Adviser to the PM on Finance and Revenue Dr Abdul Hafeez Shaikh, in a press release issued on May 18, 2020, noted that while preparing the next budget, “we should be more vigilant, practical, and analyze the opportunities and challenges offered by the current environment”. He added that the “government is ready to listen to all stakeholders to prepare a budget which is according to the need for the prevailing economic circumstances and innovative in providing solutions to the structural problems of the economy”.
An innovative and pragmatic budget for fiscal year 2020-21 is important, especially given the economic meltdown as of the Covid-19 pandemic, rising levels of unemployment and poverty. The government needs money to meet these challenges. Dr Hafeez Shaikh has made it clear that no new taxes will be levied in the existing taxes. It means there will be a drastic cut in development expenditure rather than in wasteful and unproductive expenditure.
The federal government will have to take some concrete measure to plug the existing tax gap, which is substantial as highlighted by the World Bank in its report, ‘Pakistan Revenue Mobilisation Project’: “Pakistan’s tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower middle income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, ie the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent respectively) and it is larger for the GST/GSTS than for income tax (65 percent vs 57 percent respectively)”.
In the existing circumstances, the FBR needs to be overhauled to combat the huge tax leakages. At the moment, in the income tax regime, 66 withholding taxes but yielding low revenues. The legislature has levied both income tax under Entry 47, Part I, Federal Legislative List, Fourth Schedule to the constitution and under Entry 52 that is imposed in lieu of taxes. This is unconstitutional as held by the Supreme Court of Pakistan in Messers Elahi Cotton Mills & others v Federation of Pakistan & others [ PLD 1997 Supreme Court 582] holding that “…legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax.”
The legislature needs to remove complexity and provide what is highlighted in a recent Policy Paper by PIDE, titled ‘Doing Taxes Better: Simplify, Open & Grow Economy’. The FBR on the other hand is to take up the challenge of bridging monstrous tax gap through automation and introduction of a tax intelligence system rather than enhancing the rates of the existing ones, especially indirect taxes.
The central theme of Budget 2020 should be achieving the long-delayed and much-needed goal of simplification of the tax system, ensure welfare of the common people and provide universal entitlements [free education, health, decent living, affordable public transport, universal pension, income support, civic amenities etc] to all citizens through a comprehensive social security system. This would only be possible by following a rational tax system proposed in 2016 [Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute, 2016] and some concrete measures suggested below.
The federal and provincial governments to counter the economic toll of the Covid-19 pandemic need to generate and spend more money for infrastructure improvement to create more employment and ensure higher growth, engaging the private sector to take part in public projects. This would kick-start the economy. Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their inefficient machinery, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive owned by the federation and provinces, should be leased out for industrial, business and commercial ventures. This will generate substantial funds, revenue and facilitate rapid economic growth and substantial employment opportunities.
The following are some measures to generate revenues (tax & non-tax) for both federal and provincial governments: For the next three years, the actual quantification of income of non-corporate businesses and professions should be given up and taxation may be moved to gross basis at fixed rate (after determining the fair rate for each class of business/profession). There will be no audit/raids.
The federal government should amend the definition of “agricultural income” to bring into its ambit receipts from sale of orchards, lease of lands, nurseries and in this way, the rich absentee landowners and those engaged in businesses of nurseries will come under the Income Tax Ordinance, 2001.
There should be a levy of one percent on those with net moveable assets exceeding Rs10 million and at the same rate on immovable assets by provincial governments; that way the rich will be forced to contribute at least Rs200 billion to help the economically distressed by the Covid-19 pandemic.
The total collection by imposing unified sales tax on goods and services (as done by India in 2017) can reach Rs3500 billion as against a collection of around Rs1659 billion by the federal government through sales tax on goods [Rs1459 billion in 2018-19] and provinces by sales tax on services [cumulatively Rs190 billion]. The additional revenue collection of Rs1400 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but will also enhance distribution amount to the provinces. Distribution will be strictly as per the constitution.
The collection under the new law will be by the FBR as provincial assemblies need to pass only resolutions under Article 144 of the constitution, empowering the National Assembly to enact integrated sales tax on goods and services. There is no need to enter into a controversial amendment in the constitution disturbing the 18th Amendment. The loss in Federal Excise Duty (FED) due to illicit and smuggled cigarette sector alone is Rs100 billion a year. It can be plugged by a trace and track (T&T) system.
The above measures can achieve the target of raising tax and non-tax revenue as well as helping the struggling businesses to revive and grow, ultimately taking the economy out of deep recession.
The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.
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