The federal budget for fiscal year 2016-17 is expected to be announced in the third week of May 2017 so that it can be approved before the advent of Ramzan. The main task before the government in the last year budget of its current tenure is how to win the hearts of voters. It means no ‘harsh’ (sic) tax measures!
The present government has miserably failed to harness the actual tax potential of around Rs8 trillion at federal level alone without levying new taxes. On the contrary, it levied unjust and unfair taxes retarding economic growth. By blocking refunds, it caused irreparable loss to the export sector. Showing exaggerated tax collection has been Dar’s dilemma since 2014. Had he concentrated on growth rate of around 6 per cent during the last four years, we could have easily collected Rs8 trillion as taxes without harming the economic growth.
In these columns, we have been presenting many concrete measures for collection of revenues to the extent of Rs8 trillion by Federal Board of Revenue (FBR). The worthy federal finance minister is fully cognizant of the fact that there is no dearth of rational and viable proposals to reform tax system that is the root cause of many ills. The question is whether he would be willing to go for necessary fundamental reforms in the last budget of his current tenure. His past record shows complete lack of willingness to enforce tax obligations and establishment of a revenue agency that can win the hearts of the masses ensuring them like Canadian Revenue Agency does by saying: “We make sure that the money is available to fund the public services by collecting taxes and duties as laid down by Parliament. We want to give you a service that is even-handed, accurate and based on mutual trust and respect. We also want to make it as easy as we can for you to get things right.”
Unless and until such an agency is established, people will not discharge their tax liabilities voluntarily and happily, no matter how many pre and post budget seminars are held.
Businessmen have been repeatedly claiming that they want to pay due taxes but FBR is the main hurdle. It harasses them and no speedy redressal system is available against their highhandedness. They cite the example of sales tax where a strong mafia exists comprising unscrupulous traders, dishonest tax advisers and corrupt tax officials because of whom the effective rate of tax of sales tax is reduced to about 3.7 per cent against the standard rate of 17 per cent.
Existing hotchpotch sales tax law with high rates is not bringing desired revenues but, due to its regressive nature, causing misery to millions living below the poverty line. The burden of this tax, like many others that are imposed as full and final discharge under the Income Tax Ordinance, 2001, is shifted to consumers, benefitting the rich.
In the coming budget, the government should introduce 5 per cent single-stage sales tax across the board. It will yield three times more revenue than what is presently collected. At the same time, income tax at a flat rate of 10 per cent should be collected from all those who have taxable income, abolishing all kinds of presumptive and minimum tax regimes. Provinces should also tax rich landowners and collect tax on all services, but at a low rate of 5 per cent.
After doing away with all kinds of exemptions and immunities, including section 111(4) of the Income Tax Ordinance, 2001, the government should enact asset-seizure legislation for confiscating untaxed assets. This strong deterrence is a prerequisite for enforcing tax obligation. Even a just and fair tax system cannot work if not supported by effective enforcement mechanism. All untaxed assets, lying home or abroad, should be seized if owners are not ready to pay taxes voluntarily. We can never tap our real tax potential, which is not less than Rs8 trillion, unless fundamental reforms in tax policy and administrations are made. Rapid industrial and economic growth and socio-economic justice should be our main objectives; tax being a by-product will automatically increase.
The successive governments, civil and military alike, have miserably failed to discharge their basic obligation of protecting life and property of its people, what to talk of providing essential services like health, education, housing and transport. Taxes collected are consumed mainly by debt serving, perks of VIPs, security of the rulers and their foreign tours. Besides indulging in regressive taxation, the government keeps on borrowing at a high cost, from whatever source available, to run day to day affairs.
It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax) and VAT-type sales tax. Since 1991, the burden of taxes on the poor has increased by 38 per cent whereas on the rich it stands reduced by 19 per cent.
The lack of judicious balance between direct and indirect taxes has pushed around 60 million Pakistanis below the poverty line. The FBR claims that the share of direct taxes is increased to 40 per cent. It is a blatant lie. From income tax collection, if presumptive taxes are excluded, its share in total collection will hardly be 25 per cent or even less. It confirms that present taxation system is highly regressive. The present government is least pushed to change the inequitable character of our tax system, under which the burden of taxes is less on the rich and more on the poor.
Our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need for discussing the philosophical framework, principles of equity and justice, which should be the main concern of our tax policy; not simply achieving revenue targets. Our fiscal managers want to meet budgetary targets through oppressive taxes, shifting incidence on the poorer segments of society and exempting the rich. Undoubtedly, 17 per cent sales tax (on many items even 25 per cent as on petroleum products) has proved inflationary and its impact on business and industry, simply destructive.
If the present government wants to win the hearts of the people and get vote of the majority, it must introduce in the forthcoming budget, 5 per cent single-stage sales tax (not at import stage but manufacturing and retail stage) subject to two conditions: first, there would be no refund and/or adjustment for any sector (except exporters) and second, that all of them would pay income tax on their real income, which in no case will be less than 2.5 per cent on their assets liable to charge under Zakat & Usher Ordinance, 1980.
This kind of alternate minimum tax is imposed on the rich in many countries, notably United States of America in recent years. This kind of taxation can bring prosperity for all as the state will have sufficient resources to look after its citizens and go for necessary projects essential for development and rapid industralisation.