Need for fair & efficient taxation

Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Tax reforms certainly do not mean mere alteration of tax laws or making cosmetic changes here and there. Meaningful tax reforms are not possible without first establishing an efficient, workable structure. The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverket that maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish National Tax Authority (NTA) on the same lines [Towards Broad, Flat, Low-rate and Predictable Taxes [PRIME Institute, third edition, November 2024].

 The issue of fragmentation of taxes and multiple collection agencies in Pakistan has been discussed in detail in these columns. In the forthcoming federal budget for fiscal year 2025-26 [Budget 2025], expected to be announced on June 2, 2025 or June 5, 2025, prepared under the strict supervision of the International Monetary Fund (IMF), there is hardly a possibility of any substantial relief for the salaried class and other segments bearing the brunt of high taxes and unbearable cost of living. The real dilemma is that there is no debate about reducing the monstrous tax expenditure of over Rs. 4 trillion while suggesting new tax measures of Rs. 700 billion.

Public Finance Management Act 2019 made it “mandatory for the Federal Government to include a statement of estimated tax expenditure of the Federal Government in the Annual Finance Bill”. In compliance of the same, the Federal Board of Revenue (FBR) released Tax Expenditure Reports from 2020 to 2024 covering the period from June 30, 2019 to June 30, 2023, which are available at its website. However, data for year ending June 30, 2024 is yet not released. Hopefully, it will be made available with Finance Bill 2025.

Pakistan needs a federalized tax structure as highlighted in Need for federalized tax structure, MinuteMirror, May 29, 2023 and ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018].

Strangely, the World Bank has not acknowledged in any of its papers/reports related to Pakistan Raise Revenue Project, the contribution of local writers and presented the same ideas as its own recommendations. For example, it may be noted that the idea of National Tax Agency first time appeared in 2013 in  ‘Need for National Tax Agency’, Business Recorder, November 1, 2013], then in Tax proposals—VII: Need for NTA, Business Recorder, May 22, 2015 and ‘Need for NTA’, Business Recorder, November 27, 2015. It was suggested that the FBR or any other tax collection agency need to be run by a competent board as a short-term reform measure before all these finally merged into a single national tax authority [NTA].

The NTA should not only collect taxes at all tiers of government but should also disburse benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitization) can be a great step towards e-government model for the country that is presently non-existent.

The models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) suggested as worth studying/adopting after debate and suggesting modifications suiting our peculiar requirements. This was later elaborated many a times in various articles and in a book, Towards Broad, Flat, Low-rate, and Predictable Taxes, third edition, PRIME Institute,  November 2024] and in Need for National Tax Authority, Business Recorder, October 20, 2017, ‘A case for ‘National Tax Authority’, Business Recorder, November 30, 2018 and December 2, 2018.  It was also included by the Tax Reforms Commission in its final report submitted in February 2016 [which was marked confidential and till today is not made public despite repeated public requests].

 The failure to tap actual tax potential and bring the undocumented  sectors in the tax net is the real dilemma of both the federal and provincial governments. Poor performance of FBR adversely affects the provinces as they are overwhelmingly dependent on the Divisible Pool. Provinces are not ready to collect taxes wherever due e.g. agricultural income tax from rich absentee landlords and property tax from owners of palatial houses/bungalows/farmhouses etc. and not giving fiscal powers to local governments as envisaged under Article 140A of the Constitution of Islamic Republic of Pakistan [“the Constitution”].

In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution between the Centre and provinces. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is insignificant—in the first nine month of the current fiscal year 2024-25 it was 7.48% in total tax revenues and in overall national revenue base (tax and non-tax revenue) only 6.63%.

In 2025, our economic managers are relying on Seventh National Finance Commission (NFC) Award [7th NFC Award] signed on December 30, 2009, before the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment]. Article 160(3A) of the Constitution, inserted by 18th Amendment, categorically says: “The share of the Provinces, in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award”. However, outside the ambit of Article 160 of the Constitution, the National Assembly can impose taxes to meet budgetary gap as it did in 2013 by enacting Income Support levy Act, 2013, but repealed it the very next year [A tax for the poor that the rich never paid, Daily Times, October 21, 2018].

When the federal government can impose any tax/levy/cess to meet its needs without sharing proceeds with the provinces then what is the motive of IMF and others behind starting a controversial debate over the 18th Amendment? The issue is not that of 18th Amendment, but poor collection of taxes by the FBR that hurts the provinces as well, which also do not collect taxes from the rich and mighty. This real dilemma of Pakistan is discussed in detail in Revisiting NFC Award, Daily Times, February 10, 2019 and IMF, NFC Award and PTI, Daily Times, October 14, 2018. 

 A special feature of the 7th NFC Award was recognition that for Balochistan, share from the divisible pool was guaranteed at Rs. 83 billion in financial year 2010-11 which was more than double from the actual divisible pool share of financial year 2009-10. It was also ensured that Balochistan province would receive provincial share in the divisible pool based on the budgetary projections instead of actual collection by Federal Board of Revenue (FBR). Shortfall, if any, based on the actual collection reported by FBR would be made up by the Federal Government itself. Initially, this arrangement was for five years of the 7th NFC Award but later on in order to cater for the financial needs of Balochistan, an amendment was introduced in the Presidential Order No.5 of 2010 [containing text of 7th NFC Award] providing that this arrangement “shall remain protected throughout the Award period based on annual budgetary projections”.

After 15 years of 18th Amendment and 16 years of 7th NFC Award, during Decade of Democracy [2008-18] neither Pakistan Peoples Party nor Pakistan Muslim League (Nawaz) made efforts to ensure adequate collection of revenues by FBR so that distribution of their net proceeds—commonly known as divisible pool—could bring fiscal consolidation for the federation. The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per command of Article 140A of the Constitution.

The culprit is not the 18th Amendment but the vested interests of elites. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely. In the coming week, they will notify yet another NFC but nothing will change unless oppressive, exploitative and elitist structures are dismantled!

The way forward is that provinces should have the exclusive right to levy sales tax not just on services but also on goods as was the situation in 1947. It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilization in Pakistan.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds LLD in tax laws with specialization in transfer pricing.

 He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law.

He is Chief Editor of Taxation.  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 has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

 He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

X (formerly Twitter): DrIkramulHaq

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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).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.

His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

 X (formerly Twitter): Adbul Rauf Shakoori

The recent publication, coauthored by these writes with Huzaima Bukhari is                       

Pakistan Tackling FATF: Challenges & Solutions, available at:

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35

https://www.amazon.com/dp/B08RXH8W46