The major tax codes of Pakistan at the federal level — Sales Tax Act, 1990, Income Tax Ordinance, 2001, Customs Act, 1969 and Federal Excise Act, 2005 — contain numerous exemptions and concessions, a majority of these were added, modified, or withdrawn through executive orders, called statutory regulatory orders (SROs), without the consent of parliament in utter violation of Article 77 of the Constitution of Pakistan.
After foreign lenders, particularly the International Monetary Fund (IMF), started questioning the use of SROs for the benefit of the ruling and privileged classes, the power to issue SRO was made subject to approval of the cabinet in extraordinary circumstances through Finance Act, 2015. This is just an eyewash as till today tax concessions and exemptions available to the privileged classes — military-judicial-civil complex, businessmen-turned politicians, and absentee landlords — continue unabated.
The enormous exemptions and concessions available in sales tax contribute towards illegal enrichment and widen the rich-poor divide. These are abused by the unscrupulous businessmen with the connivance of taxmen and their crafty advisers to get benefit of even taxable supplies by misdeclarations at the import level. This indirect tax also takes large portion of meagre incomes of the poor and very small slice of the enormous money available to the rich.
The exemptions under the Income Tax Law, especially for the powerful segments, cause huge loss to the national exchequer — all tax-free perks and benefits of public offices and high-ranking civil-military officials of public offices and high-ranking civil-military officials are funded by taxpayers’ money.
The State spends billions of rupees for these perks that, in fact, should have been utilised to provide the basic amenities of life, education, medical, housing, and transport to the public at large. It is an established fact that billions forgone as tax exemptions and concessions could have significantly reduced Pakistan’s debt and fiscal deficit.
In 1991, the income taxation in Pakistan was largely converted into indirect taxation to reduce burden on the rich and increase incidence on the poor — this was done by the civilian government of Mian Mohammad Nawaz Sharif. Since then, presumptive taxes have been retained — even in the Income Tax Ordinance, 2001 promulgated by General Pervez Musharraf.
The presumptive taxation is in reality income tax exemption. For example, commercial importers pay fixed rate of income tax on the value of imports, which is full and final liability in their case, and they pass on the burden to the purchaser — this in no way can be called income tax paid by them though the FBR takes its credit under income tax collection. A similar position exists for contractors, service providers, and commission agents etc.
The powerful civil-military bureaucracy, president, prime minister, governors, chief ministers, ministers, state ministers, advisers, senators, MNAs, and MPAs together received Rs. 500 billion in the fiscal year 2014-15 as perks and perquisites alone. Not only this, the powerful segments did not pay a single penny as tax on plots and benefits received free or at concession rates, in utter violation of section 13(11) of the Income Tax Ordinance, 2001.
Besides the mighty bureaucrats and politicians, tax waivers are also generously extended to the defiant mighty businessmen. The government of Pakistan Muslim League-Nawaz, after assuming power for the third time in June 2013, instead of taking steps against tax evaders and wealth plunderers, gave them “relaxations”.
The finance minister proudly announced in September 2013 that “all demands of traders relating to tax matters have been accepted”. Though tax amnesties were personally announced by the Prime Minister for non-filers, they did not bother to file income tax returns — unprecedented amnesty scheme was given requiring them to pay only Rs. 20,000 rupees for a tax year with no questions asked and no audit conducted.
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The amnesty scheme of the Prime Minister that expired on April 30, 2014 received extremely cold response — only 3,395 persons availed paying a paltry sum of Rs. 87.7 million. Now PML-N is planning to give another tax amnesty to all tax evaders for whitening their untaxed assets by just paying 3 per cent of value of assets.
The position under the customs is equally appalling where approximately 2,000 tariff lines (representing 50 per cent of the SROs) are liable for import duties of less than 5.1 per cent, with almost 900 of them zero-rated. This is how tax laws have become a mockery of rule of law in Pakistan.
Tariq Bajwa, the Chairman Federal Board of Revenue (FBR), admitted in 2014 that “the government is facing a massive revenue shortfall as two-third imports are duty free. It is a matter of grave concern for the FBR that the dutiable imports have dwindled in a major way during the current fiscal year.” Bajwa, during a hearing before the Senate Standing Committee on Finance on May 13, 2014, revealed that “the cost of tax exemptions granted over the years to the affluent was Rs. 480 billion per annum”.
He was asked to explain why FBR keeps on issuing SROs due to which customs duty, excise, sales tax, and even income tax at source is not being collected and who are the beneficiaries?. The Chairman said: “all of these exemptions cannot be withdrawn, as some are socially sensitive while others are protected under the constitution.”
He further revealed that “in the first seven months of the current fiscal year, Rs. 320 billion worth of exemptions were given that included income tax exemption given to independent power projects (IPPs) for electricity producers that is protected through agreements and will not be easy to withdraw.”
Tariq Bajwa was incorrect on all the points. First of all, no exemption could be granted through any SRO as held by the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak). As regards the exemption granted to the IPPs, it can also be withdrawn as held by the Lahore High Court in AES Pak Gen (Pvt) Company Lahore v Income Tax Tribunal Lahore (2006) 93 TAX 159 (H.C Lah.) and endorsed by the Supreme Court in Uch Power (Pvt) Ltd and others v Income Tax Appellate Tribunal and others 2010 SCMR 1236.
The exemptions and concessions in Pakistan are for the rich and mighty and not for the less-privileged to be “socially sensitive” as claimed by Chairman FBR. Till 1977, before Ziaul Haq’s coup, Pakistan had progressive rates of income taxes, capital transfer taxes, and wealth tax for redistributive justice. Since then, there has been a continuous shift from equitable taxes to inequitable ones by granting extraordinary concessions and exemptions to the mighty segments of society.
The writers, lawyers and authors of many books, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)