• TheNews International
  • facebook
  • twitter
  • rss

Reforms we need

Economic equality and prosperity, peace and social tranquility can never be achieved unless taxation system is reformed completely

Reforms we need

In Pakistan, ironically, the less-privileged are subjected to oppressive taxation to finance the luxuries of elites who enjoy extraordinary tax-free perks and perquisites, unprecedented benefits like expensive cars, golf clubs, rest houses and awards of free or concessional plots at prime locations. The way the elites waste and plunder the taxpayers’ money is not a secret.

Since independence, no serious effort has ever been made to reform the elitist apparatus that has miserably failed to deliver. Pakistan has been pushed to recurrent economic crises due to perpetual failure of the elites. Our fiscal deficit is now over Rs2.5 trillion and debt burden is over 600 percent of revenues. In coming days, the government will have to borrow more and more — externally and internally — just to pay interest on old loans and meet day to day expenses.

The dire need in today’s Pakistan is to undertake fundamental institutional and structural reforms. Our biggest burden on economy is the huge unproductive workforce comprising nearly four million people, in various governments (federal, provincial, local and corporations) and Public Sector Enterprises (PSEs), who waste time and money, mostly create hurdles for citizens and businesses rather than serving them. Rightsizing of monstrous administrative machinery and improving quality of public services should be the top agenda of reforms. Less government should be the rule. This can be done by transferring much of the work to local governments, which should be installed from the lowest level up. Health, education, water and sanitation, local roads, local policing, local property transfer, property and income tax etc should all be handled by local elected authorities.

For making Pakistan a self-reliant economy, we need to stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, privatise or make government-owned corporations profitable, accelerate industrialisation and increase productivity, improve agriculture sector, reduce inequalities through a policy of redistribution of income and wealth.

It is high time that professionals and civil society campaign against oppressive, anti-people policies and work relentlessly for establishment of an egalitarian state. We can make Pakistan a self-reliant and prosperous country through fiscal decentralisation and grass root taxation at local government level.

It is high time that professionals and civil society campaign against oppressive, anti-people policies. We can make Pakistan self-reliant and prosperous through fiscal decentralisation and grass root taxation at local level.

Revenues worth trillions of rupees have been sacrificed by the governments — civil and military alike — since 1977 extending unprecedented exemptions and concessions to the privileged classes. Some of these are highlighted below:

Military rulers abolished all progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax etc. Now these are with provincial governments after the Eighteenth Constitutional Amendment, but they are also least interested in taxing the rich and mighty.

The historic decision of taxing “agricultural income”, passed by Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” as obtaining in section 2(1) of the then Income Tax Act, 1922 to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan, but this attempt was successfully foiled by a military dictator.

During Zia’s 11 years rule and that of General Musharraf for nearly 9 years, absentee land owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax.

Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have enacted laws to this effect, but total collection during the last five years was less than Rs2 billion (share of agriculture in GDP on average was about 20 percent for this period).

Tax losses for not taxing speculative transactions in real estate are to the extent of billions of rupees per annum. The definition of ‘business’ given in the Income Tax Ordinance, 2001 covers “adventure in the nature of trade” and yet our tax machinery caused colossal loss to the national exchequer by not bringing adventures in the nature of trade in real estate into tax ambit.

Multi-national Companies (MNCs) through abusive transfer pricing mechanism, deprive Pakistan of taxes of over Rs200 billion every year.

Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before he took charge as finance minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his global assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis. The repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite substantial revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan.

In 2003 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemptions given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US$ 60 billion) started pouring in from all over the world remitted by all and sundry without any fear of being investigated, courtesy amnesty given under section 111(4) of the Income Tax Ordinance, 2001. Influx of enormous wealth was directed to the stock exchanges and real estate market where the sharks continued to engulf small investors through unholy maneuverings; or was used to artificially enhance the prices of property. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.

According to a conservative estimate, from 2003 to this date we have lost Rs300 to 500 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life. The wealthy should now be taxed at grass root level through local governments according to the size of houses they own. Tax on immovable property after the Eighteenth Constitutional Amendment is the sole prerogative of the provinces. By levying capital gain tax on disposal of urban immovable property, the provinces can generate sufficient resources rather than look towards the federal government for money all the time.

Section 111(4) of the Income Tax Ordinance, 2001 is abused by powerful segments, politicians, government officials and businessmen through benami transactions. The loss caused due to this provision alone for the last 20 years is estimated at nearly Rs1500 billion.

The above are just a few areas showing how much tax loss we have been incurring perpetually since 1977. Total loss of revenue through Statutory Regulatory Orders (SROs) issued during the last 25 years alone is estimated at about Rs3000 billion — unprecedented concessions to the rich made the State poorer and the masses indebted enormously. We did not need any borrowing at all, if SROs were not issued and taxes had been collected fairly and justly.

Tax revenues have a critical role in municipal self-governance in all successful social democracies. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or those for which they are responsible for under the law. Take the example of Finland where the most important levy is municipal tax, which amounted to almost 44 billion Euros in 2018 — Pakistan collects less than 30 billion Euros as taxes both at federal and provincial level!

If a country of 5.4 million people (Finland) can achieve this level of taxation at municipal level alone, then we a nation of over 210 million can do much more, but only if there is the will. One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. We have the resources but system for self-governance as in vogue in Finland and elsewhere in the world is non-existent despite the clear command vide Article 140A of the Constitution. Resultantly, power is not with the people but in the hands of the privileged few.

Economic equality and prosperity, peace and social tranquility can never be achieved unless taxation system is reformed completely. It needs partial decentralisation where taxes are collected for education, healthcare and social welfare services through municipalities working on the principle of self-governance ensuring that revenues are spent for the benefit of public and not the powerful segments of society alone.

Dr Ikramul Haq

Leave a Reply

Your email address will not be published. Required fields are marked *

*

 characters available

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Scroll To Top