International Monetary Fund (IMF) and other lenders must by this time have learnt that ruling elites of Pakistan are simply incorrigible! They have demonstrated time and again extreme apathy towards problems faced by the weaker segments of society-there is consensus now that Pakistan is meant only for privileged classes. This apathy becomes criminal when the economic plight of millions is worsening with every passing day, but the privileged classes, instead of paying their taxes are bent upon enjoying life at the expense of the poor and getting more and more tax benefits.
On 4th October 2012, according to a newspaper, "Pakistan has backtracked on its commitment to the International Monetary Fund (IMF) that it will not issue any new statutory regulatory order (SRO) for tax exemption and instead issued four SROs to give benefits to industrialists and exempt retailers from registration." The report was referring to a number of SROs issued by the Federal Board of Revenue (FBR) on the direction of Ishaq Dar to offer tax breaks to the affluent "who had threatened to stage a countrywide strike." This decision was not only contrary to the agreement signed with IMF but unconstitutional in view of Article 77 read with Article 162 of the Constitution of Pakistan. Through these SROs, the government bypassed the Parliament and committed open violation of the latest dictum of Supreme Court in the case of Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others 108 TAX 1 S.C. Pak that says:
"It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192)." [Page No, Para 20]
The major "concession" given through SRO was reduction in sales tax on purchases from unregistered persons from 17% to 1%! Rate of sales tax was reduced from 5% to 3% on imports and supplies of fabrics and tax on value addition was further cut to 2%.
In Memorandum of Economic and Financial Policies (MEFP) submitted by the PML-N government to the IMF for securing $6.7 billion Extended Fund Facility (EFF) it was stated that "the government has already stopped issuing any new tax concessions or exemptions (including customs tariffs) through SROs except for an Act of Parliament." Issuance of SROs on 4th October 2013 is negation of their own stance as well as a clear understanding given to IMF that "the government would approve laws by the end of December 2015 to permanently stop issuing SROs." Time and again the government of PML-N has said that its "three-year tax base expansion plan hinges on eliminating exemptions and concessions embedded in SROs and in the law, as well as on eliminating powers of the executive to grant preferential tax treatment through SROs." However, as actions speak louder than words, it just proves how hypocrite these rulers are and how others are justified in calling us cheats and liars.
According to a Press report, "Analysts describe the new SROs as a major blow to the drive aimed at broadening the tax base, which also put a question mark over the ability of the government to sustain pressure." It is pertinent to mention that last year only 711,000 people filed income tax returns while the number of active registered sales tax payers was below 100,000," exposing the extreme inefficiency of FBR.
The report went on to say that "like its predecessors, the PML-N government too increased the burden on existing taxpayers in the new budget and the only measures that it took to encourage people to come into the tax net were eventually withdrawn. The preferential tax treatment is expected to cause a revenue loss of at least Rs 10 billion against government's claim of less than Rs 5 billion. This loss may make it more difficult to meet the annual tax target of Rs 2.475 trillion. The revenue board has already missed its first quarter target by a wide margin."
According to an SRO, the government also withdrew a condition that had required retailers to submit their address, computerised national identity card number and national tax number with their withholding statements. This will keep retailers out of the tax net, leaving a significant sector out of the formal economy. The same SRO reduced the amount required to be withheld by wholesalers, dealers and distributors from 20% of total sales tax to 10% of tax. Through SROs 895 and 896 of 2013, the government removed dozens of items from the Third Schedule of Sales Tax Act 1990. Before the omission, the manufacturers were bound to print price and sales tax amount on their products and withhold sales tax. These items were added in the Third Schedule at the time of announcement of budget with estimates that Rs 8 billion would be collected on this account.
The items removed from the Third Schedule include household electrical goods such as air conditioners, refrigerators, deep freezers, television sets, recorders, electric bulbs, tube-lights, fans, irons, washing machines as well as telephone sets and household gas appliances. Other items deleted from the schedule were ovens, mattresses, auto parts, lubricant oils, tyres and tubes, storage batteries, arms and ammunition, paints, distempers, enamels, pigments, varnishes, gums, resins, dyes, glaze, tiles, biscuits and chocolates.
From above, it is obvious that that only have our economic managers miserably failed to bring the country out of the prevailing economic crisis, they have even given up all efforts to do so. They are openly violating commitments made with international lenders at the time of making agreements, especially with the IMF as earlier government did in 2008. The grim economic challenges-monstrous external and domestic debts, rising fiscal deficit, crushing inflation, record unemployment, just to mention a few-are still persisting and assuming dangerous levels but the government is least pushed to take concrete and urgent measures suggested by experts time and again. On the contrary, the government is resorting to many unwise policies that may push the country towards total economic collapse.
We have an established history of backtracking. The IMF expressed positivity in 2010 even after the government failed two agreed deadlines of introducing Value Added Tax (VAT): first was 1st July 2010 which was later extended to October 2010. The government failed to impose VAT even in budget 2011 which obviously annoyed IMF and it suspended any further tranche. Pakistan also failed to meet many other obligations agreed with IMF. After FBR's figure fudging drama-brilliantly exposed by the media-our authorities were unable to face the IMF. This was perhaps the main reason behind the reported decision "not to pursue the IMF programme any further." It was simply tragic - a heavy price that nation had to pay for FBR's follies, and the irony is that those people are still controlling FBR!
