As mentioned in last week’s column, the governments — federal and provincial — are lax about taxing the rich and mighty. On the contrary, they extend them extraordinary tax-free perks and perquisites, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are pushed to become what Franz Fanon called, the Wretched of the Earth. Due to pro-rich policies, wealth has become increasingly concentrated into a few hands. The dilemma of Pakistan is cronyism, greed and corruption on the part of the elites. They are parasites, not growth catalysts or innovators. By improving compliance and broadening the tax base, it is not at all difficult to raise funds of over Rs. 8 trillion, and using this money to make dams, improve infrastructure and provide social services to the needy. To achieve this, we need to restructure the existing tax machinery, withdraw concessions and immunities and crack down on tax evaders and the plunderers of national wealth.
We need a simple, fair and predictable tax system: 10 percent tax on individuals (with alternate minimum of 2.5 percent on net wealth), 20 percent on companies and other entities, and 8 percent sales tax on all local supplies (for exporters 0 percent tax). This will fetch us taxes amounting to Rs. 7 trillion (Rs. 4 trillion income tax and Rs. 3 trillion as sales tax). We can get Rs. 1 trillion by levying a 2 percent customs duty on all items (exporters importing raw material to get refunds once export proceeds are realised by the State Bank).
The Finance Minister, Asad Umar. while presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018, followed the traditional babu approach to balance the books. He failed to fulfill the promise of collecting Rs. 8 trillion made by Pakistan Tehreek-e-Insaf (PTI) — in fact, the target of Federal Board of Revenue was reduced by Rs.169 billion to Rs. 4.72 trillion — a reduction of 3.5 percent over this year’s original budget! He did not bother to study the paper Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016) that gives a detailed roadmap and step-wise action plan for this cause.
So far, the government has not decided to impose surcharge on the wealthy classes and levy excess profit taxes on cartels in different sectors that have earned extraordinary profits
The question is whether the new government — following its predecessors — will borrow more from local and foreign sources or try to raise proper tax revenues? Our debt-to-GDP ratio has already crossed the danger mark. It is heartening to note that the new government has taken measures to levy taxes on the import of luxury items. But so far, it has not decided to impose surcharge on the wealthy classes and levy excess profit tax on cartels in different sectors that have earned extraordinary profits in various industries, such as sugar, cement, flour mills, telecom and the banking sector. Instead of doing any work on new emergent tax measures, our financial managers are reportedly begging for more funds from abroad to meet the fiscal and trade gaps.
The federal government must impose excess profit taxes on cartels that earned billions by manipulating prices — they were fined by Competition Commission with evidence that was irrefutable. If this is done, the government can easily raise additional funds of Rs. 400 billion. The provincial governments should also levy progressive taxes such as the wealth tax on the rich and must collect agricultural income tax from absentee landlords — this alone can generate revenues of over Rs 200 billion. Provincial governments have been wasting funds received as shares from the divisible pool, but have shown no inclination to generate funds themselves by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich and on unproductive transactions. The following two measures alone can generate extra revenue of Rs 500 billion at the federal level — out of which the provinces will receive 56 percent as per the existing NFC Award:
Excess profit tax on cement, sugar, flour mills, and banking and telecom sectors would generate extra tax of Rs. 300-350 billion. All persons having income exceeding Rs. 2 million should also be asked to pay 10 percent extra surcharge for helping the poor. This will generate Rs. 100-130 billion. This amount should be deducted from taxable income to avoid double taxation.
One-time de-logging litigation scheme: taxpayers must be asked to pay 25 percent tax arrears between October 2018 and June 30, 2019 with pending cases before appellate authorities and courts deemed to be settled. In 1998, India through a similar scheme [KarVivadSamadhan] generated revenues of over Rs 900 billion, while disposing huge backlogs of cases in the country. Such a scheme with time limitation up to June 30, 2019 would not only generate immense revenue but would also help in reducing the workload of Tribunals and High Courts.
The above two measures alone can generate extra funds of Rs. 500 billion that the federal government requires to keep the fiscal deficit in a safe limit. These measures will not burden the common people as incidence of tax would fall on the rich. Any enhancement in indirect levies becomes beneficial for those not on the rolls of Federal Board of Revenue — they collect it from the people but do not deposit the same in the government treasury. The federal government should stop looking for more borrowed money and take immediate steps for resource mobilisation to overcome the fiscal deficit — the mother of all ills.
The provincial governments can also raise substantial revenues by levying taxes on the rich absentee landlords—many of whom are guilty of removing and breaching dykes to save their lands while diverting flood waters towards poor inhabitants living in villages and towns. They should also impose transactional taxes on speculative dealings in real estate and expenditure tax on luxury consumption (people are paying millions to five star hotels for social events). They can generate adequate funds if these tax measures are introduced. The real tax potential of Pakistan — a cursory look at undeclared income would prove this — is not less than Rs. 8 trillion. If we manage to collect tax revenue of even Rs. 8 trillion, our reliance on domestic and foreign loans can decrease significantly and diminish after few years provided we achieve growth rates of at least seven percent for 10 years.
The writer, Advocate Supreme Court, is Adjunct Faculty at LUMS. Email: [email protected]; Twitter: @drikramulhaq
Published in Daily Times, September 20th 2018.