Perils of unfair taxation 

The existing system imposes high taxes but yields low revenues. Only 2000 companies pay 75% of total taxes. The standard sales tax rate is 18% but effective rate, according to 2016 report of Tax Reforms Commission, was not more than three to four percent. The situation in 2023 may have improved, but it is still not more than eight percent. Refunds of billions of rupees of sales tax and income tax were unlawfully withheld to show higher figures in the past—Of unpaid refunds and figure fudging, Business Recorder, November 9 & 14, 2018. Federal Board of Revenue (FBR) never reveals the actual amount of refunds due—just shows the figure of refunds actually paid. FBR has yet not posted on its website the total quantum of refunds payable as on June 30, 2023 after claim of collecting for the first time over Rs. 7 trillion. It should do so without any further delay and must pay all the pending refunds by July 31, 2023.  

 Unfair taxation is the root cause of our multiple socio-economic ills, resulting into inequitable distribution of resources. FBR as it exists today is incapable of tapping real tax potential, as in addition to capacity issues, those in power and other vested interests do not allow it to work freely. We need a National Tax Agency (NTA)—FBR high-ups in the past preferred the name, ‘Pakistan Revenue Board’ (PRB). This body, whatever name may be given, shall not only be responsible for collection of taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security schemes, such as, disability allowance, old age benefits,  income support, child support, pension, just to mention a few, in lieu of paying fair taxes.

One of the salient features of NTA would be its innovative structure, run by an independent Board, accountable to Parliament through the Minister of Revenue. The minister would have the authority to ensure that the NTA operates within the overall government framework and treats its clients with fairness, integrity, and consistency. Further details of its structure and duties are discussed in Case for “NTA”, Business Recorder, November 27, 2015.

The field officers complain about shortage of manpower and necessary facilities. They further complain that approval of head of FBR is required even for a visit/raid to any business premises or to seek details of a bank account. In other words, they allege that purposefully on the pressure of business community, the last Pakistan Tehreek-i-Insaf (PTI) coalition government and present one of Pakistan Democratic Movement (PDM), like their predecessors, rendered the FBR toothless as they can neither impound record, nor get third party information. On the other hand, businessmen accuse tax authorities of abuse of powers, highhandedness and harassment for self-aggrandisement. In this agonizing scenario, can any government collect taxes fairly and fearlessly when the system is so complex and needs simplification?

The PDM Government like that of PTI failed to give due weightage to studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economy and Growth inclusive tax policy: A reform proposal, quoting Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016). Its updated version is now available free at: https://primeinstitute.org/wp-content/uploads/2022/04/TOWARDS-FLAT-LOW-RATE-BROAD-AND-PREDICTABLE-TAXES-Second-Ed..pdf

The following were the main tax proposals made to Ministry of Finance and FBR before the announcement of every budget by us in these columns and elsewhere:

1. In order to tap the real tax potential of retail sector and to bring informal economy into tax net, the following simple and fair tax system is suggested as under:

Section 3(9) & (9A) of the Sales Tax Act, 1990 should be omitted and following new subsection (9) should be inserted:

“(9) Notwithstanding anything contrary contained in the provisions of this Act, tax on retailers be charged, levied, collected and paid as provided under rules issued under section 99B of the Income Tax Ordinance, 2001 at the rate of 4% of the gross turnover or at such a lower or higher rate as the Federal Government may specify by notification in official gazette.

Provided that provisions of subsection (7) of section 3 shall not be applicable in case of retailers covered under this sub-section”.

In the Income Tax Ordinance, 2001, section 99B should be substituted as under:

“Notwithstanding anything contained in any other law for the time being in force a tax shall be charged, levied, collected and paid at the rate of 2% of the gross turnover inclusive of Sales Tax as provided under subsection (9) of section 3 of the Sales Tax Act, 1990 on 15th of every month next following the month to which such turnover relates. The Federal Government may, by notification in the official Gazette, prescribe special procedure for scope and payment of tax, filing of return and assessment in respect of such retailers, as may be specified therein:

Provided that the provisions of section 147, withholding of tax under Part “V” of Chapter X (except tax on salaries under section 149) and Chapter XII and provisions of Schedule 10 shall not be applicable to retailers covered under this section”.

