Huzaima Bukhari and Dr Ikramul Haq

The Federal Board of Revenue (FBR), in its Year Book 2013-14, placed on its website on October 30, 2014, claims that it collected Rs 2,266 billion (provisional data) during the fiscal year 2013-14 as against Rs 1,946 billion during 2012-13 and “thus a positive growth of 16% has been attained”. The annual publication does not mention that actual tax potential is not less than Rs. 7000 billion and that it failed to achieve even original target of Rs 2,475 billion. The biggest failure of FBR was to compel the richest Pakistanis—their number is about 15 million—to file income tax returns. It only received 840,000 returns in 2013, out of which less than 15,000 non-salaried filers admitted tax liability of Rs. one million or more!

The oft-repeated narrative that Pakistanis do not pay taxes—popular with analysts, TV anchors, academicians, policymakers and foreign donors—is factually incorrect. The reality is that over 50 million have been paying advance income tax as mobile users—many of them having below taxable income of Rs 400,000. On the contrary, our State Oligarchy—militro-judicial-civil complex, landed aristocracy, industrialist-turned-politicians and public office holders—are thriving on national resources and are not ready to pay taxes due from them. They contribute less than 1% in total taxes.

The militro-judicial-civil complex (higher echelons and not the lower staff) enjoys unprecedented perks, perquisites and benefits at the expense of taxpayers’ money. The mighty landowners exploit labour of landless tillers and unscrupulous industrialists and traders exploit poor urban workers to amass more and more wealth. Additionally, they create artificial hike in prices of essential items to snatch back whatever little is earned by the poor and the fixed-income classes. The prevalent tax system protects them and shifts burden on the weaker sections of society.

Dr Kaiser Bengali, a known economist, has recently stated that the average net worth of Pakistani parliamentarians is $900,000, yet few of them pay due income tax. “The dearth of tax revenue limits government investment in sectors like education and healthcare that could help reduce inequality, and keeps the country dependent on international aid. This prevents the growth of a diverse and strong economy, while perpetuating economic and political inequalities”, he added.

The regressive taxation, retarding growth, has resulted in shrinking of middle class in Pakistan. Presently just a few families have per capita income of $4,286—the minimum benchmark set by the World Bank to qualify as a middle class person. Average family size of middle class is four to five and according to the World Bank’s definition, a four-member family collectively earns $17,144 (Rs 1.83 million) a year or Rs 152,867 per month. During the budget speech, Ishaq Dar while imposing higher tax on persons earning above Rs 500,000 per month proudly claimed “it would affect only 3,500 individuals”. He should have been concerned about the shrinking size of middle class in Pakistan, but he was telling us we have only a handful of them!

In any society, middle class, comprising professionals, scientists, doctors, and engineers, plays a pivotal role in the growth of a country but our ruling elite does not want them to grow as they can challenge their monopoly over resources. India is striving hard to increase the size of its middle and even upper middle class—expected to be 39 million by 2015. But our state oligarchy is bent upon pushing the middle class to the poor class and the poor class to below the poverty line. If Pakistan’s economy remains captive in the hands of state oligarchy, it will never turn around. Pakistan will have more and more people below the poverty line what to talk of increasing the size of middle class, which is considered as the backbone of any economy. It is in the interest of state oligarchy as the poor can be exploited and forced to vote for them whereas educated middle class cannot be coerced for “engineered electioneering” paving the way for a sham democracy.

Reduction in the size of middle class is causing a negative impact on contribution of direct taxes in the overall revenue of Pakistan. The share of income tax, according to official figures, as percentage of GDP is continuously declining; it was merely 2.5% in 2013-14, 2.1% in 2012-13, 2.2% in 2011-12, 2.4% in 2010-11, 2.5% in 2009-10, 2.6% in 2008-09, 2.9% in 2007-08, 3.2% in 2006-07, 3.3% in 2005-2006, whereas in 2004-2005 it was 3.5% [source: FBR’s Year Books 2004-05 to 2013-14 and Economic Surveys 2004-5 to 2013-14].

