“A fairer balance of fiscal effort between the Federal and Provincial governments, which have agreed to rebalance spending activities in line with the 18th constitutional amendment through the signature of a National Fiscal Pact that devolves to provincial governments higher spending for education, health, social protection, and regional public infrastructure investment, enabling improved public service provision. At the same time, the provinces will take steps to increase their own tax-collection efforts, including sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonising their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025”— IMF’s Press release No. 24/273, July 12, 2024
This year, the process of seeking tax proposals from various stakeholders for the forthcoming federal budget for fiscal year (FY) 2025-26, by the Ministry of Finance (MoF) and Federal Board of Revenue (FBR) was initiated as early as in January 2025. It is reported that by now all the major players have filed their proposals either for FY 2025-26 or multiple coming years!
Every year before the announcement of the annual federal budget—which has become an official ritual—a plethora of tax proposals are received by FBR from trade and professional bodies, tax bars, and industry representatives, but in the end, the dictates of International Monetary Funds (IMF) prevails as beggars cannot be the choosers!
For the last many years, FBR itself has been soliciting budget proposals by placing detailed guidelines on its website. However, each year the Finance Bill proves to be a hopeless document—containing meaningless amendments in tax codes, imposing more and more burden on the existing taxpayers—especially through cumbersome withholding of taxes—with no policy shift to promote business, facilitate existing taxpayers and bring the untaxed sectors/persons in the tax net.
This series will present some evocative changes in our tax system that can boost business, in particular exports, to ensure accelerated economic growth leading to enhanced taxes for the government to overcome fiscal deficit and imbalances on external accounts.
Taxation in Pakistan is oppressive, lopsided, and counterproductive—there is only 2% of corporatisation of total business. By heavily taxing the corporate sector vis-à-vis firms and associations of persons, FBR has been encouraging the undocumented sector. We have about 250,000 companies registered with the Securities & Exchange Commission of Pakistan (SECP), out of which return filers and payers of some taxes are less than 70,000.
The annual addition in the corporate sector is less than 40,000, whereas in countries like Malaysia and Turkey having much smaller populations than Pakistan, the number is much higher with impressive annual growth. If we want to move from an undocumented economy to a transparent corporatised sector to achieve rapid growth, the government must reduce corporate rates to 20%.
The priority of our economic managers has been trying to achieve revenue targets, fixed single-mindedly every year in utter disregard of how the economy is actually behaving or at the dictate of IMF
Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan, the ill-directed, illogical, regressive, and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry, especially since we have started submitting completely before the dictates of the foreign donors. Had the successive governments concentrated on economic growth and industrial expansion, there would have been a consequential substantial rise in taxes.
It is impossible to enhance revenues with stagnation in the economy, and over-taxing such an economy, as has been done in Pakistan—it has in fact destroyed our tax system as well. The priority of our economic managers has been trying to achieve revenue targets, fixed single-mindedly every year in utter disregard of how the economy is actually behaving or at the dictate of IMF. This is the main malady of our tax system.
By fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, Pakistan has been forced into a quandary, where it can neither afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle, which has ensnared our policymakers.
We will have to find ways and means to come out of this tangle to make Pakistan an economically viable and secure place, which can attract investors. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, investors would never come forward.
FBR, the apex administrative revenue authority, has been single-handedly destroying Pakistan’s trade and industry by resorting to discretionary powers [Statutory Regulator Orders (SROs)], withholding undisputed refunds payable to the taxpayers, making excessive tax demands and recovering the same by freezing the account even before the order by Tax Tribunal, resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets.
Such actions of the tax machinery are detrimental for business and industry and resultantly, FBR not only has failed to tap the real revenue potential but has remained unsuccessful in meeting even many times revised targets for the last many years. Besides, there is a perpetual increase in our fiscal deficit and debt burden.
Income Tax Law makes no distinction between legal and illegal income. It taxes all kinds of incomes irrespective of their source. Where taxpayers/citizens fail to explain the source of any asset acquired or expenditure incurred, the entire amount is treated as income from an unexplained source. FBR, instead of tracing back from assets and expenses, all such untaxed (unexplained) sources and taxing them, wants to stop people from earning income! It should rather promote earnings and tax any undeclared, under-declared, or unexplained assets and expenditures. It can be done with automation—Tax Intelligence System!
We, as a nation must concentrate on increasing our productivity, efficiency, and economic growth, which alone can ensure more revenues for the State
The existing income tax law, badly drafted and inconsistent, treats many withholding taxes as minimum or final taxes, which are in substance transactional or consumption taxes. Under the Income Tax Ordinance, of 2001, we are not only taxing real incomes but also expenditures, investments, and consumptions—in fact mainly non-income items. We need to correct these distortions in the coming budget if we really want to create a just and vibrant society—without justice, no society can flourish.
