Huzaima Bukhari and Dr Ikramul Haq
The government, in its second budget, has once again ignored much overdue economic reforms. The policymakers have not yet realised that the country can survive with lower taxes provided there is substantial curtailment of wasteful spending, like providing extraordinary perks and benefits to the militro-civil-judicial complex and public office holders, and funding the losses of public sector enterprises (PSEs). Why should the masses pay for tax-free benefits enjoyed by the rich and mighty, especially when billions can be generated by selling highly expensive properties occupied by them? Every year, billions are spent or lost because of pleasing them with more and more benefits, maintaining buildings and transport, besides meeting huge expenditure on VIP facilities, free or concessional plots, new cars, security of personnel, foreign tours etc.
The benefits in kind should be made part of a ‘Composite Pay Package’ determined on prevalent market wages. Palatial residential buildings must be sold through public auction. All public sector enterprises should be privatized or run by an independent Board of Directors comprising professionals. Ishaq Dar in the budget preparation, like his predecessors, disregarded that the biggest burden on national exchequer is money spent on privileges for the elites and meeting exorbitant losses of PSEs. The present tax system, which is already heavily dependent on indirect taxes to meet such erratic funding, is going to be harsher for the poor for regressive measures proposed in Finance Bill 2014. If it is approved as such, the sluggish growth will be further retarded. Obviously, Dar did not pay any attention to simplifying the tax system and reduce its onerous impact that undermines economic growth as suggested by us in a three-part series in these columns—Essential tax reforms, Business Recorder, April 11-13, 2014.
New irrational tax proposals will create more avenues of corruption for the mafia that controls the Federal Board of Revenue (FBR). Many tax measures, if implemented, are bound to harm businesses and increase miseries of the poor. The businessmen will pass on the burden of indirect and fixed taxes to the consumers. The cost of doing business for a retailer vis-à-vis sales tax and further tax on electricity, as proposed, would tremendously increase. The impact of taxes for those having monthly electricity bill of less than Rs 20,000 would be 46% and for more than Rs 20,000, it would be 48.5% [Table A]. One wonders if it was well-thought-for decision (sic) or another ill-advised act of high-handedness of FBR confirming how stalwarts sitting there, oblivious of mundane realities, are bent upon to destroy our business in one go.
Take another example of a proposed amendment in section 7 of Sales Tax Act, 1990, which says that input tax will be allowed on actual consumption alone. Whosoever suggested this must be taken to task by the Parliament. It is near to impossible to work out input tax on actual consumption. Only a genius sitting in FBR can elaborate how one can correlate actual consumption with input tax. Certainly, the sales tax audit mafia with this kind of a legal provision will be armed with another lethal weapon in its hands to extort more money from the taxpayers. They will allow or disallow input tax as they deem fit. The shifting of basis of tax adjustment to consumption instead of total procurements for the relevant tax period will create serious liquidity issues for business houses. Computation and accounting for input tax according to actual consumption by the business and verification of it by the officers would be impossible. It is worth-mentioning that provincial sales tax has been made inadmissible. Sales tax or federal excise paid on services becoming non-adjustable in violation of agreements signed with Sindh Revenue Board, Punjab Revenue Authority should be a cause for concern but nobody has yet highlighted it.
