The main faultline of Budget 2017-18 is the failure to provide a roadmap for self-reliance to collecting taxes as per the real tax potential and achieve a growth rate of over seven percent for a decade.
In the absence of adequate resources and a burgeoning debt burden, we cannot become what the finance minister desires: a member of G20 by 2030. It’s strange that not a single measure is included in the Finance Bill 2017 to counter the illegal flight of capital and bring back untaxed money stashed abroad. Everybody pleads for the rationalisation of taxation – taxing the rich and bringing down the rate of sales tax to 10 percent after abolishing all exemptions. In the wake of the Panama Papers, the finance minister should have introduced concrete steps to crack down on the informal economy to show its seriousness on this front.
The taxation proposals show a further increase in indirect taxes (through regulatory duties on hundreds of items) and the absence of pragmatic measures for tapping the real tax. The Finance Bill 2017 confirms that the rich and mighty will continue to retain their colossal incomes and wealth. In fact, they are likely to amass more without paying due taxes. They are happy to remain non-filers by paying a meagre withholding tax and avoiding due taxes on real incomes.
Sadly, the corporate sector is further penalised through 10 percent taxation on undistributed profits and a rise in tax rate on turnover tax from 1 percent to 1.25 percent. These steps, along with higher tax rates on dividends and capital gains on shares, will result in further investment in unproductive vacant plots in lucrative societies. There will be a negative impact on the corporatisation and documentation of the economy. Less investment in industries means fewer job opportunities.
The gigantic government apparatus – an epitome of bad governance – has received raises in pay and pension. Not a single step has been taken to curtail the enormous perks and benefits of the public officeholders, judges and high-ranking civil-military official. These could have been monetised to save billions.
All independent economists are unanimous that in his fifth budget, the finance minister could not address the main economic challenges faced by the country – fiscal, trade, current account deficits, the stagnation in industrial growth and the decline in exports. The 70th bureaucrat-designed budget only contained the same-old cliches about economic revival. In the last four years, the government has not been able to initiate long-overdue fundamental reforms to overcome issues like poverty, resource mobilisation, the shortage of skilled manpower, the non-availability of affordable, uninterrupted power supply and the rapid infrastructure development.
The budget has failed to provide steps to bridge the huge tax gap. The tax potential of Pakistan is not less than Rs8 trillion. According to Household Integrated Economic Survey (HIES) 2011-12, which was conducted by the Pakistan Bureau of Statistics, 10 million individuals have an annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection will be around Rs3,000 billion.
If income tax from corporate bodies, other than non-individual taxpayers and individuals who earn an income between Rs400,000 and Rs1,000,000 is added, the gross figure would not be less than Rs5,000 billion. The FBR collected only Rs1,220 billion during fiscal year 2015-2016. In the current year, the figure will be not more than Rs1,400 billion.
Similarly, due to leakages in sales tax, federal excise and customs duties, the total collection is 50 percent of the actual potential. In 2015-16, the FBR collected Rs1,088 billion as sales tax, Rs162 billion as federal excise and Rs404 billion as customs duties. Collection under these heads in the current year will marginally improve while the actual positional is Rs3,000 billion. This year, the expected growth in the FBR’s collection is around eight percent. This will be after blocking refunds and taking advances worth billions from taxpayers. The goal of collecting Rs8 trillion – which is the real potential – is not even a part of the vision of budget-makers. This testifies to the fact that there is no will to tax the rich segments of society.
The wealthy sections of society do not pay their due taxes, enjoy tax-free benefits and also get state land at throwaway prices or as free awards. The government is least bothered to tax undocumented economy and benami transactions. Since the rich sections of society are engaged in these transactions, the FBR is helpless. It is evident from the Tax Directory 2015 that out of 1,001,722 returns filed by individuals, 31 percent of people paid no tax. Around 63 percent were among those who paid up to Rs20,000 while 83 percent paid up to Rs100,000. Only 43 individuals paid taxes exceeding Rs10,000,001.
The total number of filers – other than individuals – amounted to 72,699. Out of these, 39 percent paid no tax at all. Only 1,395 entities paid Rs25 million or more. Only 60 entities paid Rs1 billion or more. Around 100 top companies contributed about 56 percent of the total tax paid by all companies and other association of persons (AOPs).
According to the FBR’s own admission, the total number of return filers until May 26, 2016 amounted to about 1.2 million, whereas 90 million mobile users paid advance income tax of 14 percent during the period relevant for tax year 2016. There are nearly 1.8 million Pakistanis who frequently embark on international tours, but do not file tax returns. There are around three million people who have obtained NTNs for their businesses, but 60 percent of them are non-filers.
These facts and figures confirm that the FBR has failed to enforce tax laws. In the last two years, over $4 billion alone has been invested by Pakistani in the UAE. on the floor of the House The finance minister vowed to bring back the money stashed abroad by tax evaders, but not a single penny has been retrieved till today.
The state of the economy is not at all satisfactory. Imports are increasing, exports are declining, the energy crisis persists, debts and fiscal deficit are worrisome, poverty is a reality for millions, tax compliance is extremely poor and unemployment is a source of disillusionment for the overwhelmingly young population. We need a sustainable growth of six percent to eight percent for a decade to provide two million jobs every year to our youth alone.
There is a national consensus that existing tax policies have been stifling economic growth and widening the rich-poor divide. They need to be reformulated to provide an equitable, pragmatic and investment-oriented environment that integrates efficient tax administration with simplified tax laws that are easily comprehensible and hassle-free from implementation perspectives. This perspective is completely missing in Budget 2017-18.
The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.
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