Road to prosperity

A fair and just tax system is at the core of social democracy. Funds contributed by taxpayers should be expended for meeting state expenses and providing social justice to all citizens.

This perspective is totally missing in our political milieu. None of the political parties—including the three leading players, namely, Pakistan Tehreek-e-Insaf, Pakistan Muslim League Nawaz and Pakistan Peoples Party – has ever made it part of their election manifesto.

In this last part, a roadmap for a new tax system that can help in achieving the much-desired goal of self-sustainability is presented for debate by all political parties. After public consensus, it may be adopted as common agenda for introducing fair taxation and extending social security to all citizens.

Recent months witnessed the closure of large industries and stagflation. Besides sleaze and incompetence of multiple federal and provincial revenue authorities, inconsistent tax policies have forced the business community to search for safer havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to invest in the tremendous Pakistani talent that goes to waste for lack of proper funding.

The most visible factor discouraging voluntary tax compliance is the extremely complicated and cumbersome nature of laws, rules, procedure etc. and attitude of the staff. Even the corporate and educated class finds it difficult to comprehend, follow and observe simultaneously applicable innumerable tax obligations, what to talk of the common folk on the street.

Economic challenges faced by us are multiple and grim – we are trapped in a deadly debt trap, but there is no will on the part of rulers to come out of it by tapping the real tax potential and stopping wasteful and unproductive expenses. Our total national debt is now over Rs60 trillion, total revenues about Rs8 trillion and expenses Rs13 trillion, due to sheer callousness of successive rulers, who have been borrowing recklessly to pay earlier debts for bridging fiscal gap – debt servicing this year will exceed Rs5 trillion and fiscal deficit over Rs6 trillion.

We also face the herculean task of providing over two million jobs annually to young people alone for which, the economy needs to grow eight per cent to 10 per cent annually for a decade, requiring an investment of 20 per cent of the GDP. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, who are our greatest asset – imparting education and skills to them and creating matching jobs is today’s need. This can be met successfully by assignment of taxes for productive investment and employment generation.

The prevalent pessimism is due to the apathy of the rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on harping about symptoms of an ailing economy but never try to cure the real causes of illness.

Devising an efficient tax model for rapid economic growth requires an analytical study of all irritants prevailing in the tax codes, procedures and implementation processes. The main irritant is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses – both at the federal and provincial levels. We need public debate for suggesting solutions to remedy the situation and promote taxation and business growth attracting domestic and foreign investment and ensuring much-needed jobs.

At present, both the centre and provinces are not collecting taxes as per potential due to weak enforcement and inherent problems of an outdated tax system. Our national tax potential is not less than Rs16 trillion, if agricultural income tax, provincial and local taxes are also collected efficiently.

Income tax collection alone can be Rs7 trillion provided all exemptions are withdrawn and the entire undocumented economy is brought into the tax net. Customs and federal excise have potential of over Rs2 trillion. Harmonized sales tax (HST) at 10 per cent has a potential of Rs6 trillion, provided all kinds of taxes on goods and services, presently levied through federal and provincial assemblies, are merged with complete assurance to the masses that they will be free from any kind of harassment; and money collected would be spent towards their welfare.

The existing tax system encourages parallel economy, the reform of which is a fallacy. Patchwork here and there is just an exercise in futility – no matter how many tax reform commissions or committees are constituted the results will be the same.

The solution lays in dismantling the existing oppressive tax system and shifting to low-rate, simple and just taxation, which is growth-oriented, workable and acceptable to all stakeholders. A fair tax model needs public debate. Under this model those not filing returns or avoiding true disclosures will opt to pay voluntarily. Tax rate for individuals will be 10 per cent or 2.5 per cent of net wealth, whichever is higher, and companies/firms only 20 per cent. The cost of compliance under this model is minimal but penalty for non-compliance is extremely high.

The tax system should be meant to incentivise growth, not to stifle it as the prevalent one is doing. There should be some tangible benefits for citizens to comply voluntarily and eagerly contribute towards the national exchequer. Whenever governments resort to highhandedness in collecting taxes, instrumental in encouraging tax evasion, the people term it as robbery in broad daylight. The tax system that will work smoothly for Pakistan, keeping in view our peculiar socio-economic circumstances and mindset of the masses, must be simple, fair and predictable with minimal compliance hassles.

This simple tax model will induce voluntary compliance provided all citizens are aware that competent and effective tax machinery exists having a tax intelligence system that can easily detect tax avoidance. Without this deterrence, even the simplified tax model will be unworkable. Enforcement with zero tolerance for defiance is the key to ensure success of any tax system. The agenda of fair taxation cannot succeed if wastage of public funds and its abuse by rulers continue unabated. The quid pro quo for paying taxes is as important as the system to collect tax.

All taxes at the federal, provincial and local levels should be collected through a National Tax Authority (NTA) and all existing authorities should merge in it. The mode and working of the NTA can be discussed and finalised under the Council of Common Interest [Article 153 of the Constitution] and its control can be placed under the National Economic Council [Article 156 of the Constitution].

Despite levying all kinds of oppressive taxes, the federal government has failed to bridge the ever-increasing fiscal deficit, creating monstrous debt burden. Since the share of every province in federal taxes under the National Finance Commission is dependent on how efficiently taxes are collected by the Federal Board of Revenue, it is important that federation and federating units actively participate in the tax collection apparatus, processes and efforts. No serious debate has ever been initiated on the issue as to how we should increase the cake’s size to ensure that both the centre and provinces flourish, as sufficient funds are made available to run the governments and fulfill people’s basic needs/fundamental rights.

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