“The impact of economic growth on the lives of people is partly a matter of income distribution, but it also depends greatly on the use that is made of the public revenue generated by economic expansion”—An uncertain glory-‐India and its contradictions by Jean Dreze and Amartya Sen
“Prime Minister Anwaarul Haq Kakar has not approved the restructuring plan of the Federal Board of Revenue (FBR) due to constitutional issues in setting up a National Tax Authority (NTA) and confusion over the mandate of the newly proposed structure”—PM halts FBR restructuring plan by Shahbaz Rana
“FBR reforms on track: PM
Prime Minister Anwaarul Haq Kakar on Tuesday said that the reform agenda of the FBR was on the track and the government was committed to build the capacity of the institution and to bring about all the necessary changes that would make FBR a more efficient in terms of revenue collection and service deliver”—Press release on the website of FBR
The achievement of the cherished goal of self-reliance is not possible with the existing outdated, oppressive and unjust tax policy and outdated tax machinery coupled with unproductive expenditure, burgeoning debt burden and massive debt servicing. It is high time to make a paradigm shift in prevalent tax policy.
Our revenue potential at federal level alone is not less than Rs. 16 trillion provided the tax base is broadened, pro-growth, equitable and rational policies are devised with the backing of stakeholders, tax machinery is completely overhauled and all exemptions and concessions available to the privileged sections of society are withdrawn. If we succeed in tapping optimum tax potential, there will be no need for any internal or external borrowing. Implementation of a rational tax policy can convert our current fiscal deficit into surplus within a short span of time for which we need inclusive and sustainable growth of over six percent.
A rational National Tax Policy is essential to increase government revenues and to improve citizens’ lives. When taxes are fair and government spending prioritizes essential public services, growth becomes a reality resulting in reduction of both poverty and inequality. This was emphasised in a paper titled, Fair Taxation for Poverty Reduction & Equality. The above paper can be treated as “proposals” that the Federal Board of Revenue (FBR) seeks before annual budgets. Since nothing has changed since 2015, it can be good food for thought for the Revenuecracy for the budget 2024-25, to be formulated under a new elected government.
Tax policy reforms have never been on the agenda of any political parties since 2008. The PDM came to power just to save the skin of its top leadership from the National Accountability Bureau (NAB), which is again being used by those who matter in the land for eliminating “undesirable” political figures or for forcing them to change camps or for the time being saying goodbye to constituency politics.
The Tehreek-e-Insaf (PTI) that had coalition governments in the centre and in three provinces during its tenure in office from August 18, 2018 to April 9, 2022, could not even start a meaningful country-wide debate on devising a pro-growth National Tax Policy - what to speak of presenting its blueprint that it claimed during election campaign was ready and awaiting implementation. Position of the alliance government of Pakistan Democratic Movement (PDM) was equally pathetic. It was more concerned with eliminating PTI and its head than holding elections.
Tax policy reforms have never been on the agenda of any political parties since 2008. The PDM came to power just to save the skin of its top leadership from the National Accountability Bureau (NAB), which is again being used by those who matter in the land for eliminating “undesirable” political figures or for forcing them to change camps or for the time being saying goodbye to constituency politics.
It is an incontrovertible fact that onerous tax policies of successive governments, military and civilian alike, have widened the rich-poor gap. In the wake of Covid-19 endemic and even before, millions were pushed below the poverty line, courtesy anti-growth and pro-rich policies. The State, as defined in Article 7 of the Constitution of Islamic Republic of Pakistan, must act quickly for a paradigm shift is all spheres of governance—both at structural and operational level.
As regards taxation for ensuring substantial revenues as well as social equity and economic expansion, many road maps are available.
Our Main Dilemma
High taxes and lower yields have resulted into lack of funds for industrial and business growth and public benefits, but colossal unaccounted/untaxed cash is circulating in the economy in search of further “undercover” gains. Our political culture supports rent seeking and racketeering. Tragically, this social evil is doubly compounded as it necessitates greater and greater tax burden on law-abiders. The most crucial problem faced by Pakistan is devising measures to curb tax evasion and distributing the burden of taxes fairly and justly—the rich enjoying tax exemptions and amnesties. Honest taxpayers are disillusioned by the fact that elites not only get amnesties for concealed assets but also abuse taxpayers’ money for unprecedented luxuries. For a meaningful change, the federal and provincial governments should abolish all regressive taxes forthwith and concentrate mainly on growth. Tax amnesty schemes must be dispensed with once and for all and unexplained assets must be confiscated by the State for the benefit of the poor.
The existing tax system as a whole—at national and provincial levels—is highly unjust. It protects those having monopoly over economic resources. There is no political will to tax the privileged classes.
Fundamentals Of Tax Policy
There is a national consensus that existing tax policy needs to be reformulated providing an equitable, pragmatic, investment-oriented tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from implementation perspective. Past efforts to reform the tax system, through foreign loans/grants, have not yielded desirable results. The bureaucratic, closed-door meetings and lack of any meaningful dialogue with stakeholders and tax experts is the root-cause of failure for a research-based, pragmatic tax policy—foreign-funded tax reforms will never succeed. The Executive should have no power to issue Statutory Regulatory Orders (SROs) in blatant violation of Article 77 read with Article 162 of the Constitution.
Equity Principle
The existing tax system as a whole—at national and provincial levels—is highly unjust. It protects those having monopoly over economic resources. There is no political will to tax the privileged classes. The poor are paying exorbitant sales tax and even advance income tax. On the contrary, the mighty get tax waivers and concessions. The predatory segments even indulge in benami (name-lender) transactions and invest heavily in real estate through front men to whiten proceeds of crime. This culture must end. Transparency should be in all areas. At the same time, tax rates should be brought down to promote industralisation and growth of small and medium enterprises (SMEs).
Successive governments have failed to convince the people for voluntary payment of taxes on their real incomes.
Benefit Principle
Successive governments have failed to convince the people for voluntary payment of taxes on their real incomes. Since rulers indulging in wasteful expenditure have never bothered to live within their means, failed to protect the life and property of the people and provide them basic needs like health, education and civic amenities, massive tax non-compliance has become a rule and not an exception. Things will never improve unless citizens are convinced by actions and not mere words by rulers that taxes are meant for public welfare, not for the luxuries of rulers and state functionaries.
The government should launch programs, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include free medical and educational facilities, low-cost housing, and drinking water, uplifting of rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of their taxes, there will be better tax compliance.
Our tragedy is that even after numerous oppressive and high-rate taxes fiscal gap is increasing every year, bringing more miseries for the common people of Pakistan. Taxation is a potent instrument to shape and influence the socio-economic polices of a country. It is, therefore, imperative for us to formulate a rational tax policy beneficial for all and not by following blindly, prescriptions given by lenders/donors. Its main features are available in above mentioned books.
The federal and provincial governments in the coming budgets after general elections on February 2024 must bring fundamental structural and operational changes and not mere amendments here and there in tax codes that instead of serving some useful purpose, further complicate matters. The federal government must work for National Tax Policy & Administration Reforms, elaborated in these columns, taking provinces and all stakeholders on board for achieving rapid industrial and economic growth that will automatically take care of revenue mobilisation without putting any undue burden on the masses.