NationalVOLUME 15 ISSUE # 08

Comprehensive tax reforms

Pakistan cannot become Riasat-e-Madina – a truly welfare state – unless all sections of the population, specially the richer classes, pay their full taxes. We need hard cash to provide education, health, housing and other facilities to the people, and that cash is missing.

Tax policy should be such that promotes investment, industrialisation and employment generation by diverting resources to the productive sectors of the economy. The essence of the policy should be to tax the rich and benefit the poor in order to promote socio-economic justice. But over the last 70 years, successive governments have failed to bring the necessary reforms to the tax system. If we improve compliance and broaden the tax base, it should not be difficult to raise funds of over Rs. 8 trillion at the federal level and Rs. 2 trillion at provincial levels.

While addressing top officials of the Federal Board of Revenue last week, Prime Minister Imran Khan expressed dissatisfaction with the working of the revenue authority. He asked them to implement the tax reforms approved by him in October 2018, to collect taxes of Rs. 8 trillion, in order to reduce fiscal deficit and the burden of debt servicing. It is relevant to point out here that in 2018-19, the total expenditure on account of debt servicing was Rs. 1,987 billion against the budgeted figure of Rs. 1,620 billion. The allocation for the current fiscal year is Rs 2,891 billion, 78 % higher than the last year.

This is a big challenge that the government has to meet and it can do so only by raising the revenue. As things stand, the FBR lacks the capacity to do the job. Besides rampant corruption, there is lack of trust between the tax collector and the tax payer. While the revenue collection is low, massive loss is also caused by the asset whitening schemes that governments float from time to time.

Interestingly, before coming to power, the top leadership of the Pakistan Tehreek-i-Insaf described tax amnesty schemes as immoral and unlawful. But after coming to power, it has changed its stance. The PTI government has taken many U-turns, one of which is offering an asset whitening scheme, resulting in tax` losses of billions of rupees. It notified its first whitening scheme, Assets Declaration Ordinance, 2019, through a Presidential Ordinance on May 14, 2019. The scheme offered generous incentives to those who had not been paying their taxes honestly, concealing and/or understating assets/incomes/sales/expenses and cheating the State.

It may be added here that the head of the Directorate of International Taxes of the FBR told the House Committee of the National Assembly two weeks back that out of 191 persons who availed the 2018 and 2019 asset whitening schemes, tax received by the FBR was only Rs. 4.6 billion against the declared assets of Rs. 94.2 billion. Thus, these 191 people paid on an average of 4.9% of the value of their assets in taxes. It was admitted by the FBR chairman that they could have recovered 70% of the value of assets because as per provisions of the Income Tax Ordinance 2001, on a concealed asset, there is a maximum income tax of 35% along with 100% penalty, bringing the total tax liability to 70%. The truth of the matter is that Imran Khan’s advisors let him down by foregoing 70% tax on untaxed assets for which definite information was available through a multilateral treaty signed by Pakistan.

The basic problem is that the PTI has failed to tackle the issue of bureaucratic capacity, although in its initial days it had identified administrative reforms as top priority and to this end appointed Dr Ishrat Hussain as Advisor to Prime Minister for Institutional Reforms & Austerity. But no follow-up action was taken and nothing came out of the initiative.

To recall, in his inaugural address to the nation Imran Khan outlined his grand vision for Naya Pakistan and promised to cut down on expenses and to introduce structural reforms for revamping the economy. But he committed the blunder of depending on the discredited PAS cadre that frustrated all efforts for meaningful structural reforms in the bureaucracy, especially in the Federal Board of Revenue. The PTI, after two supplementary finance acts and Finance Act, 2019, allowed the FBR to follow the old policies of the previous government by resorting to oppressive indirect taxes, retarding economic growth and widening fiscal deficit.

Needless to say, the long-term remedy to our economic problems does not lie in seeking the help of the IMF and getting input from FBR’s top hierarchy who are part of the problem. We need to seek indigenous solutions to our tax issues. As per its own comprehensive tax policy unveiled on August 24, 2012, the PTI must adopt concrete measures for revenue generation internally. If the policy is implemented, it can change the economic direction of Pakistan. Our tax potential is immense. What is needed is a comprehensive plan of action to fully exploit it.