Huzaima Bukhari, Dr. Ikramul Haq, Abdul Rauf Shakoori
The impact of economic growth on the lives of people is partly a matter of income distribution, but it also depends greatly on the use that is made of the public revenue generated by economic expansion’—An uncertain glory-‐India and its contradictions by Jean Dreze and Amartya Sen
This is in continuation of last week’s column [Budgets 2024: think afresh, Business Recorder, May 24, 2024]. Achievement of the cherished goal of self-reliance is impossible with the existing outdated, oppressive, and unjust tax policy and antiquated tax machinery coupled with unproductive expenditure, burgeoning debt burden, and massive debt servicing.
It is high time a paradigm shift in the prevalent tax policy is undertaken. Our revenue potential at federal and provincial levels is not less than Rs. 34 trillion provided the tax base is broadened, the informal economy is documented, and pro-growth, equitable, and rational policies are devised with the backing of stakeholders.
We need to overhaul the existing ineffective and incompetent tax machinery completely. There is an urgent need to withdraw all exemptions and concessions available to the privileged sections of society. Our most important consideration should be export-led growth and tapping optimum tax potential. Once these are done, there will be no need for any internal or external borrowing. Implementation of a rational tax policy can convert our current fiscal deficit into surplus within a short span of time for which we need inclusive and sustainable export-led growth.
Rational ‘National Tax Policy’ is essential to increase government revenues and to improve citizens’ lives. When taxes are fair and government spending prioritizes essential public services, growth becomes a reality resulting in a reduction of both poverty and inequality. This was emphasized in a paper titled, Fair Taxation for Poverty Reduction & Equality (Huzaima & Ikram 2015)—available at http://maketaxfair.net/assets/Fair-Taxation-for-Poverty-by-Dr-Ikram.pdf.
The above paper and suggestions made in various columns, especially in Budgets 2024: think afresh, Business Recorder, May 24, 2024, can be treated as “proposals”, the Federal Board of Revenue (FBR) is seeking the budget 2024-25, though it was mentioned in earlier columns that “it is the constitutional obligation of Legislature and not Executive” under the Constitution of Islamic Republic [“the Constitution”].
Pakistan Tehreek-i-Insaf (PTI) had coalition governments in the center and in three provinces during its tenure [18 August 2018 to April 9, 2022], could not even start a meaningful country-wide debate on devising a pro-growth National Tax Policy what to speak of presenting the blueprint that it claimed during the election campaign was ready and awaiting implementation. The position of the alliance government of the Pakistan Democratic Movement (PDM) was equally pathetic.
PDM was more concerned with eliminating PTI, rather than holding elections as per the time frame given in the Constitution. Tax policy reforms were never on its agenda, which even otherwise was not possible as the 5-year tenure of the National Assembly was until August 12, 2023, but was dissolved three days earlier by Shehbaz Sharif, now second-time prime minister of Pakistan.
PDM came to power just to save the skin of its top leadership from the National Accountability Bureau (NAB), which was being used by those who matter in the land to eliminate “undesirable” political figures or to force them to change camps or the time being saying goodbye to constituency politics.
It is an incontrovertible fact that onerous tax policies of successive governments, military and civilian alike, have widened the rich-poor gap. In the wake of the COVID-19 endemic and even before, millions were pushed below the poverty line, courtesy of anti-growth and pro-rich policies. The state, as defined in Article 7 of the Constitution, must act quickly for a paradigm shift in all spheres of governance—both at structural and operational levels.
As regards taxation for ensuring substantial revenues as well as social equity and economic expansion, a workable pragmatic roadmap is available in Tax Reforms in Pakistan: Historic & Critical View, published by Pakistan Institute of Development (PIDE) (available free at: https://file.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf and in Towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020) [available free at: https://primeinstitute.org/wp-content/uploads/2022/04/TOWARDS-FLAT-LOW-RATE-BROAD-AND-PREDICTABLE-TAXES-Second-Ed..pdf ].
OUR MAIN DILEMMA
High taxes and lower yields have resulted in a lack of funds for industrial and business growth and public benefits, but colossal unaccounted/untaxed cash is circulating in the economy in search of further “undercover” gains. Our political culture supports rent-seeking and racketeering.
Tragically, this social evil is doubly compounded as it necessitates a greater and greater tax burden on law-abiders. The most crucial problem faced by Pakistan is devising measures to curb tax evasion and distributing the burden of taxes fairly and justly—the rich enjoying tax exemptions and amnesty. Honest taxpayers are disillusioned by the fact that elites not only get amnesties for concealed assets but also abuse taxpayers’ money for unprecedented luxuries.
For a meaningful change, the federal and provincial governments should abolish all regressive taxes forthwith and concentrate mainly on growth. Tax amnesty schemes must be dispensed with once and for all and unexplained assets must be confiscated by the State for the benefit of the poor.
FUNDAMENTALS OF TAX POLICY
There is a national consensus that existing tax policy needs to be reformulated providing an equitable, pragmatic, investment-oriented tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from an implementation perspective.
Past efforts to reform the tax system, through foreign loans/grants, have not yielded desirable results. The bureaucratic, closed-door meetings and lack of any meaningful dialogue with stakeholders and tax experts are the root causes of the failure of a research-based, pragmatic tax policy—foreign-funded tax reforms will never succeed. The Executive should have no power to issue Statutory Regulatory Orders (SROs) in blatant violation of Article 77 read with Article 162 of the Constitution.
EQUITY PRINCIPLE
The existing tax system as a whole—at national and provincial levels—is highly unjust. It protects those having a monopoly over economic resources. There is no political will to tax the privileged classes. The poor are paying exorbitant sales tax and even advance income tax.
On the contrary, the mighty get tax waivers and concessions. Predatory segments even indulge in benami [name-lender) transactions and invest heavily in real estate through frontmen to whiten proceeds of crime. This culture must end. Transparency should be in all areas. At the same time, tax rates should be brought down to promote the industrialisation and growth of small and medium enterprises (SMEs).
BENEFIT PRINCIPLE
Successive governments have failed to convince the people to volunteer payment of taxes on their real incomes. Since rulers indulging in wasteful expenditure have never bothered to live within their means and failed to protect the life and property of the people and provide them with basic needs like health, education, and civic amenities, massive tax non-compliance has become a rule and not an exception.
Things will never improve unless citizens are convinced by actions and not mere words by rulers that taxes are meant for public welfare, not for the luxuries of rulers and state functionaries. The Government should launch programs, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include free medical and educational facilities, low-cost housing, and drinking water, uplifting of rural areas, land improvement schemes, and employment guarantee programs. Once people see the tangible benefits of their taxes, there will be better tax compliance.
Our tragedy is that even after numerous oppressive and high-rate taxes fiscal gap is increasing every year bringing more misery to the common people of Pakistan. Taxation is a potent instrument to shape and influence the socio-economic policies of a country. It is therefore imperative for us to formulate a rational tax policy beneficial for all and not by following blindly, prescriptions given by lenders/donors. Its main features are available in the above-mentioned books.
The governments in the coming budget, expected to be announced on June 7, 2024, must bring fundamental structural and operational changes and not mere amendments here and there in tax codes that instead of serving some useful purpose, further complicate matters. The government must work for National Tax Policy taking all stakeholders on board for achieving rapid industrial and economic growth that will automatically take care of revenue mobilisation without putting any undue burden on the masses.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board, and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have co-authored a book, Pakistan Tackling FATF: Challenges and Solutions
