Huzaima Bukhari and Dr Ikramul Haq
Unfortunately no serious effort has been made by the successive governments, civil and military alike, to devise a rational tax policy for encouraging industrialisation through corporatization of business leading to documentation of economy. The Finance Bill 2018 presented on April 27, 2018 before Parliament by Dr Miftah Ismail, an unelected Finance Minister, testifies to this beyond any doubt. The sole stress on squeezing the existing corporate entities and shifting the main incidence of taxes to the weaker sections of society, e.g., unprecedented taxes on mobile subscribers, has reaffirmed the already- proven pro-rich tilt of the Pakistan Muslim League (Nawaz).
The perpetual failure to crack down on untaxed assets and ill-gotten wealth, rather giving generous amnesty schemes to the rich and mighty, has converted Pakistan into a ‘soft-state’—the term introduced by Swedish Nobel-winner economist Gunnar Myrdal in his book ‘Asian Drama’ to describe a general societal “indiscipline” prevalent in South Asia and by extension much of the developing world in comparison to kind of modern state that had emerged in Europe. The decades-long policies of appeasement towards the tax evaders and plunderers of national wealth have made the entire nation to live in ‘debt prison’. We need radical reforms on all fronts to come out of it and transform Pakistan into a true social democracy.
Recent years have experienced closure of a large number of industries and a perpetual decline in exports and rise in imports. Besides corruption, inefficiency and incompetence of Federal Board of Revenue (FBR), inconsistent tax policies are dissuading local and foreign investors to take benefit of tremendous Pakistani talent. Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to our inept economic managers and their submission to donors’ agenda, we have an overemphasis on retrogressive taxation. Due to sheer incompetence of our economic wizards, Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and future is for those who can develop them as quickly as possible.
Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our budget makers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented, export-driven tax incentives, funds generation for infrastructure development, and employment generation, without which sustainable inclusive growth is not possible.
Pakistan faces the herculean task of providing jobs to millions young people every year. For achieving this target, economy must grow at the rate of 8% to 10% per annum over a long period of time — for this we need investment of 25% of GDP. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, which are our greatest asset—imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation—our real engine of growth. The prevalent pessimism is due to attitude of the rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness.
We need to incentivize corporatization of business. By 31 December 2017, the total number of companies registered with Securities & Exchange Commission of Pakistan was 84,201, out of which less than 35,000 filed tax returns for Tax Year 2017— in 2016, 32,391 companies filed income tax returns. The total number of returns received by FBR by 15 February 2018 was 1,238,906.
The Income Tax Ordinance, 2001 contains numerous anti-corporate provisions. The companies are maltreated by FBR’s field officers—after collecting billions as ‘collection agents’ of State without any compensation they are penalised even where the taxpayers on whose behalf tax was deductible/collectible had paid the same. High corporate tax rate and double taxation of dividends and reserves out of already taxed profits are some examples of anti-corporate provisions—the list is not exhaustive. In these circumstances, no one would like to conduct business through a company, especially when rates for individuals have been drastically reduced. It is travesty of principle of fairness and equity that audited accounts by independent and reputed auditors are rejected just on whims and without bringing any material on record by taxation officers. Avoidable litigation is imposed on the companies and they have to hire costly professional to get justice, it at all after years.
The corporate sector is the worst sufferer of FBR’s arid policies. With low corporate tax rate of 20%, we could have promoted corporate growth. On the contrary, in 2015 the Parliament imposed ‘Tax on undistributed reserves’ [section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another wrong move. In 2014, ‘Alternative Corporate Tax’ [section 113C of Income Tax Ordinance, 2001] was levied. Such erratic, arbitrary and expropriatory taxation have further retard corporate sector and discourage future growth. In the Finance Bill 2018 while individual tax rates have been drastically reduced, companies have only been promised gradual reduction in tax rates and elimination of super tax in the next three years!!
Devising a fair, predictable and efficient tax model for rapid industrial and business growth in Pakistan requires an analytical study of all the irritants prevailing in tax codes, procedures and implementation processes. The main irritant is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses—both at 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. The starting point for this can be proposals contained in paper, ‘Towards Flat, Low-rate, Broad & Predictable Taxes’, published by Prime Institute, a public policy think-tank.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