FBR’s Year Book 2013-2014 is completely silent about the huge gap in collection of income tax in Pakistan. According to Pakistan Telecommunication Authority (PTA), there were 130 million mobile users as on 30 June 2014. A huge population, not less than 50 million (if we exclude multiple and inactive subscribers), in 2013-14 paid 15% income tax (from 1st July 2014 it is reduced to 14%) and 19.5% sales tax on mobile bills (prepaid or post paid), but only 840,000 filed income tax returns in 2013—if statements filed for presumptive taxes and salary returns are excluded, the actual number of business returns was below 500,000. Majority of the mobile users may not have taxable income yet they are burdened with undue liability. On the contrary, majority of rich just pay a fraction of income tax (withheld at source) on actual taxable incomes without bothering to file even income tax returns—in 2013 less than 15,000 non-salaried individuals admitted tax liability of Rs one million! This exposes effectiveness and competence of FBR, but Year Book 2013-14 does not utter a single word about it.

FBR has failed to perform during the last many years. For over 90% collection, it relied on withholding provisions, advance tax and voluntary payments. It has made little efforts to force the rich and mighty to file returns, which proves beyond any doubt its unproductiveness. Shahid Javed Burki in Provincial Rights and Responsibilities [Journal of Economics, September 2010] opines that “about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy.” FBR is not properly taxing these rich 15 million.

Pakistan’s tax potential at federal level alone is about Rs 7 trillion. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs 1,650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000 is added, the gross figure would not be less than Rs 4,500 billion—FBR collected only Rs 884 billion as direct taxes in 2013-2014.

Out of total direct tax collection, FBR received Rs 578,413 (62.5%) from withholding agents. In this area as well, massive corruption is prevailing with the connivance of tax officials—the withholding agents collect/deduct taxes and do not deposit in the government treasury, or the payer and the payee join hands to deprive the exchequer of billions of rupees with the connivance of corrupt tax officials.

Another shocking fact admitted in Year Book 2013-2014 is the dismal performance of FBR field officials in collecting income through their own efforts by employing forensic audit techniques, using third party information or utilizing data collected by FBR over a period of time, about the rich and mighty who do not even bother to file tax returns. Figures contained in FBR’s Year Book 2013-2014 show that out of total collection of direct taxes at Rs 884 billion, collection on demand was just Rs 80,582 million, it was Rs 89,427 million in 2012-13. This alone confirms the pathetic state of affairs prevailing in FBR where officers are getting double salary and honorariums.

Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50% of actual potential [joint study of Andrew Young School of Policy Studies at Georgia State University and World Bank]. FBR in 2013-14 collected Rs 1,002 billion as sales tax, Rs 139 billion as federal excise and Rs 241 billion as customs duties. Collection under these heads should have been at least Rs 2,500 billion. Target of Rs 7 trillion is achievable provided the mighty segments are properly taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.

If existing tax gap is bridged, our revenue collection can reach Rs 8,500 billion (Rs 3,500 billion direct taxes and Rs 5,000 billion indirect taxes) which could change the entire fiscal scene and fate of the nation. By collecting this amount, we can easily meet current expenditure, development and public welfare outlays—government requiring no internal or external borrowing would be able to retire debts in a few years as done by the Hungarian government. However, the dream of making Pakistan a self-reliant economy can never be realized unless the mighty State Oligarchy is divested from its control over the resources and exploitative tools.

The growth of economy, equitable distribution of resources and emphasis on the welfare of the masses—providing them jobs, decent life and universal entitlements—alone can guarantee the progress and prosperity of any State. Presently in Pakistan, taxes are collected from the poor and are utilized to extend extraordinary benefits to militro-judicial-civil complex and businessmen-cum-politicians. If all benefits, concessions and free perquisites given to militro-judicial-civil complex are replaced with a taxable consolidated pay package, government cuts down huge wasteful expenditure, the life of common man can be improved immensely by allocation adequate resources for meeting their social needs, especially that of the underprivileged sections. (The writers, partners in law firm, Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences)