The task of Federal Board of Revenue (FBR) like Greek myth of Sisyphus is endless, ineffective and fruitless. Tons of proposals from trade and professional bodies, tax bars and industry representatives, before and after budget, are not read what to speak of given any serious thought by tax managers, who have only one task: how to achieve revenue targets. They indulge in highhandedness, arbitrariness, and resort to wickedly-drafted amendments as well as onerous tax regulations — for example, advance tax/minimum tax even when there is loss; refusal to pay refunds after collecting excess tax (there are 70 withholding provisions)!
Taxation should serve as a catalyst for economic growth. In Pakistan, the ill-directed, illogical, regressive and unfair tax regulations for the last many years have caused a dampening effect on the industrial and business growth. Had the successive governments concentrated on economic growth and industrial expansion, as its natural outcome there would have been consequential substantial rise in taxes today.
It is not possible to enhance revenues amid stagnated economy, and over-taxing such economy, as has been done in Pakistan. It can virtually destroy the revenue system as well. This is a vicious circle in which our policymakers are now trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive state where investors find attractive conditions to invest and live. In a country where there is no security of life and/or property, notwithstanding the availability of tax benefits and other incentives, investors will never come forward.
It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains. What is more tragic is that this social evil inherent in the tax system gets doubly compounded as it necessitates greater and greater tax burdens on those who are law-abiding.
The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similarly placed situations. Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are not paying anything with the connivance of their friends and mentors in the tax machinery. The unholy alliance between tax evaders and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system and achieve the goal of rapid economic growth.
In addition to permanent money-whitening facilities like section 111(4) of Income Tax Ordinance, 2001 and section 5 and 9 of Protection of Economic Reforms Act, 1992, every now and then the government announces a tax amnesty scheme that favours chronic tax evaders, smugglers, corrupt, extortionists, drug barons and criminals. Such schemes are a slap on the face of honest taxpayers [proving them as most foolish for paying taxes diligently]. An extortionist, drug baron, and land grabber can decriminalise his ill gotten money through such a scheme but the poor businessman who paid it due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return!
There is a national consensus that the existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment-oriented and growth-accelerating tax system, integrating good tax administration with simplified tax laws that are easily to be understood and hassle-free from implementation perspectives.
The present tax system is highly unjust as evident from Household Integrated Economic Survey (HIES) 2015-16 showing the share of the top 20 per cent of households in overall income is nearly 45 per cent, while for the bottom 20 per cent, it is slightly less than 9 per cent — a multiple of 5 times. In the absence of a fair tax policy, the agenda of tax reforms will remain lopsided as discussed in How to boost tax collection, The News, May 21, 2017.
The government should free itself from the figure game of FBR. Our tax potential at federal level alone is not less than Rs8 trillion [Roadmap for tax reforms, The News, February 12, 2017] provided the tax base is made wider and equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn.
Unfortunately, the track record of FBR shows remote possibility of collecting taxes to the tune of Rs8 trillion in the next five years to give enough fiscal space both to the centre and the provinces to come out of the present mess, and providing relief to the poor as well as trade and industry. Under the given scenario, federation-provinces tax tussle will continue.
Provinces complain that they get insufficient resources from the tax pool due to inefficiency of FBR. The federal government accuses them of not generating sufficient resources of their own in the wake of 18th Constitutional Amendment despite getting wide powers of taxation. If this remains the state of affairs, Pakistan will stay in debt enslavement and more and more people will be pushed below the poverty line. The only way to come out of the crisis is that the Parliament reconsiders the prevailing social contract between federation and provinces. Provincial autonomy and local self-governance without equitable distribution of income and wealth is meaningless. Pakistan cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens.
Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements guaranteed under the Constitution. The principle of universal entitlements seeks to prevent the formation of inequalities and the foundation of the poor as a separate social group, whereas residualism and marginalism take the form assisting the poor and the needy, and thus implicitly defining them as certain types of social groups.
The provincial assemblies have failed to establish local governments, as ordained in Article 140A of the Constitution, on the basis of social policy. They have so far just copied the previous outdated laws with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.
For fiscal decentralisation as per Article 140A, local governments’ financial resources must be commensurate with the responsibilities provided for by the Constitution and the law(s) to ensure welfare of the people and ensure sustainable growth at grass root level. Part of the financial resources of local authorities should derive from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.
Unfortunately as of today, there is no political will to implementing fiscal reform agenda, though general consensus about it exists. Addiction to borrowed money and lust for wasteful spending are the main stumbling blocks for achieving the cherished goal of self-reliance that can pave the way for rapid growth, employment generation and substantial spending for social sectors. The ever-widening fiscal deficit amongst many other reasons has its roots in wasteful funding of a monstrous government machinery, especially corruption-ridden-inefficient public sector enterprises (PSEs), and extending of unprecedented perks and perquisites to militro-judicial-civil-complex from taxpayers’ money. These profusely bleed the already scarce resources — both tax and non-tax.
The story of persistent failure of implementing a prudent fiscal policy in Pakistan and poor management of economic affairs is thus, not unknown or untold — it is even candidly admitted in all official documents, released from time to time, relating to taxation, public expenditures and public borrowing. Unless fundamental reforms are undertaken, FBR’s Sisyphean task will continue, taking the country nowhere near the path of self-reliance.