Reciprocity of taxes

The people of Pakistan, especially with low and fixed incomes, have once again been burdened with exorbitant indirect taxes through the mini-budget presented before the parliament on February 15, 2023. These taxes come amidst hyperinflation and rising unemployment. The mini-budget presented by the PDM government is part of the preconditions imposed for finalization of the delayed 9th International Monetary Fund (IMF) review.

It is highly lamentable that at a time when economically marginalized segments of society are facing extreme hardships and finding it even difficult to make both ends meet, the Federal Board of Revenue (FBR), through a notification, raised the rate of sales tax from 17 per cent to 18 per cent. It is in utter violation of the dictum laid down by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) that taxation through executive orders is unconstitutional in view of Article 77, read with Article 162 of the constitution.

The country is surviving on bailouts from the IMF owing to the ruling elites’ perpetual failure. They pay negligible taxes and squander billions on wasteful expenditures. Our successive governments – civil and military alike – have failed to acknowledge the principle of reciprocity of taxes – how to provide citizens with better facilities of education, health, housing, transport, clean drinking water, and sewerage etc. in return for taxes collected from them.

People say that paying taxes is unjustified when the state is indifferent and elites openly show apathy towards their fundamental needs. No less than 25 million children are out of school in Pakistan in violation of Article 25A of the constitution — see the SC’s detailed judgment on a petition regarding miserable conditions of schools. The rich and mighty, with the help of crafty tax advisers, easily avoid taxes by exploiting weak enforcement and lacunas in laws. Admittedly, non-reporting and under-reporting of incomes and evasion of sales tax/customs/federal excise duty is rampant in Pakistan, but it must be seen in the context of giving unprecedented tax concessions, immunities and amnesties by successive governments, military and civilian alike.

The governments never bother to crack down on untaxed money. On the contrary, the ruling elites have been appeasing tax cheats by extending generous tax amnesties and whitening schemes from time to time. All political parties must ponder over this before reforming the tax system, which for them and donors merely means more taxes! If we manage to bring even five million ultra-rich people into the tax net, forcing them to pay 10 per cent tax on their colossal incomes, impose eight per cent sales tax across the board, there will be no fiscal deficit. Simultaneously, we must bring much-needed reforms in civil services, tackle tax evasion through asset-seizure legislation and counter rampant corruption in the public sector by not throwing some officials out of job but making the system workable – the staff should be paid justly with strong accountability.

The government officials should get composite pay package, based on market wages, as is the case in private sector, where officials arrange their own residences and conveyance. They must live among the masses and not in fortified areas. Their alienation from the common people, whom they are supposed to serve, and the quest to preserve elitist structures are the root causes of the citizens’ dissatisfaction with the system. Pakistan is capable of substantially reducing, or even eliminating, its fiscal deficit and debt burden in a couple of years, provided that a comprehensive and well-designed work plan based on a multi-dimensional strategy is prepared and implemented for resource mobilisation and debt retirement, coupled with ending all tax-free benefits to militro-judicial-civil complex by monetizing the same. The huge and expensive properties occupied by them should be converted into income-yielding assets by leasing them out through public auction.

Our system extends extraordinary tax-free perquisites/benefits to the powerful segments of society, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are being pushed to become what Frantz Fanon called ‘The Wretched of the Earth’, courtesy pro-rich policies leading to accumulation of wealth in a few hands. Pakistan’s dilemma is cronyism, greed and corruption on the part of predatory elites. They are parasites and not growth catalysts or innovators. By improving compliance and broadening tax base, it is not at all difficult to raise revenues of Rs16 trillion, construct dams, improve infrastructure as well as provide social services to the needy from this pool.

For collecting Rs16 trillion, we need to restructure the existing tax machinery, withdraw concessions/immunities and crackdown on tax evaders and plunderers of national wealth. The biggest challenge before any government is to dismantle the elitist structures that fleece the poor only to benefit the rich. The culture of VIPs, plots, perks and benefits needs to end, along with all waivers, concessions, exemptions, amnesties and immunities for the rich and mighty. For optimizing revenues, we need one autonomous and efficient tax agency, insulated from external pressures. The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts in the field and implement it after securing consensus in the parliament. This alone can help in raising the much-needed revenues of at least Rs12 trillion at the federal, and Rs4 trillion at the provincial levels.

Two measures alone can generate extra revenue of Rs800 billion at the federal level in the next four months. First, excess profit tax of 30 per cent on sectors having windfall gains would generate extra tax of Rs500 billion. All people with an income exceeding Rs150 million should also be asked to pay 10 per cent extra surcharge for helping the poor. It can generate Rs200 billion. Second, one-time de-logging litigation scheme. The taxpayers should be incentivised to pay 30 per cent tax arrears between March 1, 2023 to June 30, 2023 with pending cases before appellate authorities and demands deemed to be settled.

In 1998, India through a similar scheme (Kar Vivad Samadhan) generated a revenue of over Rs900 billion, while disposing huge backlog of cases. Such a scheme with time limitation up to June 30, 2023 will not only generate enormous revenues – no less than Rs100 billion – but would also help in reducing workload of tribunals and high courts.

The above two measures alone can bring extra funds of Rs800 billion that the federal government urgently requires to keep fiscal deficit within safe limits. These measures will not burden the common people, as incidence of tax would not fall on them. The enhancement of sales tax, as done by the government, becomes beneficial for those not registered with the FBR – they collect it from people but do not deposit the same in the government treasury. The federal government should stop looking for more indirect taxes, borrowed money and take immediate steps for resource mobilisation to overcome fiscal deficit, which is the mother of all ills.

The writer, Advocate Supreme Court, is Adjunct Faculty at LUMS and member Advisory Board of PIDE