The biggest challenge on tax the mobilization front faced by Federal Board of Revenue (FBR) is bridging the monstrous tax gap through automation and introduction of tax intelligence system and not levying more taxes or enhancing the rates of the existing ones. — Rationalising tax system, Business Recorder, July 19, 2020.
“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 [(1997) 76 TAX 5 (SC Pak) PLD 1997 Supreme Court 582].
The Budget 2024 for fiscal year 2024-25 is in the making - amidst difficult times, when we are faced with the twin challenges of fiscal consolidation and economic revival. It should be abundantly clear that mitigating extreme financial hardships faced by lower income segments of society needs to be given the top most priority. The traditional approach adopted for decades in Pakistan for balancing the books, levying more taxes, containing fiscal deficit and other number games will have to be reconsidered in totality under the prevalent exceptional circumstances, when we are seeking yet another bailout from the International Monetary Fund (IMF).
In this series, some concrete measures will be presented to simplify taxes for rapid and sustainable high growth, leading to better revenue collection without hampering the already troubled and sluggish economy.
Complex tax codes, complicated procedures, a reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are main reasons for low tax collection.
Unfortunately, nobody is talking about raising revenues by adopting some out-of-box measures. Somebody needs to tell the Prime Minister and Finance Minister that the iniquitous prescription of erratic and oppressive taxes in the forthcoming federal budget will not solve our problems, especially in the prevalent circumstances.
The federal and provincial governments need to generate and spend more money for 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, governments need to reduce wasteful expenditure, right-size the monstrous size of their machinery, monetize all the perquisites of bureaucracy and make taxes simple and low-rate.
State lands, lying unproductive owned by the federation and provinces, should be leased out for industrial, business and commercial ventures. It will generate substantial funds, revenue - through public auction, 10% as full and final tax can be collected amounting to billions - and facilitate rapid economic growth.
Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society.
The World Bank in its report, Pakistan Revenue Mobilisation Project, has 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).”
The World Bank, before mentioning the tax gap, has not done proper research or study on oppressive taxation and fragmented structures at federal and provincial levels that are the main cause of our fiscal problems. In this series, the fundamental issues will be highlighted along with solutions.
Federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the country’s tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, a reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are main reasons for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer.
Those having taxable income should be facilitated to file simple and easy one-page tax return made available both in English and Urdu.
The following measures and steps are necessary to broaden the tax base, simplify taxation and create a reliable national socioeconomic registry. All adult individuals, whether earning income or not, on the basis of their Computerized National Identity Card (CNIC) used for getting mobile connectivity should be registered by the Federal Board of Revenue (FBR) compulsorily by amending the law and then asked to update their profile. Both English and Urdu interfaces should be available on the FBR website.
Those having taxable income should be facilitated to file simple and easy one-page tax return made available both in English and Urdu. It will help in documentation of all households and their earning levels at national level by matching family-tree data available with NADRA. Individuals earning below the taxable limit should be paid income support, or negative tax, till the time the State provides them employment and not keep them beggars for life.
According to latest data available on the website of Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers on March 31, 2024 was 192 million (a 79.63% teledensity), 132 million mobile broadband subscribers (54.70% mobile broadband penetration), 3 million basic telephony users (1.07% teledensity) and 135 million broadband subscribers (56.13% broadband penetration).
At present, the entire taxable population and even those having no income or income below taxable limit are paying advance adjustable income tax of 15% at source as mobile users. From this it is not difficult to establish income taxable base and then through automation send them even prepaid return.
As suggested above, if FBR registers all the unique 125 million mobile users, we can achieve the collection of Rs. 20 trillion (income tax Rs. 11 trillion and sales tax Rs. 9 trillion). FBR will have to take the following steps.
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 have focused on curing symptoms rather than addressing underlying causes.
After compulsorily registration of all unique 125 million mobile users, send them text message giving username and password to upload (in the case of non-filers) or update profile (on the basis of filers) on FBR’s website answering just four questions: whether they are a dependent or head of family. If an individual is the head of family, they should mention number of dependents, whether they are self-employed or a salaried person - salaried persons should be made to write the name and address of their employer. Self-employed individuals should mention the nature of their businesses or profession and address, or addresses if multiple places are used, where business is conducted and profession is exercised. Everyone should be made to report their annual net income from all sources and gross receipts. Those not registered as voters will be entered in the voters’ list through the help of Election Commission of Pakistan to become voters.
In a case study, a roadmap for radical revamping and restructuring of the entire tax system, suggesting broad, lower-rate taxes and collection through automation is highlighted. Tax reforms undertaken to date, have mainly been patchwork, and 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 have focused on curing symptoms rather than addressing underlying causes.
The reforms, including the World Bank-funded six-year-long Tax Administration Reforms Project (TARP), miserably failed to motivate people towards voluntary tax compliance. The number of tax filers, excluding those filing income below taxable limit of paying negligible amount to become part of Active Taxpayers List to avoid higher incidence of withholding taxes, is still extremely low due to complex and cumbersome procedures, even filing of e-return is not possible by the well-educated class, what to speak of small and medium enterprises (SMEs) and individuals doing business at a small level. The number of sales tax registered persons and those actually paying any substantial amount is even more pathetic, at less than 50,000.
In 2020, the Federal Government obtained a loan of US$400 million for the Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of Pakistan Raises Revenue (PRR) Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million.
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.
Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US$304 million from the World Bank for tax reforms, and it was approved by Planning Commission on September 16, 2020. Like earlier programs, these are also bound to fail as most major stakeholders are not taken on board.
Our existing Income Tax Ordinance, 2001 extends extraordinary tax-free perks and perquisites to the powerful segments of society, in the form of amnesties, concessions and waivers. In the last two years, these have caused a tax loss of Rs. 6 trillion, that is grossly understated in official documents.
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 into 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 that benefits all members of society. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual. All these areas will be explained in the forthcoming parts of this series.