Sunday, August 18, 2013

Riyasati Ashrafiya (State Aristocracy) thriving on taxpayers’ money

Taxes for what
By Huzaima Bukhari & Dr. Ikramul Haq

The government’s yearning for “more and more taxes” has become a point of irritation for the citizens who argue where are the entitlements promised in the Constitution as quid pro quo?

Successive governments — military and civilian alike — have failed to convince the people that payment of taxes is their collective responsibility. The major reason for tax defiant culture in Pakistan is abuse of taxpayers’ money by Riasti Ashrafiya (state oligarchy) — militro-judicial-civil complex and public office holders — for plots, perquisites, personal comforts and luxuries.
People say if the government cannot protect their life and property, it has no right to collect taxes. In a democratic polity, taxes are collected for providing the citizens universal entitlements e.g. health, education, housing, transport, and civic amenities etc. The valid argument against paying taxes in Pakistanis is that it constitutes extortion by the ruling oligarchy for perpetuation of its control over resources.

The government’s yearning for “more and more taxes” has become a point of irritation for the citizens who argue where are the entitlements promised in the Constitution as quid pro quo? Excessive taxation without growth and equity has only compounded our economic ills — look at the number of fiscal deficit, quantum of internal and external debts, rate of inflation etc.

Voicing his concern, Nadeem-Ul-Haque, former Deputy Chairman of Planning Commission, in Reform or face fundamental ascendency, emphasised, “the state must first provide the social contract i.e. good law and order and security of life. It must dismantle the rent seeking that protects the rich….. Rent seeking relies on three main components: state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system that allows the poor man’s land to be acquired for the elite especially the army and civil service”.

An equitable tax system requires payments linked with benefits received from government services — the Scandinavian social democracy model is a good example to quote. In social democracies, the cost of government services are apportioned amongst individuals according to the relative benefits they enjoy. In economic terms, this is called “benefit principle” that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden.

Tax policy should be aimed at achieving the cherished goal of distributive justice. The government should launch programmes financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include free medical and educational facilities, low-cost housing, and drinking water facilities in rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of the taxes paid, there will be better response to tax compliance.

Taxes cannot be collected through harsh measures and irrational policies as has been done recently by Ishaq Dar. The government, by its actions, must demonstrate to the citizens that money collected from them is spent for collective welfare. Presently, the ruling oligarchy is enjoying innumerable tax-free benefits from money collected from the masses, which get nothing in return. This is worst one can think of in any system of government.

It is an irrefutable fact that despite resorting to all kinds of negative tactics, blocking of bona fide refunds, the Federal Board of Revenue (FBR) has failed to improve tax-to-GDP ratio. It declined to 8.2 per cent during the financial year 2012-13 from 9.2 per cent in the immediate preceding year. With failure to collect target of Rs2381 billion, the fiscal deficit jumped to nearly Rs1700 billion proving that irrational tax impositions cannot avert fiscal disaster.

In 2004, the FBR promised 0.2 per cent per annum growth in the tax-to-GDP ratio for the next five years while submitting ‘tax projections’ and ‘revenue-to-GDP ratio’ to the International Monetary Fund (IMF) on the conclusion of 9th review under the Poverty Reduction Growth Facility (PRGF). The FBR informed the IMF that it would increase tax-to-GDP ratio from 9.2 per cent to 10.3 per cent in 2008-09 — in reality there was a decline of 0.4 per cent! Even the funding by World Bank for reforms (sic) of the FBR could not bring desired results as there is perpetual decline in tax-to-GDP ratio.

Economy as a whole in a shambles — growth in real terms is negative, debt burden is increasing monstrously, fiscal deficit has reached 68 per cent of GDP, inflation is again in double digit, taxes are evaded by the rich massively and whatsoever is collected is mercilessly wasted by the state oligarchy — who really matter in this Land of Pure.

Riasti Ashrafiya is thriving on the taxpayers’ money — they are the main beneficiaries of all the state’s resources. The list of tax free perquisites available to them is baffling and shocking — Perils of tax breaks, The News, February 17, 2013. The government’s kitty is empty because of wasteful spending on the perquisites of a handful few, on useless state enterprises and financing the monstrous government machinery that is both inefficient and corrupt.

The colossal wastage of taxpayers’ money on unproductive expenses gets further compounded when there is no will to take advantage of vital natural and human resources on the part of Riasti Ashrafiya. What makes things worse is the fact that many powerful political figures, in government and opposition, and strong men in khaki and mufti have stacked billions of dollars abroad when their fellow countrymen are dying of hunger — Our money, their banks, The News, July 7, 2013. These classes pay miserly tax in Pakistan but enjoy unprecedented tax-free benefits financed by the common people!

The ruling elites, representing militro-judicial-civil complex, industrialists-turned-politicians, absentee landlords and unscrupulous traders, are owners of huge movable and immovable assets created out of untaxed money. The issue of Pakistan is how to make tax incidence equitable and just. It is not possible unless all the generals, judges of higher judiciary, high-ranking civil officials get ‘consolidated pay packages’ and pay tax on that just as other employees do. These packages should be market-oriented but not tax-free.

The government, if sincere in collecting taxes from all, should immediately withdraw all exemptions and tax whitening schemes [section 111(4) of the Income Tax Ordinance, 2001], enforce agricultural income tax on absentee landlords earning net income of more than Rs400,000, reintroduce wealth tax on the super-rich and immediately legislate for asset-seizure law to counter money laundering, tax evasion and rent-seeking.

It is admitted by the FBR that even after “great efforts” (sic) less than 1.5 million filed income tax declarations for tax year 2012. In Pakistan, the total number of mobile users alone is 125 million, out of which 5 million are rich and pay more than Rs40,000 as annual bill — they are potential taxpayers. Why have they not been compelled by the FBR to file returns? It testifies to the FBR’s inefficiency and ineffectiveness.

These days, the FBR is taking undeserved credit for a new initiative (sic) by establishing the post of Commissioner (Headquarters) Broadening of Tax Base given the task of adding a few thousands new taxpayers this year. This Commissioner sitting right in the FBR is completely oblivious of ground reality that how easily we can raise the number of tax filers to 4 million, if not more — presently 50 million plus are paying adjustable income tax for usage of mobile service and selecting from them who earn taxable income, but not filing tax declarations, is not a difficult task. But the FBR wants many new posts to do it! It can be done with a simple software application — Member IT of FBR can ask service providers to identify who are paying Rs40,000 or more per annum.

[The writers, tax lawyers, are Adjunct Professors at the Lahore University of Management Sciences (LUMS).]

[This article first appeared in The News on Sunday, August 18, 2013.]

Note: Reproducing this article in my Blog does not amount to my agreeing with the authors' point of view.

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