Dr Ikramul Haq

Roadmap to prosperity

The Federal Board of Revenue (FBR) and provincial tax agencies’ pathetic performance in bridging the huge tax gap and wasteful expenses on the part of the federal and provincial governments are badly affecting the fiscal scene. On the one hand, the federal government is in a debt trap, and on the other, provinces – heavily dependent on transfers under National Finance Commission Award – are getting less than budgeted amounts. Provinces have also miserably failed to collect due agricultural income tax from rich absentee landlords.

In the first five months of the current fiscal year, according to a press report, “The cumulative spending on debt servicing and defence remained at Rs2.2 trillion, equivalent to 107 per cent of the federal government’s net income. The net income of the federal government was Rs2.04 trillion, after paying the provinces their shares under the National Finance Commission Award”. This confirms the real dilemma faced by the federation, highlighted in my last week’s column ‘New year challenges’ published in this paper on December 25, 2022.

As usual, the FBR is facing a shortfall in its half-yearly target of Rs3.65 trillion by at least Rs250 billion as per media reports. The bulk of taxes collected by the FBR are from withholding taxes. According to a report: “Of Rs1.1 trillion that the FBR collected, on account of income tax during the July-November period, Rs734 billion were collected by those who are not employees of the FBR. The amount paid as advance income tax by taxpayers is over and above this collection”. The International Monetary Fund (IMF) in its Country Report No. 19/380 also revealed that, “more than 40 per cent of total tax revenue in Pakistan is collected at the import stage”.

Many writers and institutes, like the Pakistan Institute of Development Economics (PIDE), have been highlighting the vices of oppressive and narrow-base taxation in various research papers. Viable solutions have also been offered to make it fair and broad-based, but the FBR has never paid any heed.

The following need consideration on a macro level. Corporate tax rate should not be more than 20 per cent, including super tax etc.; income tax rate should be lowered to maximum 10 per cent with alternate tax of two per cent on net wealth exceeding Rs100 million, whichever is higher. Moreover, all individuals should be facilitated to file simple income tax return [no wealth statement] – those earning below taxable limit should be paid income support [negative tax]. A single-page return form should be in English, Urdu, and all regional languages. Reporting of real income by all will help create data bank at the national level of all households. Their earning levels will determine who needs to pay and who should be entitled to social benefits and how to improve social and economic mobility to end the poverty trap.

Moreover, the state must end the culture of appeasement – no more amnesties or incentives to the dishonest at the cost of the honest. Those who filed, but were underpaid should be offered to make up deficiency by paying due tax with no penal action. This would yield much more than the target fixed for the FBR at Rs7.47 trillion. For reducing the fiscal deficit to the level of four per cent of the GDP, it is imperative to first curtail unproductive and wasteful expenses by 30 per cent; increase non-tax revenues by leasing out valuable state lands and assets, for example palatial government houses, through public auction and for specific activities to generate employment and boost economic activity; taxes at all levels – federal, provincial and local—should be made simple, low rate, broad-based and payable with ease.

Furthermore, instead of overburdening businesses with heavy taxes, they should be facilitated by improving all ‘ease of doing business’ indexes, and reducing the ‘cost of doing business’. There should be tax credits for investing in human resource development, and research and development (R&D) to have qualified workforce in all areas – providing employment to all and paying them as ordained in Article 3 of the constitution. Innovators, especially Small and Medium Enterprises (SMEs), must be provided all possible facilities and incentives to concentrate on growth and productivity. The banking sector must be proactive in lending to SMEs and big businesses. Banks are overwhelmingly extending loans to the government considering it as a safe bet. Banking laws need to be amended for quick disposal of disputes as done in many countries.

Similarly, foreign investors should be facilitated by being granted long-term visas and/or nationality – many Afghans and Iranians are keen to invest in Pakistan. The data of all citizens should be centralized to determine their economic status, whereas a system of universal pension and social security should be in place for the needy, but at the same time also facilitate them in overcoming the trap of poverty. A National Tax Agency (NTA) and All Pakistan Unified Tax Services, having professional expertise in all related fields, should be established. The NTA can communicate to all citizens what their income/expenditure levels are. This would determine correct tax obligations and bona fide entitlement of social support from the state.

All national and provincial legislators should impose simple, predictable and low rate taxes – income tax on all incomes including agricultural income should be under the exclusive domain of the federal government, whereas harmonised sales tax on goods and services should exclusively go to the provinces on the basis of goods produced and supplied, and services rendered within their territories. This will ensure fiscal consolidation and make the country self-reliant. Moreover, we must abolish multiple taxes and collect local taxes, for example property, vehicle taxes etc. to meet the needs of local residents by allocating funds to local governments to provide health services, education, civic amenities of all kinds, as well as recreation etc.

A minimum of four per cent of the GDP should be allocated for education, and an additional two per cent for R&D. All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in instalments to overcome cash liquidity problems, of course, paying additional tax for grace period(s). After the lapse of a deadline, stringent action under the law should be taken, including confiscation of property, fine and/or imprisonment.

Shockingly, both the IMF and FBR have ignored proposals given in ‘Tax reforms: Agenda for Self-Sustainability’ for collecting Rs14 trillion at the federal and provincial levels, enabling Pakistan to overcome monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens. The failure to undertake these fundamental reforms is the real problem. The federation can easily collect Rs12 trillion in taxes at the federal level and Rs2 trillion at the provincial level to create adequate fiscal space to come out of the present economic mess and provide the much-needed and long-delayed benefits to all the citizens, as well as provide relief to trade and industry. For achieving the above levels of taxes, our focus should be on sustainable growth that will increase taxes as a by-product – harsh taxation only hampers expansion and prevents investment in existing and new businesses.

Will politicians in power care to take corrective measures? Let us pray 2023 brings prosperity for Pakistan and equal opportunities and universal entitlements for all citizens as guaranteed in the constitution.

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