Budget 2016-17: In the same old mould!-I

WEB DESK: Majority of the Pakistanis would certainly be dejected after hearing the budget speech of Ishaq Dar expected on June 3, 2016.

Not because there will be no relief for the poor as usual-nobody expects it now in Pakistan-but the real cause of disappointment is going to be continuation of the oppressive tax system that is anti-growth and anti-people.

The burden of unjust taxes is continuously increasing on the less privileged whereas the rich and mighty are just paying meagre amounts and enjoying extraordinary benefits. During the last three years, it is proved by the present government that it lacks the will to reform the tax system.

The brunt of indirect taxes, even under the garb of direct taxes, has retarded economic growth besides inflicting more miseries on salaried persons and the middle classes. The government failed to accelerate economic growth and is following the failed donor-imposed prescription of austerity.

As reports in Press suggest, the major taxation proposals will be of regressive nature. These will bring more disastrous results for the poor and overall economic growth. The members of National Assembly shamelessly increased their pays three-folds even before the budget, while 60 million are living below poverty line and millions are malnourished.

The gigantic bureaucratic apparatus-the epitome of bad governance and corruption-will also get raises and more facilities. The government is not inclined to curtail its monstrous wasteful expenditure and monetize all perquisites and benefits of the civil servants.

What should budget 2016-17 look like? This question was never discussed by the government or opposition benches. They remained busy in hurling accusations and mudslinging over the Panama and other leaks.

Pakistani political parties have yet not learnt that they need to have select committees working on various matters so that they can devise and implement well-debated and well-researched policies.

Presently, in taxation matters they follow donors’ agenda via bureaucrats! Even in its third year in power and for the third time in the Centre, PML (N) has prepared budget 2016-17 in the same old mould-bureaucratic-controlled and donor-desired.

Ishaq Dar and his team, while preparing this important document, not for a moment engaged the experts to seek their input as to what Pakistan should do to achieve rapid economic growth, class stability through employment generations to avoid chaos, civic strife, lawlessness and religious obscurantism.

He has paid no attention to restructuring of existing unjust economic system. The burgeoning debt servicing, wasteful expenses, declining exports, industrial slowdown, recession, inefficiency and bad governance, pose serious challenges to our economic well-being.

But, in the forthcoming budget you will see no serious efforts to meet these challenges. The budget-makers (sic) have been more interested to balance their books through foreign and domestic resources (some purely imaginary or unrealistic). Somebody satirically asked, what else can one expect from a chartered accountant?

He is least bothered about the fact that Pakistan’s share in global exports is diminishing by 1.45% every year since 2005 or that return filers showed 18.4% decline this year. He has been instrumental in destroying exports by not paying bona fide refunds of billions due to exporters and appeasing the non-filers by just subjecting them to pay higher rate of withholding tax!

The forthcoming budget will provide no concrete steps to harness the real tax potential of Pakistan, which at federal level alone is not less than Rs 8 trillion. A model for achieving this target without hurting the economic growth is suggested by us-Towards Flat, Low-rate, Broad & Predictable Taxes.

It is available at the website of PRIME Institute (http://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/). Dr Arthur B. Laffer, the Father of Supply-Side Economics and famous for “Laffer Curve”, has made the following remarks about this work: “Huzaima Bukhari and Dr Ikramul Haq have designed a tax reform plan that would dramatically change the structure of taxation in Pakistan by correctly aligning incentives to promote economic growth and voluntary tax compliance.

An ideal tax system should consist of the lowest possible tax rate on the broadest possible tax base. Such a system gives people the least incentive to evade, avoid or otherwise not report taxable income. Along with sound money, free trade, spending restraint and minimal regulation, the adoption of these recommendations will launch Pakistan onto a new trajectory of economic growth and prosperity for all”.

This paper suggests that no tax reform will succeed unless tax administration is completely overhauled and modernised. Tax administration should be headed by professionals and not outdated bureaucrats. It should employ modern IT system to capture inflows and outflows to enforce tax obligations.

