Reconfiguring tax system

The government should stop looking for more borrowed money and take immediate steps for resource mobilisation to overcome fiscal deficit

Taxation is a lot like sheep shearing. As long as you shear a sheep, it will continue to produce a new crop of wool but you can skin the animal only once — Anonymous

While it’s a routine for the federal government to revise downward its “unrealistic” fiscal revenue targets, the country’s tax collection capacity is not less than Rs4.5 trillion — Draft Interim Report of Tax Reforms Commission as reported in press.

Tax reform, according to University of Tennessee professor William Fox, “would seem to achieve more goals than just revenue chasing. Other goals might include better revenue elasticity, improved fairness, reduced efficiency costs, easier administration and compliance.”

Reconfiguring a tax system is a daunting task and broad tax reform efforts cannot be undertaken lightly. According to a press report, this is the central theme of a comprehensive interim report prepared by Tax Reforms Commission (TRC) which is not made public and presently marked as confidential. TRC was notified on September 25, 2014 for suggesting tax reforms in all the areas — from tax administration to tax legislation and related matters.

According to a press report, “while TRC Chairman Masood Naqvi, a fellow of chartered accountants (FCA), would remain tight-lipped about what recommendations the commission was going to forward to the Finance Ministry, a member hinted that the report was focused more on reforms aiming at broadening of the country’s “narrow” tax base.

Pakistan, a developing country of about 200 million people, has below 10 per cent Tax-to-GDP ratio, one of lowest in the region. “We have a narrow tax base as our rotten taxation system direly needs reforms on enforcement and automation fronts,” opined a member of the commission.

It is an established fact that the governments — federal and provincial — are all lax in taxing the rich and mighty. On the contrary they extend them extraordinary tax-free perks and perquisites while the sufferers are the poor masses as day by day they are transforming into the wretched of this earth whereas wealth is getting concentrated in a few hands which hold the reins of this country.

Provincial governments have been wasting funds received as share from divisible pool, but have shown no inclination to generate funds themselves by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich people and on unproductive transactions.

The dilemma of Pakistan is cronyism, greed and corruption on the part of the ruling elites. They are parasites and not growth catalysts or innovators. By improving compliance and broadening tax base, it is not at all difficult to raise funds of over Rs8 trillion but the rulers are engrossed in giving generous tax concessions and immunities to evaders and plunderers of national wealth.

The federal government, as usual, is keen to borrow more from local and foreign sources — knowing well that already debt-to-GDP ratio has crossed the danger mark. It is shocking to note that both the Ministry of Finance and Federal Board of Revenue (FBR) have yet not received any instructions from political masters to prepare plans to levy taxes on import of luxury items, impose surcharge on wealthy classes and introduce excess profit tax on sectors that have earned extraordinary profits e.g. sugar, cement, flour mills, telecom and the banking sector. Financial managers, instead of doing any work on new emergent tax measures, are begging for more funds from IMF and other donors.

The federal government was and is not at all ready to impose excess profit tax on cartels that earned billions by manipulating prices — they were fined by Competition Commission with evidence that was irrefutable. If this is done, the government can easily raise additional funds of Rs400 billion. The provincial governments, like the federal government, are not willing to levy progressive taxes e.g. tax on luxury cars and grand houses as well progressive agricultural income tax on rich absentee landlords — this alone can generate revenue of over Rs200 billion.

Provincial governments have been wasting funds received as share from divisible pool, but have shown no inclination to generate funds themselves by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich people and on unproductive transactions.

The following three measures alone can generate extra revenue of nearly Rs one trillion at federal level — out of which provinces will receive 56 per cent as per 7th NFC Award:

Excess profit tax on cement, sugar, flour mills, and banking and telecom sectors would generate extra tax of Rs300-350 billion. All persons having income exceeding Rs2 million should also be asked to pay 10 per cent extra surcharge for helping the poor; it will generate Rs100-130 billion. This amount should be deducted from taxable income to avoid double taxation.

One-time de-logging litigation scheme: Taxpayers be asked to pay 25 per cent tax arrears till June 30, 2015 with pending cases before appellate authorities and courts deemed to be settled. In 1998, India through a similar scheme [Kar Vivad Samadhan] generated revenue of Rs900 billion, while disposing huge backlog of cases in the country. Such a scheme with time limitation up to June 30, 2015 would not only generate immense revenue (not less than Rs100 billion if properly drafted and publicised) but would also help drastically in reducing workload of tribunals and high courts.

Withholding tax of foreign remittances exceeding Rs100,000: Section 111(4) of Income Tax Ordinance, 2001 protects tax evaders and criminals. It says that on foreign remittances no tax would be levied and no question would be asked about their source. This has destroyed the entire social fabric of the society. Genuine taxpayers are discouraged. This section should be amended and on a single remittance exceeding Rs100,000 (poor labourers working abroad send meagre amounts) tax deduction of 15 per cent should be imposed. This way huge revenue of at least Rs400 billion can be generated.

The above three measures can provide extra funds of Rs500 billion to the federal government to keep fiscal deficit within a safe limit. These measures will not burden the common people as incidence of tax would fall on the rich. Any enhancement in indirect levy becomes beneficial for those not on the rolls of FBR — they collect it from people but do not deposit the same in the government treasury. The federal government should stop looking for more borrowed money and take immediate steps for resource mobilisation to overcome fiscal deficit — the mother of all ills.

The provincial governments can also raise substantial revenues by levying taxes on the rich property owners and absentee landlords — many of them are guilty of removing and breaching dykes to save their lands while diverting flood waters towards poor inhabitants living in villages and towns. They should also impose transactional taxes on speculative dealings in real estate — look at the quantum of transfer fee earned by DHA and Bahria alone — and expenditure tax on luxury consumption (people are paying millions to five star hotels for social events).

They can generate adequate funds if these tax measures are introduced. The real tax potential of Pakistan — a cursory look at undeclared income/wealth would prove it — is not less than Rs8 trillion. If we manage to collect tax revenue of even Rs6 trillion, our reliance on domestic and foreign loans will decrease significantly and debt servicing consuming over Rs1500 billion would come down.