“In exercise of powers under subsection (9) of section 3 of the Sales Tax Act, 1990 and section 99B of the Income Tax Ordinance, 2001, the Federal Government has prescribe the following procedure for qualifying retailers thereunder:

1. The retailers shall receive/file monthly return and make payment on monthly basis along with return calculated as per formula provided below on 15th of every month next following the end of month to which such turnover relates.

1. All retailers must get themselves connected with FBR through Point of Sale (POS) irrespective of their turnover. No audit shall be conducted for retailers who opt for POS.
2. Retailers shall be allowed to incorporate profit in their books working back the income tax paid applicable to total income (imputable income).
3. 1% cash back/rebate on yearly basis will be allowed to such retailers who have adhered to all the provisions prescribed. However, if it is proved on the basis of information that cash back/rebate was claimed on erroneous basis then notwithstanding anything contained in any law for the time being in force, such retailer shall be charged with a penalty of 5% of annual turnover and imprisonment that may be up to 5 years”.

As evident from above, effective income tax rate will be 1% of turnover for those retailers who opt and comply with the proposed law/procedure. Those who do not opt will become uncompetitive as they will remain subjected to withholding taxes, 18% sales tax, advance tax, if applicable, audit and higher rate of income tax. The details of their assets, incomes and expenditure etc will be in possession of FBR after having real time data access and obtaining reports from private licensed credit information bureaus, established under Bureau Act, 2015, working under the regulatory control of State Bank of Pakistan.

1. The total collection by imposing unified sales tax on goods and services (as done by India in 2017) can reach Rs. 7500 billion as against collection of around Rs. 3000 billion by FBR through sales tax on goods and provinces cumulatively through sales tax on services in the last fiscal year. The additional revenue collection of Rs. 3500 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but will also enhance distribution amount to the provinces. Distribution will be strictly as per Constitution. The collection under new law will be by FBR till NTA is established. For this provincial assemblies only need to pass resolutions under Article 144 of the Constitution empowering the National Assembly to enact integrated sales tax on goods and services.
2. There is no need for any amendment in the Constitution for this purpose and establishing NTA. The slogan of ‘One nation, One Tax’, adopted by India in 2017, and Harmonised Sales Tax (HST) by Canadian federal and some provincial governments is the way forward as taxpayers operating on trans-provincial level are facing many difficulties. It was suggested that if provinces do not agree, then for trans-provincial entities, FBR can levy sales tax on services following the command of Supreme Court in Messers Sui Southern Gas Ltd & Others v Federation of Pakistan & Other 2018 SCMR 802. It extensively and authoritatively elucidates the post-Eighteenth Amendment position vis-à-vis legislative competence of federation and federating units as under:

“We are in agreement with the observation made by the learned High Court that though in a Federal system, provincial autonomy means capacity of a province to govern itself without interference from the Federal Government or the Federal legislature, but as the Provincial legislature does not possess extra-territorial legislative authority i.e. it cannot legislate regarding the establishments operating beyond the territorial boundaries of that province”.

The above pronouncement of the Supreme Court is not restricted to any particular law and covers tax laws as well. It is binding under the Constitution and provinces if do not agree for integrated sales tax of goods and service will suffer loss of revenue paid by trans-provincial entities. 

It is suggested by us time and again that the FBR should become member of private licensed credit information bureaus [“the bureaus”] who have already collated and stored data from NADRA, Excise, Land, Banking, FIA (travel), schools, insurance companies, utilities’ providers and telecommunication operators (telcos). But FBR wants to reinvent the wheel. It secured power to real-time data access in Finance Act 2020 without having capacity to analyse database that only a smart data scientist can do. The FBR has poor record of data protection as there have been frequent leakages and abuses. One wonders, what was the need to obtain this power when work has already been done by bureaus enjoying legal mandate to collect data from those sources that FBR wants to tap in the absence of infrastructure and human capabilities? There is, in fact, a need to have a Centralized Depository wherein data from all sources can be utilised by various agencies including FBR after passing Personal Data Protection Law, still at draft stage with the Ministry of Information Technology and Telecommunication.