Let us tax all individuals at a 10% flat rate of income tax and ask them to file returns at this rate for any previous year(s) for any undeclared and unexplained incomes, assets, and expenses, and incorporate the same in their wealth statement (s). Before determining a fair rate of income taxation, we need to debate who is really bearing the incidence of income tax at the moment when 60% of income tax collection is through withholdings, and the majority of these are on items that do not represent “income”!
There cannot be two opinions about the complete shifting of our economic priorities. We, as a nation must concentrate on increasing our productivity, efficiency, and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is the existence of inefficient, corrupt, repressive, and criminal governments/institutions, which do not give a damn about the welfare of the common people.
Successive governments’ onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan’s undeniable geo-strategic and business-competitive position in the region. There is an urgent need to make necessary and tough decisions to make Pakistan a respectable place to live, work, and invest.
Our political elite in power through FBR has been extending concessions, immunities, and amnesties to dishonest non-compliant people engaged in trade, business, and industry and thriving on rent-seeking
We are, therefore, not proposing cosmetic changes in the Income Tax Ordinance 2001, Sales Tax Act 1990, Federal Excise Act, 2005, and the Customs Act, 1969. On the contrary, we are concentrating on key areas where paradigm shifts are needed at the structural and operation levels to ensure not only more tax revenue for the State but also business growth, social equity, and fairness so that honest taxpayers are not disillusioned.
Historically, our political elite in power through FBR has been extending concessions, immunities, and amnesties to dishonest non-compliant people engaged in trade, business, and industry and thriving on rent-seeking.
The unholy alliance between dishonest tax collectors and unscrupulous businesspersons must end. The honest taxpayers must be respected, protected, and rewarded. We need to take the following initiatives for this and create a tax culture leading towards voluntary compliance.
TAXPAYERS’ BILL OF RIGHTS
The Government, before imposing any new obligations on the taxpayers, must restore the confidence of taxpayers by immediately promulgating a Taxpayers’ Bill of Rights, as was done by a number of countries including the USA and the UK in the 1980s.
- The provisions of the Bill must:
- Safeguard and strengthen the rights of taxpayers.
- Ensure equality of treatment
- Guarantee the privacy and confidentiality of their declarations
- Provide the right to assistance by the State in tax matters
- Guarantee the unfettered right of appeal through an independent appellate system and alternate fast-track administrative dispute resolution system.
ASSIGNMENT OF TAX
Assignment of a tax means the transfer of taxation power from a higher level to a lower level of government. Taxation power includes: the right to levy tax, collect tax, and appropriate proceeds from the tax. Thus, there can be three interpretations of the assignment of a tax. Firstly, higher-level governments may levy and collect a tax but hand over the entire proceeds to lower-level governments. Secondly, the higher-level government may levy a tax but allow the lower-level governments to collect it and retain fully the proceeds therefrom.
Finally, the higher-level government may transfer a tax to lower-level governments, a situation which defines the assignment of a tax in its strictest sense. All provincial governments are violating the command of Article 140A of the Constitution of the Islamic Republic [“Constitution”] and not devolving political, administrative, and fiscal powers to elected local governments.
In the Pakistani scenario, the exact opposite has happened. The levy of presumptive/minimum taxation by the federal government and no powers to elected local governments to levy taxes and raise funds for providing education and health at the grassroots level have denied the fundamental rights of the people. The provinces enjoy exclusive rights under the Constitution to levy taxes on services within their respective physical boundaries.
The federation blatantly encroaches upon their undisputed right by levying tax on services on a presumptive/minimum basis—this is in substance indirect tax—under various sections of the Income Tax Ordinance, 2001. Such taxes are not taxes on income, which the federal government is empowered to levy under entry 47, Part I, Federal List, Fourth Schedule to the Constitution.
Generally, the purpose of tax assignment is to augment the resources of lower-level governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower-level government to levy the tax assigned to it. Not only this, the lower level government may not have the power to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing the tax rates within a minimum and maximum range prescribed by the higher-level government.
There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal and taxing powers among federations, provinces, and local governments. True provincial autonomy can only be guaranteed if the assignment of tax principles is followed in letter and spirit.
The establishment of local governments with assigning powers mentioned in Article 140A is a constitutional obligation. It is the duty of the Election Commission of Pakistan to hold elections for local governments which it has failed to perform. All four provinces and the federal government have also failed to fulfill the command of Article 140A in letter and spirit even after a lapse of 14 years since the commencement of the Eighteenth Constitutional (Amendment) Act, 2010 [18th Amendment] on April 19, 2010. Let the provinces have exclusive rights over their resources and finances and they must transfer taxes to local governments so that grassroots democracy and funds for public services can be utilised and guaranteed.