Monstrous tax gap and remedial measures

There is hardly any doubt about huge tax gap in Pakistan. It is not only because of weaknesses in enforcement of Federal Board of Revenue (FBR) and provincial tax agencies, but also attributed to the bad tax policy. According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on August 31, 2022 was 195 million (88.21% teledensity). Out of these, 120 million were 3G/4G subscribers (54.35% penetration), 2 million basic telephony users (1.19 teledensity) and 123 million broadband subscribers (52.62% penetration). Not less than 110 million unique mobile users (many have more than one SIMs) are thus have been paying advance/adjustable income tax of 15% from July 1, 2022. Unfortunately, yet the Pakistanis are dubbed as tax thieves by our successive governments and international lenders and donors.

The incontrovertible fact is that presently the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users. If all file income tax returns, there will be refund payable to at least 90 million having no income or income below taxable limit though cost to claim will be much higher than what is withheld.

The FBR must collect taxes where due and not in advance or from those not chargeable to tax. Sadly 75 paisas (one Pak rupee contains 100 paisas) federal excise duty (FED) on cell call exceeding 5-minutes was levied in the Finance Act 2021 in utter apathy towards the poor. It was also in violation of the Constitution of Pakistan as held by Sindh High Court in its judgement in the case of certain telecoms [ (2023) 125 Tax 401 ((H.C. Kar)] endorsing Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.). FBR has challenged this order in the Supreme Court. Apart from the issue of constitutionality, it is a bad tax policy measure—impractical to implement for operators, anti-poor, and inconsequential to efforts of FBR to raise the desired revenue through already oppressive indict taxes.

The relief given to small and medium enterprises (SMEs) as manufacturers up to turnover of Rs. 250 million in the Finance Act, 2021, should have been for retailers and others taxpayers as well, without any discrimination. Low-rate tax on broad base with simple compliance procedure is needed to collect Rs. 12 trillion at federal level alone [see details in Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute, Islamabad, December 2020].

The coalition government of Pakistan Tehreek-i-Insaf (PTI) resorted to oppressive taxation during its rule [August 2018 to April 2022]. Now its successor, alliance government of Pakistan Democratic Movement (PDM), is doing the same. It is high time that we must stop taxing the less-privileged and downtrodden. Why are the poor still subjected to oppressive taxes like 75 paisa for cell call exceeding 5-minute and 15% advance income on mobile and/or internet use from July 1, 2022? The rich and mighty are still enjoying tax-free perks and benefits of billions of rupees.

The heavy taxation on electricity bills and a number of food items and items of daily use by the citizens is totally unjustified when tax expenditure was above one trillion rupees in each financial year since fiscal year 2020-21. The tax credits for senior citizens and special people that were available before the enhancement of tax rates by Finance Act, 2019 should have been restored by PTI or PDM, but both failed to do so even after the higher tax rates restored in 2018 on the dictates of International Monetary Fund (IMF).

While, the exporters of services from tax year 2022 are to be taxed at 1% (laudable amendment to bring it at par with exports of goods), it is not provided that how much credit would be taken in books. The definition of “imputable income” is available in the Income Tax Ordinance, 2001 and must be applied in the case of exporters of services provided that if they claim higher credit than the same, the actual working must be provided. In case of wrong claim, the punitive measures should be provided.

Many self-acclaimed professionals, selected in committees announced by the successive governments—civilian and military alike—to remove anomalies and technical issues (sector-wise etc.), have failed to even remove these obvious lacunas, what to speak of suggesting a pro-growth and investment-friendly tax policy helping in creating jobs from agriculture to high tech knowledge-based initiatives, rather than emphasising on bricks and mortars. They must be reminded of couplet of great poet and thinker, Dr. Allama Muhammad Iqbal:

Jahan-e-Taza Ki Afkar-e-Taza Se Hai Namood
Ke Sang-o-Khisht Se Hote Nahin Jahan Paida

New worlds derive their pomp from thoughts quite fresh and new
From stones and bricks a world was neither built nor grew.

The federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the ineffective, outmoded, colonial era institutions, including the country’s tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are the main factors for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer. We have been repeatedly discussing and pleading for radical revamping and restructuring of the entire tax system, through low-rate, broad-based and predictable taxes, single national tax agency and national tax court.

Tax policy reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.

The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project.

It may be mentioned that the total cost of PRR Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million. Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US$304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020. Like earlier programmes, these are also bound to fail.

The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. This is the time that the alliance government must invite all political parties, including the PTI, to consider seriously the above model, if we have to make Pakistan a prosperous country and egalitarian state—an economic power with over 220 million people to have its say in global matters for a safer, just and peaceful place for the humanity at large, especially in the wake of US and its allies complete retreat from Afghanistan and leaving the region in turmoil. Pakistan must forge alliance with all countries in the region, especially the Golden Ring countries, to protect its national interest and progress rapidly in all areas.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

 

Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, investment companies, money service businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached on Twitter @DrIkramulHaq.

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