Each Province shall, by law, establish a local government system and devolve political, administrative and financial responsibility and authority to the elected representatives of the local governments—Article 140A(1) of the Constitution
The above constitutional command, inserted vide Constitution (Eighteenth Amendment) Act, 2010, has not been implemented even after 14 years having passed. Deprived of their right to self-governance, the poor are subjected to heavy and cruel federal taxation to finance the luxuries of the militro-judicial-civil complex and politicians in power—who enjoy free or concessional benefits, including expensive plots at prime locations. The way they waste and plunder taxpayer money is no secret; shamelessness is the most appropriate word to explain their conduct. No serious effort since independence has been made to reform our indomitable militro-judicial-civil apparatus that has miserably failed to deliver, yet the corrupt politicians and profit-hungry, unscrupulous businessmen feel honoured to act as their cronies and henchmen.
Due to the sheer apathy of our ruling elites, the country is now on the brink of economic collapse. The monstrous fiscal deficit and insufficient foreign reserves have been forcing the governments to unabated borrowing—externally and internally. In the seventh months of the current fiscal year, debt servicing costs alone were Rs. 4.66 trillion—it is going to hit historic high figure, exceeding the net income of federal government by billions. This is the time that experts in fiscal finance should play their role by suggesting pragmatic remedial measures to bring the country out of a chronic debt trap.
From 2003 to date, according to a conservative estimate, we have lost Rs. 3,000 to 5,000 billion worth of wealth tax that could have been imposed on unaccounted and untaxed wealth amassed by those already enjoying the privileges of a luxurious life, without paying a single penny as income tax due to unconstitutional amnesties.
Our tragedy is that while wasteful expenses have been burgeoning recklessly, revenues worth trillions of rupees were forgone since 1977 by successive governments—civil and military alike—extending unprecedented exemptions and concessions to the privileged classes. It has relegated the nation to permanent debt enslavement.
Some major revenue losses, incurred since 1977, are as follows. Successive military rulers have abolished all progressive taxes e.g. estate duty, gift tax, capital gains tax, excess profit tax etc. he historic decision of taxing “agricultural income”, passed by Federal Parliament in the shape of Finance Supplementary Act, 1977, was thwarted by the military regime of General Zia-ul-Haq. Through this law, Parliament amended the definition of “agricultural income” as obtaining in section 2(1) of then Income Tax Act, 1922 to tax big absentee landowners. This was a revolutionary step to impose tax on net agricultural income at federal level for the first time in the history of Pakistan, but foiled by a military dictator.
During Zia’s 11 years rule and that of General Musharraf for nearly 9 years, absentee land owners, including mighty generals who received state lands as rewards, awards or otherwise, did not pay a single penny as agricultural income tax or wealth tax.
The taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the Constitution of Islamic Republic of Pakistan, 1973. All four provinces have laws to this effect, but total collection in the fiscal year 2022-2033 was little over Rs. 2 billion, while richest one percent landowners have net income of around Rs. 3 trillion. Remember that the share of agriculture in GDP in fiscal year 2022-23 was 22.9%.
Tax losses for not taxing speculative transactions in real estate are to the extent of billions of rupees per annum.
There is meagre or close to non-taxation of capital gains—exemptions and reduced rates are meant for the rich and the mighty, and not the small investors who lose more money than what they make due to maneuverings of big players. All of this has been causing annual loss of billions of rupees to the national exchequer.
Tax losses for not taxing speculative transactions in real estate are to the extent of billions of rupees per annum. The definition of ‘business’ contained in section 2(10) of the Income Tax Ordinance, 2001 covers “adventure in the nature of trade.” Yet our tax machinery is sitting idle causing colossal loss to the national exchequer by not bringing “adventures in the nature of trade” in real estate into tax ambit. Our tax-to-GDP ratio can rise to 20%, if we tax speculative dealings in real estate. This would also help in promoting construction industry as prices of land would come down, and bring the shadow black economy into the tax net.
Multinational corporations (MNCs), through abusive transfer pricing mechanisms, deprive Pakistan every year of taxes of around Rs. 800 billion.
The Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demands 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 into substantial tax liability on annual basis. The repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite tremendous revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan.
In 2003, before its abolition, the wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemptions given to the rich absentee landowners were scrapped and its scope was enlarged. This became obvious immediately after its repeal when billions of rupees, estimated at US$ 60 billion, started pouring in from all over the world, remitted by all and sundry without any fear of being investigated, courtesy amnesties given under section 111(4) of the Income Tax Ordinance, 2001 and the Protection of Economic Reforms Act, 1992.