As suggested above, by adopting rational measures, the federal and provincial governments could have substantial funds to counter the economic meltdown created by imprudent policies of the PTI and PDM governments since 2018. Resource mobilisation is necessary to spend more money for infrastructure improvement to create more employment and ensure higher growth, engaging the private sector to take part in public projects. This alone can kick-start the economy. Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their inefficient machinery and make loss-bearing public sector enterprise (PSEs) profitable through public-private partnership or get rid of them, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive in the heart of cities, owned by the federation and provinces, should be leased out for industrial, business and commercial ventures. This will generate substantial funds, revenue and facilitate rapid economic growth and substantial employment opportunities.

As expected, the PDM Government like its predecessors opted for routine measures in the Budget 2023-24 and Finance Act, 2023 and ignored all suggestions/recommendations for improving compliance, creating ease of doing business that has assumed renewed importance under the prevailing chaotic economic conditions. This has been happening since 2008 under every government that the elected representatives (sic) show apathy towards important constitutional obligations under Article 73 and 82 of the Constitution of the Islamic Republic of Pakistan. Every year, their attitude confirms that they are only interested in safeguarding their privileges, untaxed/undeclared assets, besides obtaining more and more perquisites and benefits.

The privileged classes—militro-judicial-civil complex and those in power—get what they want—tax benefit on perks and benefits of Rs. 30 billion in tax year 2019 alone! It has increased manifold since then. The level of shallow debate, hurling of accusations as well as mudslinging shown by the Treasury and Opposition benches during budget sessions since 2008 amount to open defiance of the mandate of the masses of this country, that voted them into power with the hope that they would do something for their socio-economic uplifting or at least provide them basic essential services—education, health, housing, transport, cleaning drinking water, social protection and civic amenities.

As was in the past, worthy members of the National Assembly (MNAs) while passing Budget 2023-24 and Finance Act, 2023 did not assess nor even bothered to ponder about the impact of regressive taxation on the ailing economy and its devastating burden on the poor—out of total revenue 75% comes from indirect taxes that is highest in the world. It may be mentioned that in the so-called direct tax collection by FBR, the overwhelming part is that of withholding provisions, incidence of which in many cases is passed on to the end customers/clients.

Prior to 2008, the standard excuse was that “we are not allowed to perform our constitutional duties under the umbrella of a military dictator”. Now, in the absence of this pretext, it is obvious that fault lies somewhere else. Time and again, it has been  emphasised that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation. This is only possible if the Parliament performs its constitutional role, implements flawless process of accountability and ensures good governance. Constitutionally speaking, the Cabinet is answerable to the Parliament, but the truth is that MNAs run after ministers for personal favours and gains.

Due to non-participation of public representatives in budget-making, financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances as their tax policies are based narrowly on collecting taxes at source, without bringing the mighty sections of society within the tax net or collecting what is actually due from them.

We can generate enough money for meeting all our current expenses, development needs and public welfare and the federal/provincial governments can retire debts in a few years’ if exemptions and waivers of worth trillions are withdrawn and fair taxes are collected firmly through an agency insulated from all kinds of influences and run by competent and professional staff. It is possible to become a self-reliant nation. However, this dream for Pakistan can never be realized unless all the elitist structures are dismantled and people are empowered to run their financial and administrative matters through efficient and elected bodies as envisaged in Article 140A of the Constitution with fiscal power to have own funds and allocation from shares received by provinces from National Finance Commission (NFC) Award to provide the facilities of health, education and all civic amenities to the local residents at grass root level.

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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 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 as well as partner in Huzaima Ikram & Ijaz. 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 signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax.

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.

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 .

 Twitter: Adbul Rauf Shakoori

The recent publication, coauthored by these writes, is Pakistan Tackling FATF: Challenges & Solutions, available at:  https://www.amazon.com/dp/B08RXH8W46  and  https://aacp.com.pk/