Budget 2015-16: the main fault lines

The majority of Pakistanis were dejected after hearing the budget speech on the evening of June 5, 2015. Not because there were expecting any substantial relief, but due to the absence of the will to tax the rich, and to crack down on informal economy. Also due to there being no measure to counter the illegal flight of capital and bring back looted and untaxed money stashed abroad. People were further dismayed over increases in the indirect taxes and government’s failure to take workable measures for revival of the ailing economy.
The major taxation proposals showed that the rich and mighty will continue to retain their colossal incomes and wealth – on the contrary, the corporate sector is further penalised which would result in retardation of economy and an increase in unemployment. The gigantic bureaucratic apparatus – the 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 public office-holders, judges, high-ranking civil-military officials etc; these could have been monetised to save billions.
All independent economists are unanimous that the government has failed to meet the economic challenges of the day. Even after more than two years in power, no proper strategy has been prepared to initiate the long overdue fundamental reforms and solve basic issues like power shortage and infrastructure development on a priority basis. This was nothing but the 68th bureaucrat-designed, IMF-dictated budget containing the same old rhetoric about illusory economic revival and development.
What should Budget 2015-16 have been like? This question was never discussed in public or even within the ruling party. Our political parties have till now not learnt that they need to have select committees working on various matters to produce well-thought-for, well-debated and well-researched policies. Since no such exercise was undertaken by the PML-N, Budget 2015-16 was, as usual, prepared in the same old style – routine and archaic. While preparing this important document, nobody realised that at this juncture of history, Pakistan needed economic justice, reduction of the rich-poor divide and class stability to avoid chaos, civic strife, lawlessness and religious obscurantism.
The burgeoning debt servicing (this year’s allocation is Rs1280 billion), increase in wasteful expenses, unjust tax system, industrial slow-down, recession, inefficiency and bad governance pose serious challenges to our economic survival. But in the budget no serious effort is made to address these challenges – the budget-makers were more interested in tinkering with figures here and there to balance the books through foreign and domestic resources (some purely imaginary or unrealistic).
The budget has failed to provide steps to bridge the huge tax gap. The tax potential of Pakistan is not less than Rs8 trillion. The simple calculation is: according to the Household Integrated Economic Survey (HIES) 2011-12 conducted by the Pakistan Bureau of Statistics, five million individuals have annual taxable income of Rs1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs1,650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals with 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 Rs880 billion during FY2013-2014 and in the current year the figure will be not more than Rs900 billion.
Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50 percent of the actual potential (joint study of the Andrew Young School of Policy Studies at Georgia State University and World Bank). In 2013-2014 the FBR collected Rs1,002 billion as sales tax, Rs139 billion as federal excise and Rs241 billion as customs duties. Collection under these heads should have been at least Rs3000 billion. This year there will be a slight increase of Rs200-250 billion. The target of Rs8 trillion is achievable provided the mighty segments are properly taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.
The mighty sections of society not only enjoy tax-free benefits but also get state lands at throwaway prices or as free awards. The government is least bothered about taxing the undocumented economy and benami transactions. Since the mighty sections of society are engaged in these transactions, the FBR is helpless. This is evident from the Tax Directory 2014 published on April 10, 2015 – which shows only 52,349 persons in the entire country admitting tax liability of more than Rs500,000.
The following are some disturbing facts and figures:
• Out of total returns of 856,229 filed for tax year 2014, 38 percent filers (322,439) paid no tax
• 520,290 paid tax less than Rs10,000
• 721,046 paid tax up to Rs100,000
• 1,323 paid tax between Rs1 and Rs99
• 8,454 paid tax between Rs100 and Rs500
• 251,111 paid tax between Rs501 and Rs 20,000
• 136,953 paid tax between Rs20,001 and Rs100,000
• 82,801 paid tax between Rs100,001 and Rs500,000
• 20,318 paid tax between Rs500,001 and Rs999,999
• 32,031 paid tax of Rs1,000,000 and above
• 3,663 entities declared tax over Rs10 million
• 40,763 Associations of Persons (AOPs) filed tax returns in 2014, whereas in 2013 the figure was 42,749 AOPs
The above facts and figures confirm that the government has failed to enforce tax obligations. In the last two years over4 billion dollars alone were invested by Pakistani in the UAE. The honourable finance minister made a resolve to bring $200 billion stashed abroad by tax evaders and looters of national wealth but not a single penny is retrieved even till today.
According to data available on the website of the Pakistan Telecommunication Authority, there were 134,907,976 mobile subscribers as on March 30, 2015. A huge population, approximately 50 million (if we exclude multiple and inactive subscribers), is paying 14 percent adjustable income tax and 19.5 percent sales tax, but only 856,229 people filed income tax returns in 2014. The majority of mobile users may not have taxable income yet they are burdened with undue liability. On the contrary, the majority of the rich just pay a fraction of income tax (withheld at source) on actual taxable incomes without even bothering to file income tax returns; in 2014 only 52,349 admitted tax liability of more than Rs500,000! The FBR has not uttered even a single word about this which confirms beyond any doubt that the rich and mighty in Pakistan are evading taxes with impunity.
The dilemma of our economic managers, especially the honourable finance minister, is that they are painting a rosy picture of economy in utter disregard of the fact that growth is slow, exports are declining, power shortages persist, debt is increasing, fiscal deficit is widening, poverty is a reality for millions, tax compliance is extremely poor and unemployment is a source of disillusionment for the overwhelming young population. We need a sustainable eight percent growth rate for a decade to provide two million jobs every year to our youth alone.
There is a national consensus that the existing tax policy has been stifling economic growth and widening the rich-poor divide. It needs to be reformulated to provide an equitable, pragmatic and investment-oriented environment, integrating efficient tax administration with simplified tax laws that are easily comprehensible and hassle-free from implementation perspectives. This perspective is completely missing in Budget 2015-16.
The writers, tax lawyers, are visiting professors at Lahore University of Management Sciences (LUMS).
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