The influx of enormous untaxed wealth was directed towards stock exchanges and real estate market where the sharks continued to engulf the small investors through unholy maneuverings; or was used to artificially enhance the prices of property. With no wealth tax to pay, both these avenues helped to increase individual wealth, but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.
From 2003 to date, according to a conservative estimate, we have lost Rs. 3,000 to 5,000 billion worth of wealth tax that could have been imposed on unaccounted and untaxed wealth amassed by those already enjoying the privileges of a luxurious life, without paying a single penny as income tax due to unconstitutional amnesties.
Section 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they are permitted to whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in their accounts after paying a nominal premium of the entire proceeds! The loss caused due to this provision alone for the last twenty years is nearly Rs. 1,500 billion. In the last twenty years, revenue loss because of taxing gain from disposal of immovable property at a reduced rate is estimated at Rs. 2,000 billion.
The above are just a few areas showing how much tax loss we have been incurring perpetually since 1977. It confirms that Pakistan is ruled and controlled by predatory elites in whose hands power and wealth are concentrated. The ruling elites—comprising the indomitable military-civil complex, unscrupulous politicians, mighty religious party leaders, absentee landowners and greedy businessmen—are engaged in loot and plunder, rent-seeking and the expropriation of public property.
The total loss of revenue through Statutory Regulatory Orders (SROs) issued during the last few years alone is estimated at about Rs. 2,000 billion—unprecedented concessions to the rich made the state poorer and the masses indebted enormously. The State does not need any borrowing at all, if taxes are levied according to the established norms of democratic dispensation.
It is high time that civil society, social media, intellectuals and professionals start a nationwide campaign against oppressive, anti-people policies and work relentlessly for establishment of an egalitarian state.
The dire need in today’s Pakistan is to dismantle the culture of plots and perquisites to the ruling classes, boost growth, improve governance, crack down on the corrupt, stop wasteful, unproductive expenses, cut the size of federal and provincial cabinets and government machinery, make government-owned corporations profitable, accelerate industrialization, increase productivity and efficiency, improve agriculture sector, bring inflation down, reduce inequalities through a policy of redistribution of income and wealth and make the country a self-reliant economy.
Municipalities in Finland have wide-ranging powers. In accordance with the Local Government Act 1995, elected representatives perform the functions that they are assigned by virtue of their autonomy and those they are required to do by and under the law. Extensive functions that fall within the specific sphere of authority include education, health care and social welfare services. Furthermore, the municipalities are responsible for matters related to the residents’ free time, recreation, housing, and the management and maintenance of their living environment, i.e. roads, streets, water supply and sewerage, as well as land-use planning and functional municipal structures.
Finland has a well-functioning relationship between the State and the local authorities, as well as a state-subsidy system that ensures municipal resources and residents’ equal access to services. We can learn from this great innovation.
In a previous article, it was highlighted that “tax revenues play a critical role in municipal finances in Finland that are conspicuous by their absence in our model. The power to levy and collect taxes is one of the cornerstones of municipal self-governance. It ensures that the municipalities can manage the functions that they have undertaken to execute or which they are responsible for by law. The most important is municipal tax. In 2023, the municipal tax rates ranged between 4.36% and 10.86% in mainland Finland. The average municipal tax rate was 7.38%. Total collection in 2023 of municipal tax was €16 billion. Corporate income tax amounts to a little over €6 billion, and real estate tax raises almost €4 billion. This is more than Pakistan’s total tax collection by the Federal Board of Revenue (FBR) of Rs. 7.169 billion in fiscal year 2022-23!”
If a country of 5.5 million people (Finland) can achieve this level of taxation at the municipal level alone, we the nation of 243 million can do much more, but if there is a will. One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out.
Finland has a well-functioning relationship between the State and the local authorities, as well as a state-subsidy system that ensures municipal resources and residents’ equal access to services. We can learn from this great innovation. It can change the fate of the nation overnight. We have resources, but a system for self-governance, as in vogue in Finland and elsewhere in the world, is non-existent. Resultantly, power and economic resources are not with people of Pakistan, but in the hands of the privileged elites.
Economic equality, prosperity, peace and social tranquility can never be achieved unless we dismantle the outdated elitist colonial structures completely. We need fiscal and administrative decentralization where taxes are collected for education, health care and social welfare services through municipalities working on the principle of self-governance, and revenues are collected and utilized for the benefits of local residents.