In the post elections-2018 era, all the political parties in Parliament or not should unite on one-point agenda to make Pakistan a true egalitarian state. For true democratic dispensation that ensures mass participation it is imperative to debate all-out reforms in all areas with the aim to move towards the cherished goal of self-reliance and welfare state. It is not possible to make Pakistan a welfare state unless political consensus is reached for structural reforms in the prevailing economic system that favours the elites at the expense of the less-privileged segments of society.
The outmoded justice system needs major changes to ensure that rights and obligations are performed within the four corners of law. The fair and just tax system is at the core of social democracy. Funds contributed by taxpayers should be expended for meeting state expenses and providing social justice to all citizens. In this series, we are presenting a detailed roadmap for a new tax system that can help in achieving the much desired goal of autarky leading to welfare state. This may be debated by all political parties and after public consensus can be adopted as common agenda for introducing fair taxation and extending social security to all citizens.
Successive governments—military and civilian alike—have failed to convince the people that payment of taxes is their collective responsibility—failure to fulfill it leads to debt enslavement and political subjugation. The major reason for tax defiant behaviour is lack of trust in government—abuse of taxpayers’ money for personal comforts and luxuries by the ruling elites. The State has failed to protect the life and property of the people, what to talk of providing them basic needs e.g. health, education and civic amenities. The populist argument against paying taxes is ‘why we should pay when the government cannot even ensure safety of our lives’.
The government’s yearning for “more and more taxes” has become a point of irritation for the citizens who argue that mere collection of more taxes is no answer to existing maladies. The internal and external debt will keep on rising unless the government goes for all-out reforms. Voicing this concern, Mr. Nadeem Ul Haque, former Vice-Chancellor of Pakistan Institute of Development Economics (PIDE) and ex-Deputy Chairman of Planning Commission, in his article Reform or face fundamental ascendency, emphasized:
“……….the state must first provide the social contract i.e. good law and order and security of life. It must dismantle the rent seeking that protects the rich….. Rent seeking relies on three main components: state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system that allows the poor man’s land to be acquired for the elite especially the army and civil service”.
An equitable tax system is one under which tax payments are based on the amount of benefits received from government services—the Scandinavian social democracy model is a good example to quote and follow. In social democracies, the cost of government services are apportioned amongst individuals according to the relative benefits they enjoy. In economic terms, this is called “benefit principle” that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden.
The coalition government of Pakistan Tehreek-i-Insaf (PTI) in centre and all the provincial governments should launch programmes, 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 facilities, land improvement schemes, and employment guarantee programmes though local governments. 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. The federal and provincial governments must demonstrate by their action to the taxpayers that money collected from them is spent for collective welfare.
One of the main tools of tax policy is to increase the level of savings and capital formation in the private sector partly for borrowing by the government and partly for enhancing investment resources within the private sector for economic development. In Pakistan we have failed to achieve this goal. Recent years have experienced closure of large industries and stagnation in growth. Besides corruption and incompetence of Federal Board of Revenue (FBR) and provincial tax departments, inconsistent tax policies have forced the business community to search for safer havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding.
Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to donors’ agenda of overemphasis on retrogressive taxation and incompetence of our economic wizards (sic), Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and future is for those who can develop them as quickly as possible.
For technological transfers, rapid industrial growth and employment generation, foreign direct investment (FDI) is desirable. In Pakistan when local investment is dying, expecting FDI is like living in a Fool’s Paradise. Tax incentives play an important role in attracting FDI—which has nose-dived in Pakistan during the last decade. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our budget makers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.
Foreign investors will not come to Pakistan as long as unsatisfactory law and order situation and energy shortages exist. Due to these and other negative factors even the existing industrial units are closing down or working at low capacity. Nobody is willing to invest in special economic zones, where tax incentives are available. The main reason is lack of proper infrastructure. The result is unprecedented decline in foreign direct investment during the ten years. Pakistani industrialists—fearing loss of life and property, threats from extortionists, acute power shortages, rising costs of doing business and hostile tax policies—are shifting their capital abroad. Investors, both domestic and foreign, prefer a place that characterises stability, consistency and requisite infrastructure facilities—we lack all these. Tax incentives do matter but not as first priority—any feasible growth-oriented project can be profitable after paying reasonable taxes. In Pakistan, corporate taxation in 2019 is still over 40% (income tax on corporate profits plus tax on dividends, super tax and workers welfare fund etc).
Economic challenges faced by Pakistan are multiple and grim—we are trapped in a deadly debt trap, but there is no will on the part of the rulers to come out of it by tapping the real tax potential and stop wasteful and unproductive expenses. Our total debt is about 77% of GDP now and it is increasing due to sheer callousness of the rulers. The last government during its tenure added Rs. 6.3 trillion to debt burden—increase of 103% increase and the record of the present government is equally appalling. The present PTI government has been borrowing heavily during the last eight months to pay earlier debts and bridge the fiscal gap—it will push debt servicing alone to Rs. 1.8 trillion in 2019-20—nearly 68% of total revenue collection. The reckless borrowing to bridge burgeoning fiscal deficit is estimated to cross Rs. 2.5 trillion at the end of the current fiscal year.
Pakistan also faces the herculean task of providing jobs to millions—on an average we need to create 2 million jobs annually for young people alone. For achieving this task we will have to ensure that economy grows at the rate of 8% per annum over a long period of time—for this we need investment of 20% of GDP. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, which are our greatest asset—imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation—our real engine of growth. The prevalent pessimism is due to attitude of the rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness.
We need to incentivize corporatization of business. At present there are only about 95,000 companies registered with SECP out of which 38,000 are active and file tax returns. There are numerous anti-corporate provisions in tax codes. The companies are maltreated by FBR—after collecting billions as ‘collection agents’ of State without any compensation they are penalised for small lapses that are neither intentional not willful. Taxation of notional benefits e.g. concessional loans in the hands of employees, high corporate tax rate and double taxation of dividends and reserves out of already taxed profits are some examples of anti-corporate provisions—the list is not exhaustive. In these circumstances, no one would like to conduct business through a company, especially when audited accounts by independent and credible auditors are rejected just on whims and without bringing any material on record by taxation officers. Litigation is imposed on the companies and they have to hire costly professional to get justice. It is thus no surprise that in World Bank’s ‘Doing Business 2018’ data for Pakistan that our ranking is 138!
The corporate sector is the worst sufferer of FBR’s arid policies and wide spread corruption—top management of FBR has myopic outlook as evident from over-emphasis on withholding taxes. With low tax rates we could have promoted corporate growth. On the contrary, in 2015 FBR imposed ‘Tax on undistributed reserves’ [section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another wrong move. In 2014, FBR imposed ‘Alternative Corporate Tax’ [section 113C of Income Tax Ordinance, 2001]. Such erratic, arbitrary and expropriatory taxation would further retard corporate sector and discourage future growth.
Devising an efficient tax model for rapid economic growth in Pakistan requires an analytical study of all the irritants prevailing in tax codes, procedures and implementation processes. The main irritant is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses—both at federal and provincial levels. We need public debate for suggesting solutions to remedy the situation and promote taxation and business growth attracting domestic and foreign investment and ensuring much-needed jobs.
The following article will identify some main maladies that need to be fixed through holistic tax reforms aimed at incentivising rapid growth and voluntary tax compliance.