On March 15, 2011, the government resorted to the most undesirable practice of
levying taxes through Presidential Ordinances -- though it is as per Constitution --
bypassing the true parliamentary process. Such regressive taxation -- leaving the
rich unaffected and subjecting the poor to suffer more -- is a most worrisome
aspect.
Measures announced to generate Rs 53 billion during the remaining period of the
current fiscal year amidst economic hardships faced by the people have been
justifiably criticised by independent analysts. There is a consensus that these
steps will further accelerate inflation and retard economic growth.
Levy of 15 percent surcharge under Income Tax Ordinance, 2001 increasing burden on
existing taxpayers (those outside the tax net will remain unaffected!) and its
impact on taxes withheld at import and supply stage is highly lamentable.
The burden of surcharge is not confined to individual taxpayers as wrongly claimed
by official quarters. On goods and services and host of other transactions, in fact,
rates of withholding taxes stand enhanced, overnight increasing cost of doing
business and making commodities and services more expensive -- deteriorating overall
business environments and quality of life for overwhelming majority of population.
In indirect tax regimes -- sales tax and federal excise -- changes have been made
having negative effects for agricultural sector and export-orientated units. The
approach of the Federal Board of Revenue (FBR) is to avoid taxing the rich, and
instead ask withholding agents to collect taxes at source, which is easier, though
potentially anti-business and anti-people.
Adam Smith in his classic work: An enquiry into the nature and causes of the wealth
of nations (1776), observes, "Remedy inequality of riches as much as possible, by
relieving the poor and burdening the rich".
A successful tax system must reduce inequalities through a policy of redistribution
of income and wealth. Higher rates of income taxes, capital transfer taxes and
wealth taxes are some means adopted for achieving these ends. In Pakistan, there has
been a gradual shift from equitable taxes to highly inequitable taxes.
Failure to remove inequalities through progressive taxes and shift to presumptive
and easily collectable ones has destroyed all canons of taxation. This deviation has
transferred the burden of taxes from the rich to the poor and the present
government, though posing to be pro-poor, is bent upon making things even worse.
It is high time to make a paradigm shift in the prevalent tax policy. Our revenue
potential is not less than Rs. 4-5 trillion provided pro-growth, equitable and
rational policies are devised with the consultation of stakeholders. We need to tax
the rich, broaden tax base, overhaul tax machinery, rationalise tax rates, withdraw
all exemptions and concessions available to the privileged sections of society and
plug revenue leakages.
We cannot succeed in tapping optimum tax potential unless national tax policy
parameters are redefined and massive structural reforms are made. The main
ingredients of this policy can be (a) progressive direct taxation of income, wealth,
and property transactions, (b) taxation of commodities (customs duty, excise levy,
and sales tax) purchased largely by high-income groups, and (c) subsidies (negative
taxation) on goods purchased by low-income groups.
Successive governments have never bothered to initiate any meaningful debate on
formulation of a pro-growth 'National Tax Policy'. On the contrary, they keep on
introducing onerous tax policies that are pushing millions of people below the
poverty line.
In the wake of massive destruction caused by floods, we presented in these columns
many proposals for generating extra revenues without harming the economy. The
government tried its best to introduce Value Added Tax (VAT) -- later renamed as
Reformed General Sales Tax Act (RGST) -- but failed to get the Bill passed by
National Assembly. It was pending in the Lower House, after being adopted by Senate
-- when the government under tremendous pressure introduced tax measures using
powers available to the President under Article 89 of the Constitution. It is high
time that all the political parties sit together and evolve a consensus for pulling
the country out of economic difficulties. Imposition of VAT(renamed as RGST) at a
reasonable rate of 4-6 percent across the board, without any exemptions except a
few, must not be further delayed. All the stakeholders should be consulted and after
deliberations and debate, a consensus law on VAT should be adopted.
Efforts at the national level are needed to move quickly and decisively to reverse
regressive taxation and bring the rich and mighty into tax net. Our political
culture supports racketeering. Tragically, this social evil is doubly compounded as
it necessitates greater and greater tax burden on law-abiders. The most crucial
problem faced by the State is devising of effective measures to curb tax evasion to
ensure distribution of the burden of taxes fairly and justly.
The duty to pay taxes is seen as a collective responsibility rather than a personal
one. The ability-to-pay principle views tax policy issues in isolation to incidence
of public expenditure. Many regard this principle as the most equitable and just
method of taxation. It is emphasized primarily for its redistributive role. We in
Pakistan have completely deviated from this principle, which is a constitutional
obligation of the government under Article 3 of the Constitution.
The existing tax protects exploitative elements. The poor are paying exorbitant
sales tax of 17 percent to 23 percent (in fact 40 percent on finished imported goods
after adding customs duty, special excise duty, federal excise duty, sales tax after
mandatory value addition and income tax at source) on essential commodities. But the
mighty sections of society, such as absentee landlords, big industrialists, generals
and bureaucrats are paying no wealth tax/income tax on their colossal
assets/incomes. In a country where the rich make billions on a daily basis,
tax-to-GDP ratio is pathetically low at 9 percent.
Rent of agricultural land derived by absentee landlord should be taxed heavily
forcing them to give up ownership. These lands should be given to the landless
tillers who are exploited by the feudal class. The corporate rate should be brought
down to 20 percent to promote industrialisation, but any director or other office
holder (having more than 20 percent shares) drawing annual salary exceeding Rs 5
million should be taxed at the rate of 50 percent.
Because of callousness of rulers, massive tax non-compliance is the rule of the day.
Rulers do not pay taxes despite having enormous assets at home and abroad. Taxes
should be for the welfare and benefit of the public at large and not for the
luxuries of the rulers and State functionaries.
Tax policy should be used as a tool 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
subsidized/free medical and educational facilities, low-cost housing, and drinking
water facilities in rural areas (especially flood-ravaged ones), 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. It is high time that politicians, judges, civil-military
high-ups and public office holders make their tax declarations public.
We need to bring fundamental structural and operational changes in all spheres of
governance. For achieving rapid industrial and economic growth, reforms are needed
urgently. Once these goals are fulfilled revenue collection will automatically be
taken care of.