We need economic reforms on all fronts to come out of the existing crisis. It hardly matters whether IMF is here or not. We need economic discipline for our own survival. In 2008, the IMF for its "generous" lending demanded imposition of VAT with effect from 1st July 2010 - the government after getting the VAT Bill approved from Senate abandoned the idea for reasons best known to it. Even in the Finance Bill 2011, there was no mention of introducing VAT though our Finance Minister promised IMF that VAT would be imposed from October 2010. He sought time from IMF for enforcing VAT and what happened afterwards is history. This is the way we make commitments and violate them at the highest level without any remorse.
Now Ishaq Dar has breached the agreement with IMF by issuing concessionary SROs giving the message, "We are incorrigible and obstinate." This is simply insane! Our rulers are plundering money from all sources - collected through taxes or obtained as loans. Almost every expert has pleaded that for wasting borrowed money, the fault lies with Pakistan's ruling classes and not with the IMF or World Bank. Had economic reforms been implemented and structural changes made, Pakistan could have improved its financial governance, but funds were ruthlessly squandered by the elite. On the one hand, this nation has become heavily indebted and on the other, all systems have been further destroyed with unabated corruption, inefficiency and incompetency.
Both the government and experts, pleading for more taxes, should realise the fact that real problem lies elsewhere: non-taxation of the rich and wasteful spending by the rulers. Under the existing inequitable system, the burden of taxes is less on the rich and more on the poor. Taxes, in the nature of full and final discharge of liability, are withheld even from those who have incomes below the taxable threshold. These taxes cannot be termed as income tax. These are transaction taxes or taxes on consumption. Being regressive in nature, such levies take a larger portion of income of the poor and a negligible part of hefty incomes of the rich. These taxes make the rich richer, and the poor poorer.
Over a period of time, our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need for discussing the philosophical framework, principles of equity and justice, which should be the main concern of our tax policy; not mere achieving of revenue targets. Our tax managers are meeting budgetary targets through oppressive taxes, shifting incidence on the poorer segments of society and exempting the rich. They are not tapping the real tax potential that is not less than Rs 8 trillion. The great divide between the poor and the rich is expanding. FBR has proved to be an inefficient and corrupt organisation. 80% collection is through withholding taxes. It could be outsourced to any reputed firm that would bring more taxes through better management and IT tools.
On the one hand, we are not collecting taxes according to the constitutional principle of 'capacity to pay' and on the other, annual targets are fixed to further squeeze the already dried tax base - there is no political will to tax the rich and mighty absentee landlords, big property owners and those who are engaged in wasteful expenditure. Rich absentee landlords conveniently remain outside the tax net, while the poor are paying 16% GST on even a basic commodity like salt, sold under brand names. When tax was imposed on salt in the colonial era, the visionary leaders of that time staged a revolt against such high-handedness. But in the post-independence period, our rulers are playing havoc with the economic life of the poorest by levying exorbitant tax on salt and many other everyday eatable commodities, besides enhancing the prices of utilities and POL prices beyond the capacity of the income of vast majority of the population.
It is well-established fact that our inept rulers and inefficient taxmen are the real culprits responsible for our debt enslavement. For example, there was no justification to raise the GST rate to 17% in the Budget 2013-14 - at that time IMF was not even in picture. Time and again we have highlighted the need for bringing GST rate to a single digit of 8% across the board with effective enforcement, and concentrating more on reduced spending on defence and developments, each by a third, cutting tax rates, eliminating all exemptions and concessions, and broadening the tax net. Once it is done, then FBR must put tax audits on a war footing, targeting all those who pay taxes but under-file massively (including government servants), and taxing them all on the true and fair market value of their undeclared, hidden assets, at home and abroad. Then, re-visit the documentation exercise with a view to catch those outside the tax net all together (this would also help quantify the extent of under-filing).
The real tax potential of tax collection of Pakistan - a cursory look at undeclared income/wealth would prove it - is not less than Rs 8 trillion ['FBR's Year Book 2012-13', Business Recorder, September 27, 2013]. If we manage to collect annual tax revenue of even Rs 4 to 5 trillion in the coming three years, the government's reliance on domestic and foreign loans can decrease significantly. This is, however, not possible unless FBR is converted into an autonomous body run by competent, honest and efficient persons. Collection of taxes worth these levels can eliminate budget deficits. Resultantly, Pakistan can concentrate positively on retiring costly debts in the shortest possible time and making huge savings on debt servicing-it is paying Rs 1154 billion on this account alone in the current fiscal year and it will exceed substantially next year. In fiscal year 2012-13, FBR collected just Rs 1932 billion while Pakistan's outflow on debt servicing alone was Rs 980 billion. The only way out is to collect taxes at least to the tune of Rs 5 trillion which, is not possible unless tax enforcement is ensured at all levels, collection leakages are plugged and FBR is restructured.
(The writers are Adjunct Faculty at Lahore University of Management Sciences (LUMS) and partners in law firm, Huzaima & Ikram (Taxand Pakistan)
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