The ever-growing size of parallel, undocumented economy has much to do with the way taxes are being administered for the last many decades — from a tax compliant public to a tax rebellious one, from high tax-to-GDP ratio to an obnoxiously low one, from greater revenue from fewer taxpayers (1.5 million) to very low revenue from a broad-based taxable population (approximately 90 million), from a relatively thriving economy where debts were at their lowest to an apparent prosperous one where share of debts is 68 per cent of the GDP, from a comparatively greater reliance on direct taxes to a complete turn-around towards indirect ones (even in the garb of income tax law which is essentially a form of direct tax), from relative simplicity of compliance to complicated procedures both at the federal and provincial levels.
At present every wrong has been done to make the life of a compliant taxpayer as miserable as possible. The helplessness of seeing one’s hard-earned money going down the drain has compelled many to look for greener pastures elsewhere where their taxes bring benefits back to them. Pakistan is rich in resources and its people are very generous. There is no doubt that a fair and simple tax system would be a welcome respite. Such a system would certainly ensure substantial revenues and prosperity for all. With the prevailing complicated, unjust and oppressive tax system how can it be expected that the common man would comply and tackle the tax collectors who are always bent upon whipping the innocent as well as guilty.
Black economy and tax losses
Tackling twin menaces of black money and tax evasion has always been a failure in Pakistan. Successive governments, instead of dealing with these issues, have been pardoning and appeasing tax evaders through various laws and amnesty schemes. The result is obvious — there is an ever-growing informal economy.
The present accumulated size of underground economy is estimated at Rs30 trillion; almost equal to the size of documented economy. If tax at flat rate of 10 per cent is offered to all who have failed to pay in the past, in just one year FBR will collect Rs3 trillion and then in future there would be much higher tax compared to what FBR fetched in 2016-17.
The new paradigm
We need to replace the entire tax system for fiscal stabilisation. The goal is to collect revenue of at least Rs7 trillion for federal government for meeting all expenditure and paying back loans. The current complex system only benefits a few thousand officers and staff and people having money power. Through simple flat-rate tax that is neither burdensome nor difficult to implement, the tax bureaucracy and vested-interests can be made redundant. Obviously, the toughest opposition will come from them. Nonetheless, there is no option but to dismantle the existing, out-dated and anti-growth tax system if we have to overcome the twin but inter-related malaises of fiscal deficit and debt burden.
There should be some tangible benefits for citizens to comply voluntarily and eagerly contribute towards the national exchequer. Whenever the governments resort to high-handedness in collecting taxes, people term it broad daylight robbery, instrumental in encouraging tax evasion. The tax system that will work smoothly for Pakistan, keeping in view our peculiar socio-economic circumstances and mindset of masses, must be simple, fair and predictable — flat-rate income tax with no compliance hassles.
The agenda of fair taxation cannot succeed if wastage of public funds and its abuse by the rulers continue unabated. The quid pro quo for paying taxes is as important as the system to collect tax. Where the public is blamed for not paying their due share, public authorities are equally, if not more, responsible for indulging in corrupt means taking cover of complicated procedures that eventually lead to poor collection of revenue.
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The tax base with respect to direct tax vis-à-vis fair distribution of incidence can be achieved by imposing 10 per cent flat rate tax on net income of individuals and reducing corporate tax rate to 20 per cent. This kind of simple taxation would induce voluntary compliance provided all the citizens are aware of the fact that competent and effective tax machinery exists having a tax intelligence system that can easily detect tax avoidance. Without this deterrence even the new simple tax system will be unworkable. Enforcement with zero tolerance for defiance is the key to ensure success of any system.
Like Canada and India, we need to introduce harmonised sales tax (HST) at a lower rate of 10 per cent. All kinds of taxes on goods and services, presently levied through federal and provincial assemblies, should be merged into one single HST with complete assurance to the masses that they would be free from any kind of harassment; and money collected would be spent on their welfare.
All taxes at all levels, federal, provincial and local, should be collected through a National Tax Authority (NTA) and all existing authorities should merge in it.
National Tax Authority (NTA)
National and provincial assemblies should pass a law agreeing on establishment of NTA responsible for collecting all taxes imposed by the federal and provincial governments. This would facilitate people to deal with a single revenue authority rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
The provinces should also feel responsible for better and efficient tax collection. Presently they are isolated and rely on distribution from the divisible pool whereas the Federal Board of Revenue annually collects less than the assigned revenue target. The responsibility to collect revenues should be joint giving a participative sense to all federating units.
The NTA should consist of officers and staff representing the federation of Pakistan as in taxes, both the centre and provinces have equal stakes. If the size of the pie grows every federating unit will get more and the Centre will also have more money at its disposal. For NTA, an all Pakistan Tax Service should be established. Recruitment for All Pakistan Tax Service must be independent of the present Central Superior Services structure. Competent people having knowledge in accounting, law, IT and administration should be selected through a special board, comprising members from the existing Federal and Provincial Public Service Commissions.
According to available data, total number of persons having taxable income of more than Rs400,000 is between 10 to 12 million and tax base is around Rs50 trillion (after taking into account informal economy). Flat rate taxation of just 10 per cent with strong enforcement system will yield Rs5 trillion under income tax alone.
If the present indirect taxation is replaced with HST as in a comparable federation like Canada and India, it would not only improve revenue collection but would also help alleviate the sufferings of taxpayers who have suddenly been bombarded by multiple tax authorities.
In the Pakistani milieu, if 10 per cent HST is levied, it would yield at least Rs5 trillion. A comprehensive study, courtesy Tax Reform Commission (TRC), is already with FBR.