Budget 2021: need for federalised tax apparatus

Author: Dr Ikramul Haq

“A comprehensive strategy has been formulated to shift the gear and move to higher economic growth. I do not believe in an increase in taxes to increase revenue collection but those outside the tax net would be tapped. The chances for any harassment by FBR officials shall be eliminated for which change in audit procedures. 17 percent General Sales Tax rate is very high and a mechanism has been prepared for its reduction and the government was also working on a sales tax system for small businesses….”— Finance Minister Shaukat Tarin in his first testimony before the Standing Committee of the National Assembly on May 3, 2021.

The Federal Board of Revenue (FBR), in a Press release issued on May 1, 2021, claimed collection of net revenue of Rs. 3780 billion during the first ten months of the current fiscal year, exceeding “the target of Rs.3637 billion by more than Rs.143 billion”. The International Monetary Fund (IMF) before releasing the tranche of US$ 500 agreed to lower FBR’s collection target from Rs. 4963 billion to Rs. 4717 billion for the current fiscal year (FY). In May and June FBR needs to collect Rs. 937 billion (Rs. 468.5 billion per month). The performance of FBR is praiseworthy, especially in the wake of third deadly wave of Covid-19 endemic affecting the economic activities massively due to complete and partial lockdowns in many parts of the country. Hopefully, the FBR will achieve the assigned target.

The FBR in Press release claimed: “The collection represents a growth of about 14% over the collection of Rs.3320 billion during the same period last year. The net collection for the month of April was Rs.384 billion, against a required increase of Rs.242 billion, representing an increase of 57% over Rs.240 billion collected in April 2020 and 159% of the target. The year-on-year growth of 57% is unprecedented particularly as it is realized on the heel of 46% in March. These figures would further improve before the close of the day and after book adjustments have been taken into account”.

For full details visit: https://fbr.gov.pk/fbr-registers-historic-growth-again-in-april-14-growth-in-10months/152969

While, the FBR is performing extraordinarily in difficult circumstances, the performance of all provincial governments in collecting income tax on agricultural income from the rich and absentee landowners is extremely pathetic, The share of agricultural income tax (AIT) in total tax revenue of Rs. 4.75 trillion in fiscal year 2019-20 (11.4% of GDP) was only (0.06 % of GDP), whereas share of agriculture in GDP of Rs. 44.7 trillion was around 19%.

Analysis of Economic Survey of Pakistan 2019-20) and Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, released on May 6, 2021, by the Ministry of Finance shows inadequate allocations on education and health (only 3% of GDP) both by federal and provincial governments. The second issue is that of poor quality of spending on health, education and other social services to mitigate the sufferings of the poor that are increasing day by day, especially because of frequent partial and complete lockdowns in the wake of third deadly wave of Covid-19 endemic and high food inflation. According to a Press release by Pakistan Bureau of Statistics (PBS), food inflation for April 2021 reached double digit—in urban centres it increased from 11.5% to 15.7%, (4.2% within a month) and in rural areas, it jumped from 11.1% to 14.1%. (3%). This is alarming under the prevailing heavy economic toll of covid-19 endemic when millions have lost job and many businesses are at the verge of close–majority finding it difficult to pay salaries, utilities bills. The more painful is no reduction in the rate of taxes. In the budget 2021, the federal and provincial governments must move towards low rate taxes on a broad base as discussed in Budget 2021: Taxes, Inflation Growth & IMF, Surkhyian, April 26, 2021 so that business can survive. The new Finance Minister Shaukat Fayaz Ahmed Tarin rightly emphasises growth, but presently the issue is that of survival for most of the businesses.

By broadening of tax base, improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provisions (except on salary, dividend, interest and payment to non-residents) , Pakistan can collect Rs. 8 trillion at federal level and Rs 2 trillion at provincial levels. To achieve this level of collection, Finance Minister Shaukat Tarin must immediately take fundamental structural reforms to achieve a sustainable growth rate of at least 7% in the next three years. It is not possible without simplification of tax system [FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021 and FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021].

