much-needed goal of simplification of the tax system, ensure welfare of the common people and provide universal entitlements [free education, health, decent living, affordable public transport, universal pension, income support, civic amenities etc] to all citizens through a comprehensive social security system. This would only be possible by following a federalised economic planning and implementing a rational tax system, proposed in 2016. It is updated in November 2024 [Towards Broad, Flat, Low-rate, and Predictable Taxes, Third Edition, PRIME Institute, November 2024], and some concrete measures are suggested below.
Unfortunately, nobody is talking, what to speak of debating, about raising tax and non-tax revenues by taking some out-of-the-box measures. Somebody needs to tell the Prime Minister, Shehbaz Sharif, and his economic team that the iniquitous prescription of erratic and oppressive taxes and austerity in the coming federal budget will not solve our problems.
The federal and provincial governments need to generate and spend more money on infrastructure improvement to create more employment and ensure higher growth, engaging the private sector to take part in public projects. This would kick-start the economy. Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their machinery, monetise all the perquisites of bureaucracy, and make taxes simple and low-rate.
For making Pakistan a self-reliant economy, we need to stop wasteful, unproductive expenses, cut the size of cabinet and government machinery
State lands lying unproductive, including palatial government residences for bureaucrats, owned by the federation and provinces, should be leased out for industrial, business and commercial ventures through public auctions, with 10% income tax collection at source as full and final tax, generating billions for the FBR to meet it targets fixed by International Monetary Fund (IMF). It will generate substantial funds, both tax and non-tax revenues, and facilitate private investment for rapid economic growth.
The dire need in today’s Pakistan is to undertake fundamental institutional and structural reforms. Our biggest burden on the economy is the huge unproductive workforce comprising nearly four million people, in various governments (federal, provincial, local, and corporations) and Public Sector Enterprises (PSEs), who waste time and money and mostly create hurdles for citizens and businesses rather than serving them. Right-sizing of monstrous administrative machinery and improving the quality of public services should be at the top of the agenda for reforms. This can be done by transferring much of the work to local governments, which should be installed from the lowest level up.
Local elected authorities should handle all health, education, water and sanitation, local roads, local policing, local property transfer, property and income tax, etc. For making Pakistan a self-reliant economy, we need to stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, the government-owned corporations should be run with private-public partnerships giving stock shares to the employees and introduce other steps to make these profitable through complete restructuring, increasing productivity through better technology and trained human resource, improving agricultural sector to meet local needs and creating exportable surplus; and reducing economic inequalities through redistribution of income and wealth using rational tax policy.
The following measures, both by the federal and provincial governments, can help generate additional revenues (tax and non-tax), making Pakistan a self-reliant economy. These will also provide relief to all citizens, especially the weaker section of society. Additionally, creating nationwide data showing their earning/expenditure levels and assets for providing a comprehensive social security system.
- For the next three years, the actual quantification of income of non-corporate businesses and professions should be given up and taxation should be moved to a gross basis at a fixed rate (after determining the fair rate for each class of business/profession). There should be no audits and raids. In the books or wealth statements, taxpayers are allowed to take credit of imputable income.
- Presently, barring a few, income tax is levied on net income with a minimum tax to the extent of amounts collected through over 60 withholding provisions. It is patently unconstitutional, as held by the Supreme Court in Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582].
- The apex court in the above case held that the National Assembly through Money Bill can impose taxes on income under Entry 47, Part I of Federal Legislative List, Fourth Schedule to the Constitution of Islamic Republic of Pakistan [“the Constitution”] or impose the same under Entry 52 on the basis of capacity to earn, but “it cannot adopt both the methods in respect of one particular tax”. The Finance Act 2019 violated this constitutional command by resorting to a minimum tax, and no one has taken the matter to a high court under Article 199 of the Constitution.
- For ease of doing business and waiving lengthy disclosures, if presumptive tax is imposed on turnover/receipts under Entry 52, the collection under income tax will be around Rs. 16 trillion from all persons other than companies. The total income tax collection, if we add the corporate sector’s contribution of nearly Rs. 2 trillion, will be Rs. 18 trillion. The additional revenue of Rs. 14 trillion under one head of collection alone will be a significant achievement without hampering the revival of the economy and, in fact, giving businesses and professions a stimulant to grow fast in the next three years and file simple tax returns with fear of audit, etc.
- The federal government should amend the definition of “agricultural income” after fulfilling the command of Article 162 of the Constitution to bring into its ambit receipts from the sale/lease of orchards, lease of lands, and in this way, the rich absentee landowners will come under the Income Tax Ordinance, 2001. The additional revenue of at least Rs. 500 billion will come from this move, if taxation is based on Entry 52, Part I of the Federal Legislative List, Fourth Schedule to the Constitution as discussed above, rather than going for the existing cumbersome methodology.
