Monday, September 16, 2013

Financing the parasitism of Riyasati Ashrafiya

Tax reform agenda 
By Huzaima Bukhari & Dr. Ikramul Haq

The dire need in today’s Pakistan is to tap the real tax potential and make the country a self-reliant economy, stop wasteful, unproductive expenses, cut the size of the cabinet and government machinery, make government-owned corporations profitable or restructure them, accelerate industrialisation and increase productivity, improve agricultural sector, bring inflation to single digit and reduce inequalities through a policy of redistribution of income and wealth.

High rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends in all democratic countries. In Pakistan, there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the fundamental principle of horizontal and vertical equity.

In Pakistan, the poor are subjected to heavy and cruel taxation to finance the luxuries of Riasti Ashrafiya — militro-judicial-civil complex and public office-holders who enjoy free perquisites, benefits, including expensive plots at throw-away prices at prime locations that belong to the state. The way they waste and plunder the taxpayers’ money is no secret. The country is surviving on bailouts from the IMF due to perpetual failure of the ruling elite to tax the rich and mighty that matter in the Land of Pure. Revenues worth trillions of rupees have been sacrificed by governments — civil and military alike — since 1977 extending unprecedented exemptions and concessions to the privileged classes. Gradually, the governments abolished all progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax etc.

The historic decision of taxing “agricultural income”, passed by the Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq.  Through this law, the Parliament amended the definition of “agricultural income” as obtaining in section 2(1) of then Income Tax Act, 1922 to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan, but ruthlessly foiled by a military dictator. 

During Zia’s rule of 11 years and that of General Musharraf for nearly 9 years, absentee land owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax. Taxation of “agricultural income”, at present, is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have enacted laws to this effect, but total collection in 2012-2013 was less than Rs2 billion against actual potential of Rs200 billion (share of agriculture in GDP was about 22 per cent).

No one has calculated how much tax loss Pakistan suffered perpetually since 1977 on account of non-taxation of agricultural income alone as suggested under Finance Act, 1977. If we add total loss of revenue through various exemptions, non-taxation of benefits given to state oligarchy (Riasti Ashrafiya) and through Statutory Regulatory Orders (SROs) issued during the last four decades, the number comes to over Rs100 trillion — this explains how unprecedented concessions to the rich has made the state poorer rendering every citizen of this country to an enormous indebtedness. We would not have required any borrowing at all, if tax losses were not incurred.

How the governments were abusing taxpayers’ money can be judged from the decision of Supreme Court on April 17, 2013 suspending the March 14, 2013 notification issued by Interior Ministry granting former interior minister Rehman Malik and his predecessors lifetime perks and privileges. Hearing the suo moto notice case regarding unlimited perks and privileges granted to two former prime ministers, all former interior ministers, Sindh chief minister and other senior officials by the outgoing government, the five-judge bench of apex court sought a response from relevant authorities in this regard.

It is thus no wonder that the Federal Board of Revenue (FBR) posted shortfall of over Rs450 billion for fiscal year 2012-13. Very few people know that in the face of such shortfall, the FBR withdrew the biggest revenue spinner — 1 per cent withholding tax on manufacturing — resulting in a revenue loss of Rs18 billion. Drastic cut of federal excise duty on sugar to 0.5 per cent aimed at benefiting the influential sugar industry owners, causing a loss of Rs8 billion to the national exchequer. 50 per cent cut on sales tax for steel melters caused revenue loss of nearly Rs4 billion.

In the budget for fiscal year 2013-14, the Federal Board of Revenue (FBR) is assigned a target of Rs2475 billion — nearly 25 per cent increase over the collection made for 2012-13. All experts are of the view that it is irrational and ambitious in view of expected growth rate and enforcement capabilities of the FBR.

Adding insult to injury, despite the dismal performance, the FBR gave bonuses to its staff and officers ranging from one salary to three salaries. This was shocking to say the least, especially as the country had been going through the worst economic crisis. It is not understandable why the FBR even gives double basic salary to its staff in addition to annual bonuses — they are government employees and should be entitled to normal emoluments like all other public servants.

Finance Minister Ishaq Dar and the National Assembly should look into the affairs of the FBR asking them to justify double basic salary and undue “bonuses” — especially when 90 per cent tax collection comes through withholding or voluntary payments with returns, and revenue targets are missed every year.

At operational level, the challenge is creating a corruption-free, efficient and result-oriented tax apparatus. Though the World Bank and other donors gave a lot of money and consultancy to Pakistan, things have changed only for the worse. If the FBR wants to improve its efficiency, administrative pragmatic reforms are the immediate need of the day — a successful model of Mauritius Revenue Authority ( can be studied, debated and adapted after making necessary changes to suit our peculiar conditions.

At enforcement level, the biggest challenge is how to bridge the tax gap — collection by the FBR is one fourth of actual tax potential [Fiscal fiasco, The News, 12 May 2013]. Issues of documentation and tax compliance are lingering on for years even after completion of a costly $100 million World Bank funded Tax Reforms Administration Programme (TARP).

The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System, which is capable of recording, storing and cross-matching all inflows and outflows. All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and taxes payable at source. However, no reform agenda can succeed unless FBR is insulated from outside political pressures. It should be made National Tax Collection Agency, responsible for collecting all federal and provincial taxes and should be run by an independent Board of Directors selected by National Finance Commission and/or Council of Common Interests.

It would facilitate taxpayers to approach one agency only and data sharing for all taxes would help in increasing revenues for the federation as well as the federating units.

[This article first appeared in The News on Sunday, September 15, 2013. The writers, tax lawyers, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).]

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

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