The idea of restructuring of Federal Board of Revenue (FBR) presented in Need for National Tax Agency, Business Recorder, November 1, 2013 was later elaborated in various articles, Need for National Tax Authority, Business Recorder, October 20, 2017, A case for National Tax Authority—I, Business Recorder, November 30, 2018, A case for ‘National Tax Authority’—II, Business Recorder, December 2, 2018 and Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018. The complete draft of national tax agency is available in Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020, PRIME Institute, Islamabad) and in Tax Reforms in Pakistan: Historic & Critical Review (PIDE, Islamabad).

There cannot be two opinions that FBR or any other tax collection agency needs to be run by a competent board as a short-term reform measure before all of these are finally merged into a single national tax authority. The officers of FBR have reportedly suggested the name: Pakistan Revenue Board (PRB). This body, whatever may be the name, should 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, such as universal pension, disability allowance, old age benefits, income support, child support, just to mention a few, in lieu of paying due taxes as suggested in There’s need for new tax model, Business Recorder, February 26, 2021. The National Tax Agency (NTA) can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 of Constitution of Islamic Republic of Pakistan [The Constitution] read with the Fourth Schedule to the Constitution of Pakistan by federal and provincial parliaments). This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption and creating unnecessary compliance cost, rather than operating under one-window. Presently, taxpayers have to deal with multiple tax agencies adding to their cost of doing business.

On March 12, 2020, according to the Press release of the Ministry of Finance, the National Tax Council [NTC] was established and its terms of reference (ToRs) approved. According to a Press report, “The harmonisation of GST is part of the World Bank’s budgetary support loan of US$750 to US$900 million”. It is mentioned in the report that as “suggested by the International Monetary Fund (IMF), the centre and provinces have finally agreed to establish NTC “to resolve all tax-related issues, especially for the harmonisation of general sales tax (GST) across the country”. It confirms that our governments do nothing unless lenders/donors force them to do. It was decided that NTC would have technical level representations from the federation and federating units to resolve tax-related issues without amending the constitution. The NTC has an executive committee, comprising federal finance secretary, Chairman of FBR, provincial finance secretaries and heads of the provincial revenue authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA). The executive committee of NTC before the budget 2021 must recommend the establishment of national Revenue of Board (NRB) to the Monitoring Committee of the National Finance Commission (NFC). It can be done by amending the Federal Board of Revenue Act, 2007 and passing of resolutions by all the provincial assemblies under the Constitution.

The NTC should seriously consider the models of Swedish revenue authority [Skatteverket] and Canadian Revenue Authority (CRA) that not only collect taxes at all tiers of government but also extend benefits like social security, food stamps, universal pension and income support etc. The linkage of databases of various bodies with NRB (complete digitisation) can be a great step towards an e-government model for the country that is presently non-existent. The complete roadmap for achieving this goal is discussed in Time up for fiscal integration—I, Business Recorder, December 21, 2018, Time up for fiscal integration—II, Business Recorder, December 23, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, Doing business under scattered taxation, Business Recorder, September 7, 2018 and Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018.

In the forthcoming budget 2021, the policymakers and legislature need to restructure the tax system to tap the real tax potential at national level and at the same time provide quality social services to the citizens, drastically cut wasteful expenditures, get rid of mess in energy sector and stop further bleeding of public funds on loss-bearing state owned enterprises (SOEs). The real dilemma of Pakistan is outdated, colonial-style administrative and judicial structures, elitism, cronyism, greed and corruption on the part of predatory elites. The existing bureaucrats are parasites and since rent-seeking is accepted as a norm, even the private sector is neither a growth catalyst nor ready for innovations. Mr. Shaukat Tarin must give top priority to fundamental structural reforms to dismantle elitist and rent-seeking economic systems as with this system inclusive growth for prosperity of all citizens is not possible.

________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. 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 and Visiting Faculty at Lahore University of Management Sciences (LUMS).

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).