At the same time, an independent tax appellate system should be introduced so that tax obligations are judiciously imposed and collected rather than through arbitrariness and highhandedness. Presently, non-filers are outside the audit regime and demands are created against those who file tax returns.

Since Federal Board of Revenue (FBR) has failed to enforce tax obligations, there is perpetual decrease in the number of filers-this year it is only 980,000. FBR keeps on creating huge and arbitrary demands against the filers, especially those in the formal sector. This is the reason why people do not file returns as they say once you do so then you are under constant threat of being blackmailed by FBR officials and in case you do not oblige, you are subjected to arbitrary orders.

FBR must tell the nation what has been done about the following:

There are nearly 1.8 million people who frequently embark on international tours but do not file tax returns. About 700,000 Pakistanis have multiple accounts in various banks but are not on the roll of FBR. Over 100,000 live in posh areas and more than 80,000 possess luxury cars, yet they do not file income tax returns.

There are 90,000 individual consumers who pay large utility bills, but have never filed any income tax return. There are over 200,000 people engaged in professions like medicine, engineering, law and chartered accountancy, but less than 30 percent file returns. Out of over 2.5 million who obtained NTNs in the past only 840,000 filed income tax returns. Many so-called experts keep on saying that our tax base is narrow.

The reality is that as many as 60 million mobile users are paying 14% advance income tax whether they have taxable income (more than Rs 400,000 annually) or not, in addition to 19.5% sales tax. Pakistanis are subjected to 67 kinds of withholding taxes under the Income Tax Ordinance, 2001 (both adjustable and non-adjustable).

From July to March of the current fiscal year, these heads yielded Rs 575 billion, 71% of total income tax collection of Rs 809 billion during the nine months of fiscal year 2015-16. In 2014-15, the main contribution (89.4%) of direct tax collection [Rs 980 billion] was through withholding tax or advance tax or tax paid with returns.

The non-filers were happy by just paying a little higher withholding taxing and opting to remain outside the ambit-the non-filing of returns ensures concealing of real incomes as audit is only that of filers!! The self-styled tax experts in Pakistan think that only those who file returns are taxpayers. It is true that less that only about 980,000 filed income tax returns this year.

But this figure is only that of return filers and not of taxpayers. In the income tax realm, every account holder of a bank, who receives any amount of interest, is subjected to 10% withholding tax and is a taxpayer. It is worthwhile to note that in the case of individuals and association of persons, tax deducted at source by the banks is full and final discharge under section 169 of the Income Tax Ordinance, 2001.

They are merely required to file a simple statement under section 115(4) of the Income Tax Ordinance, 2001 ie if they do not have any other source of income. The real failure of tax system is non-taxation of super-rich and rich who owe billions to the national exchequer but are not filing tax returns.

What has prevented FBR to take action against them? After receiving data from NADRA and the UAE properties and through Panama Papers, why FBR instead of taking action against them was proposing an amnesty scheme? Why no action has been taken against them till today?

Shahid Hafeez Kardar, ex-Governor of State Bank and former finance minister of Punjab, very rightly observed: “In our case tax administration weaknesses with regard to enforcement arise because of an ineffective legal system and the lack of effective accountability of government employees.

Greater publicity should be given to cases of tax evasion (only those upheld by courts or conceded to by taxpayers) in the hope that public shame would serve as one of the deterrents to tax evasion. Good governance in a structure of transparent taxation cannot be achieved with the same ease as computerisation of the taxation system through purchase of equipment and supporting software.

These essentials will continue to elude us as long as the governing political system nurtured and supported by the elite is financed by black money through institutionalised instruments and mechanisms for evading taxes.

How does one overhaul such a system through the transformation of the political structure is a million-dollar question that defies easy answers as to the need for tax reform built around transparent and simpler systems of taxation.

However, the reality is that there are no quick fixes. Exercises to simplify tax laws and to ensure effective enforcement can take several years, as the experience of even developed countries shows-for instance, it took Canada 10 years to implement the proposals of the Carter Commission.”(To be continued) –Business Recorder