- The historic decision of taxing “agricultural income” by the Parliament in the shape of the Finance Act, 1977, was thwarted by the military regime of General Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” to tax big absentee landowners in the ambit of federal income tax law. This was a revolutionary step to impose tax on agricultural income at the federal level for the first time in the history of Pakistan, but was foiled by a military dictator. It needs to be revived.
- The small farmers having land holdings up to 15 acres should remain exempt from income taxation. There is no need to amend the Eighteenth Constitutional (Amendment) Act, 2010 [18th Amendment] or disturb the National Finance Commission (NFC) Award if this measure is taken in the Finance Bill 2025, as was the case under the Finance Act, 1977.
- Military rulers abolished all progressive taxes, e.g., Estate Duty, Gift Tax, Capital Gain Tax, etc. After the 18th Amendment, these are with provincial governments, but they are least interested in taxing the rich and mighty. If these taxes are imposed on the rich, additional tax revenue of Rs. 2 trillion can be generated by all four provinces.
During Zia’s 11 years' rule and that of General Pervez Musharraf for nearly 9 years, absentee landowners (including mighty generals who received state lands as gallantry awards or otherwise as rewards!) did not pay a single penny as agricultural income tax or wealth tax. - Taxation of “agricultural income” is the sole prerogative of provincial governments under the 1973 Constitution. All four provinces have re-enacted/amended laws with effect from January 1, 2025, but no efforts are underway for their fair and efficient collection.
- The total collection during the last five years under agricultural income tax by all the provinces never reached even Rs. 3 billion (share of agriculture in GDP on average was about 25% for this period). Therefore, there is a need to give collection of this tax to FBR, which should then be directly transferred to provinces after 1% collection charges.
Multi-national Companies (MNCs), through abusive transfer pricing mechanisms, deprive Pakistan of taxes of over Rs. 800 billion every year, and this can easily be recouped by entering into the Advance Transfer Pricing Agreements with relevant countries. - The Wealth Tax Act, 1963, was abolished through the Finance Act 2003 on the specific demand of Shaukat Aziz before he took charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as a resident in Pakistan, his global assets would attract provisions of the Wealth Tax Act, culminating in substantial tax liability on an annual basis.
- The repeal of the progressive wealth tax on net wealth, especially suitable to Pakistan, where enormous assets are created without disclosing income, was shown to be justified despite substantial revenue losses and the resultant misery inflicted on the majority of the people of Pakistan. The successive governments, through amnesties and asset-whitening schemes, caused a loss of billions of dollars to the national exchequer.
- In view of the 18th Amendment, there is a need to levy a 1% tax on those having net movable assets exceeding Rs. 50 million by the Federal Government and at the same rate on immovable assets by the provincial governments. It will bring equity in taxation, as the rich segments of society will contribute at least Rs. 900 billion for these levies.
- The total collection by imposing unified sales tax on goods and services as did by India in 2017 can be Rs. 12 trillion as against the total collection of around Rs. 3099 billion by the FBR through sales tax on goods in 2023-24 and four provinces by sales tax on services cumulatively at Rs. 504 billion. The additional revenue collection of over Rs. 8 trillion will not only give fiscal space to the federal government to narrow down the fiscal deficit but also more distribution for the provinces under the NFC Award. The slogan of ‘One nation, One Tax’ by India and Harmonised Sales Tax (HST) by Canadian is the way forward for Pakistan as well.
- In Customs, the massive evasion takes place due to under-invoicing and misdeclarations, besides smuggling, etc. The collection in 2023-24 of customs duties was Rs. 1104 billion. If revenue leakages are plugged as suggested in ‘Dismantle containers’ mafia’, Business Recorder, September 14, 2018, and a flat rate of 5% is imposed on all goods, the collection can go to Rs. 2500 billion. The extra generation of Rs. 1500 billion under this head is possible, along with ending all sorts of malpractices.
- The loss in Federal Excise Duty (FED) due to the illicit and smuggled cigarette sector alone is Rs. 300 billion a year. It can be plugged by the trace (T&T) system and other tools [see detailed study by Huzaima & Ikram, Revenue Losses and illicit tobacco trade, 2020].
As evident from above, the revenue generation of not less than Rs. 36 trillion is possible in fiscal year 2024-25 at the national level, if remedial measures and additional initiatives, as suggested above, are taken. In the next article, a paradigm shift in the outdated and anti-business tax policy and revamping of the crumbling tax system will be discussed in some detail, highlighting why millions paying advance adjustable income tax do not file tax returns due to cumbersome and complicated processes and fear of harassment.