“Taxes are important for other reasons that I will explain in this book. But the idea that taxes pay for what the government spends is pure fantasy…We can’t use deficits to solve problems if we continue to think of the deficit itself as a problem… Taxes are critically important, but there’s no reason to assume the government must raise taxes whenever it wants to invest in our economy…. Raising taxes when it’s not necessary can undermine fiscal stimulus, and raising the wrong kind of taxes can leave a nation vulnerable to accelerating inflation”—Stephanie Kelton in The Deficit Myth
Pakistan's fragmented tax administration and complex tax codes are one of the reasons for low collection, and sluggish economic growth in turn, due to the heavy cost of compliance. Citizens, especially, transprovincial entities, have to deal with multiple tax agencies, namely the Federal Board of Revenue (FBR), Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA), provincial boards of revenue, excise & taxation departments, and many others.
We need a restructuring of the FBR as a short-term reform measure, explained here, and in the medium-term, all tax agencies must merge into a National Tax Agency (NTA) as is the case in many federations like us.
Tax collection in Pakistan both at federal and provincial levels is highly unsatisfactory. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in national collection was hardly one percent since the last many years. It was highlighted in PIDE Reform Agenda for Accelerated and Sustained Growth. This has made provinces totally dependent on the federal government under 7th National Finance Commission (NFC) Award and other transfers and grants.
The performance of provinces in collecting agricultural income tax (AIT), which falls in their exclusive domain under the Constitution since its inception, is extremely pathetic. This is a common issue both at federal and provincial levels arising from the sheer absence of political will to collect income tax from the rich and mighty—the share of agriculture in the GDP is 19%, whereas contribution of AIT in national tax collection is only 0.06 % of GDP.
We need a restructuring of the FBR as a short-term reform measure, explained here, and in the medium-term, all tax agencies must merge into a National Tax Agency (NTA) as is the case in many federations like us.
It is worthwhile to mention that no AIT is levied in the Islamabad Capital Territory (ICT) till today by the National Assembly, though the subject falls under its exclusive jurisdiction under Article 142(c) of the Constitution. This issue has never been raised by any member of Parliament or a think tank, not even by the International Monetary Fund (IMF) which otherwise keeps on asking to raise more taxes and increase the burden of personal income tax on the already hard pressed middle-class salaried persons.
Pakistan has to move towards higher growth for which comprehensive tax reforms are inevitable. We must strive for 8% sustainable growth for a decade to achieve a desired tax-to-GDP and investment ratio of 20%. This is not possible unless we go for enactment of new income tax law, taxing all sources, including agriculture at a uniform rate, and harmonized sales tax (HST) on goods and services. This is possible under Article 144 of the Constitution. While, the collection will be through NTA, distribution is going to be strictly under Article 160 of the Constitution.
The NTA, fully automated, operated by professionals under All Pakistan Unified Tax Services, will be supervised by an independent Board of Directors. The status of the NTA should be as provided in Federal Board of Revenue Act, 2007 that after merger will be renamed as National Revenue Board (NRB).
The NRB, unlike FBR, should not have any role in framing tax policy and drafting of laws and rules. For this a permanent Tax Policy Board should be established in the light of Article 156(2) of the Constitution with Planning Commission to become a permanent secretariat for federalised economic development.
The role of Policy Board in this permanent secretariat should be of a think tank to recommend policies for equitable and accelerated growth on national level as well as helping all assemblies and Senate for legislation to achieve the desired goals. For example, a 2% cess exclusively for debt retirement, imposed on the ultra-rich.
Pakistan has to move towards higher growth for which comprehensive tax reforms are inevitable. We must strive for 8% sustainable growth for a decade to achieve a desired tax-to-GDP and investment ratio of 20%. This is not possible unless we go for enactment of new income tax law, taxing all sources, including agriculture at a uniform rate, and harmonized sales tax (HST) on goods and services.
Since the introduction of the 18th Amendment, fiscal management, both at federal and provincial levels, is posing serious challenges for all. The above roadmap can ensure inclusive development for all citizens, especially financially empowering women, see details in PIDE Reform Agenda for Accelerated and Sustained Growth. This pro-people model, strictly within a constitutional framework, is the only way forward, above party line as national economic manifesto to address the challenge of ever-growing needs of infrastructure development and providing citizens with the facilities of free education and health, and universal entitlements like clean drinking water, affordable electricity, transport, accommodation etc.
Pakistan needs a paradigm shift in tax policy and revamping of national tax administration for generating sufficient resources for the federal and provincial governments with drastic cuts in wasteful and unproductive expenses and bring innovation and efficiency in public and private sectors. It must be the top priority in Budget 2024-25 amid the economic slowdown to reduce the rate of all taxes, and broaden the base. It will help in bringing prices down and provide answer to what Prime Minister is seeking “out-of-box proposals to help the weaker sections of society.”
Through the democratic process, all the provincial parliaments may pass resolutions under Article 144 of the Constitution, giving powers to the National Assembly and Senate to enact laws for harmonising sales tax on goods and services and income tax from all sources to be collected through NRB. It would facilitate people to deal with a single body, one-window facility at national and provincial levels.
The mode and working of the NRB can be discussed and finalized under the Council of Common Interest [Article 153] and its control can be placed under the National Economic Council [Article 156]. Tax collection and compliance at national level cannot be improved without establishing NRB and introducing an integrated Tax Intelligence System (ITTS) that can correlate imports, exports, sales tax collection on goods and services, monitor all transactions and generate a prepared income tax return. A fully automated, professional and efficient NRB would alone be in a position to improve capacity by detecting tax avoidance and evasion through ITTS.
Tax reforms are meaningless without an effective tax administration and rational tax policy that can ultimately provide funds for social services to all citizens at grass root level as envisaged under Article 140A of the Constitution.
India, after long consultations and deliberations enacted the Central Goods and Services Tax Act, 2017 (CGST Act). The CGST Act, through harmonizing indirect tax on goods and services, has broadened the tax base. Voluntary compliance, due to a robust IT infrastructure, has increased registration by almost 90% (over 14 million active CGST Act registrations till April 2024). Collection showed substantial growth, from INR 7.7 trillion in fiscal year (FY) 2018 to INR 20 trillion in FY 2023. Due to the seamless transfer of input tax credit from one state to another in the chain of value addition, there is an in-built mechanism in the design of CGST Act that incentivizes tax compliance by businesses. IMF has now given a choice to follow either Australia or India for HST.
It is, thus, obvious that introduction of HST on goods and services in Pakistan will foster a vibrant market and contribute significantly to the growth of economy. Pakistan needs to move fast towards harmonizing taxes and collection through NRB. In India, this is under the Goods and Service Tax Council. It will not only reduce the cost of collection of taxes but help in creating a centralized data bank for efficient collection of taxes and counter avoidance and evasion. Before establishing NRB as an efficient and integrated tax administration, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with growth-oriented tax policy.
Tax reforms are meaningless without an effective tax administration and rational tax policy that can ultimately provide funds for social services to all citizens at grass root level as envisaged under Article 140A of the Constitution. As a long-term reform measure, we must concentrate on devolution of political, administrative, financial responsibility and authority to the elected representatives of the local governments, after training candidates (preferably fresh graduates) with millions near home getting jobs for secretarial support, achieving the national target for employment.