=========================================================================
Table A
=========================================================================
Proposed burden of indirect taxes for retailers
=========================================================================
Monthly consumption Monthly consumption
less than Rs 20,000 exceeding Rs. 20,000
=========================================================================
Sales tax on electricity 17% 17%
Extra tax on electricity 5% 5%
Further tax on electricity 1% 1%
Sales tax on electricity bill 5% 7.5%
Total tax on electricity 28% 30.5
Purchases from registered sector 17% 17%
further tax on purchases 1% 1%
=========================================================================
Total tax Incidence 46% 48.5%
=========================================================================
Dar has failed to appreciate that reliance on withholding tax regime, both under Income Tax Ordinance, 2001 and Sales Tax Act, 1990, could not increase tax base or tax revenues. Further stress on it would strengthen the argument for dismantling FBR (with over 25000 employees) as redundant. Besides, burdening the informal sector with 2 to 3 percent extra tax would not work as more lucrative incentives exist to remain part of informal sector. It would only push inflation and/or cost of doing business. Table B depicts the disadvantage for dealing with registered sector and advantage to remain part of informal sector. Despite heavy withholding taxes, people do not bother to file tax returns. For tax year 2013 only 840,000 opted to file returns/statements against the total registered taxpayers of 3.6 million, whereas the number of those paying advance income tax as prepaid mobile users as on 30th June, 2013 was nearly 30 million.
Millions are paying advance income tax in Pakistan but yet called evaders. They feel afraid and harassed. They want to comply with legal requirement of filing returns. However, complicated procedures are the main hurdle. FBR is not ready to treat them as its clients. If it is done, there would undoubtedly be marked improvement in tax compliance resulting in increase in the number of tax filers.
=========================================================================
Table B
=========================================================================
Tax incidence: informal sector v informal sector
=========================================================================
Purchases from
registered sector
Cost Sales tax
=========================================================================
Indirect raw material 1,500,000 255,000
Indirect Packing material 1,250,000 212,500
Other overheads 2,000,000 340,000
Phone / Mobile Bills 750,000 127,500
Vehicle & Parts 2,250,000 382,500
Other CAPX 500,000 85,000
Building and construction materials & paints 2,500,000 425,000
Civil Works 1,050,000 178,500
Incidence of sales tax 2,006,000
=========================================================================
The government must realise that it is not only a matter of generating sufficient resources from the rich for the less-privileged that should be the main thrust of the tax system, but it is also generating sufficient resources for human and physical infrastructure, social works, public goods like defence, and for escaping from foreign assistance. No doubt, the rich should pay their share as prescribed in tax laws but the government should also look carefully at the spending side of the ledger with a view to rationalising it. In Pakistani milieu, the main issue is that of credibility and trust in the government. We all know that the kind of wasteful spending the government involves in, does not instill much confidence in it or enough motivation to pay one’s taxes. It is a chicken and egg situation and someone has to break this vicious circle. Thus, it is not solely the rich versus the poor that is bad enough but rather the polity versus the government. Polity demands both an efficient collection of resources according to tax laws as well as a rational allocation of the collected resources.
Scholars must undertake a research project to calculate the percentage distribution of federal resource intake by various income groups and the percent federal public benefits/subsidies accruing to various income groups. The results would certainly be revealing. For example, while there are very few footpaths and limited means of transport for a substantial number of Lahorites, there are plenty of paved roads for the minority that owns cars.
It is our unshakable belief that the future generations of Pakistan, with a sense of justice and fairness, will not allow such a tyrannical tax system to remain in operation. Much has been lost by the State by way of losing the taxpayers’ trust. Without reclaiming this very valuable national asset, the government cannot implement any meaningful tax reforms. As expected, Dar instead of going for fundamental institutional reforms and re-engineering system has conveniently continued with arbitrary and cruel taxation. Every government has a right to levy and collect taxes but no government has the right to inflict misery on the public in this process. The public should not have the gnawing feeling that it is made a victim of palpable injustice at the hands of tax machinery. In civilized societies taxpayers are treated as clients and receive assistance and respect from tax administrators. In Pakistan, they are the most insulted and the humiliated, while those who avoid and evade taxes rule and FBR protects them. Taxes are the lifeblood of any government, but these cannot be imposed or collected in a manner similar to sucking the blood from the arteries of the public through proven-corrupt tax ‘leeches’. It is about time that such transfusion is accomplished in accordance with the principles of justice, equity and fair play.
(The writers, lawyers and Adjunct Faculty at Lahore University of Management Sciences (LUMS), are partners in law firm, Huzaima & Ikram (Taxand Pakistan)
