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Sustainable growth means more taxes

Tax is a byproduct of growth, but for our economic managers statistics of tax collection matter, but growth does not

Sustainable growth means more taxes
Heavy taxes close many industrial units in Faisalabad.

History of tax reforms in Pakistan, funded by foreign agencies and successive governments, has been a history of failure. It has remained largely a bureaucratic exercise behind closed doors inducting a few hand-picked experts and avoiding meaningful consultation with stakeholders, academicians and public at large.

This attitude, blatantly undemocratic and undesirable, finds its worst manifestation in keeping “secret” the final report of 2016 Tax Reform Commission, established on September 25, 2014. This is the way we debate and carry out “reforms” in Pakistan. It is high time that the new economic and tax team of Pakistan Tehreek-i-Insaf made it public for debate.

While the Federal Board of Revenue in the name of “tax reforms” has been playing havoc with the tax system, recent years have witnessed closure of a number of industrial units, stagnation and rising inflation. During the Pakistan Muslim League-Nawaz, government there was a steady decline in exports and an unprecedented rise in import of luxury items. The then finance minister, Ishaq Dar, used to take great delight in imposing 30 to 50 per cent tax on various petroleum products to show “extraordinary tax collection” at the cost of destroying industries by adding to their cost, rendering them uncompetitive. Besides, inefficiency, corruption and incompetence of FBR, oppressive, inconsistent, illogical, burdensome, complicated and expropriatory tax policies created impediments for business growth. A similar situation prevails under the PTI. Expectations of local and foreign investments cannot be met unless we concentrate on removing irritants in our tax system providing a level playing field for all, ensuring ease of doing business and training Pakistani talent in skills and innovations.

At the moment, there is not a single institute, exclusively engaged in fiscal research and teaching taxation. We do not have a chartered institute of taxation — like the ones in United Kingdom, Australia, Malaysia, Nigeria, and Ghana. The business and law schools in universities, institutes like Pakistan Institute of Development Economics, Institute of Chartered Accountants of Pakistan, Institute of Cost Management Accountants, tax bars, Federation of Pakistan Chambers of Commerce and Industry or Overseas Investors Chamber of Commerce and Industry etc cannot show even one comprehensive research study suggesting a pragmatic, workable tax policy to achieve the above cited goals.

The present tax system discourages capital formation and investment and is the real cause of retarded economic growth, burgeoning fiscal deficit and insurmountable debt burden. But our economic managers are unable to fix them. They are not ready to accept that tax is a byproduct of growth. Rapid and sustainable growth can bring more taxes, but they are least concerned. For them tax collection numbers matter, but growth does not.

Devising an efficient tax model for rapid economic growth requires an analytical study of all the irritants in tax codes, procedures and implementation processes. The main irritants are highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses.

Economic challenges faced by Pakistan are multiple and grim — we are trapped in a deadly debt trap, but there is no solid programme available with any political party or the government to come out of it. They are least pushed to accelerate growth, induce investment, cut waste of and make the tax administration fair and efficient. Pakistan faces the Herculean task of providing jobs to millions — on an average we need to create 2 million jobs annually for young people alone. To achieve this target, we have to ensure that economy grows at the rate of more than 7 percent per annum — for this we need at least 20 percent of the GDP to be invested. This challenge is also our great opportunity for rapid economic progress.

Most of the job seekers are young people, who are our greatest asset — imparting education and skills to them and creating matching jobs is the real challenge. We need value added exports and employment generation in all fields — the real engines of growth.

Pakistan is amongst those fortunate countries of the world that enjoy an abundance of resources and a climate fit for simply any activity throughout the year. But thanks to an overemphasis on retrogressive taxation and incompetence of our economic managers, Pakistan’s dependence on imported products has increased manifold. Value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations — modern economies are knowledge-based and future is for those people who can develop them as quickly as possible.

For technological transfers, rapid industrial growth and employment generation, foreign direct investment (FDI) is desirable. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our economic managers have been preoccupied with revenue targets and have not bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investment and employment generation, without which sustainable growth is not possible.

Companies are worst hit by the FBR’s desired laws, mechanically passed by parliamentarians. Top management of the FBR has been demonstrating a very myopic outlook as evident from over-emphasis on withholding taxes. This policy has further accentuated in the Finance Act, 2019. With low tax rates and simpler complicated procedures, we could have promoted investment, especially corporate growth.

On the contrary, the FBR in 2015 imposed ‘tax on undistributed reserves’ [Section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another bad move. In 2014, the FBR imposed Alternative Corporate Tax [Section 113C of Income Tax Ordinance, 2001]. Such erratic, arbitrary and expropriatory taxation, as expected, retarded corporate sector and discouraged investment and growth.

We need to incentivise corporatisation of business. Only about 98,000 companies are registered with the SECP out of which less than 50 per cent are active and file tax returns. There are numerous anti-corporate provisions in the tax codes. Companies are maltreated by the FBR — after collecting billions as ‘withholding tax agents’ of the state without any compensation; they are penalised for small lapses that may not be willful.

Devising an efficient tax model for rapid economic growth requires an analytical study of all the irritants in tax codes, procedures and implementation processes. The main irritants are highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses — both at federal and provincial levels. We need research and public debate for suggesting solutions to remedy the situation and promote taxation and business growth attracting domestic and foreign investment and creating much-needed jobs. For this, we must establish a national tax institute where academicians, tax officials, practitioners, businessmen and other stakeholders contribute to devising holistic tax reforms. It can also provide a platform for young Pakistanis, who want to adopt tax practice as a career, to earn degrees/diplomas.

 

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

Dr Ikramul Haq

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