Towards a federalised tax structure

The top priority must be assigned to fundamental structural reforms to dismantle elitist and rent-seeking economic system

Towards a federalised tax structure

By broadening the tax base, improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provisions (except on salary, dividend, interest and payment to non-residents) Pakistan can collect Rs 14 trillion at the federal level and Rs 4 trillion at the provincial level. To achieve this level of collection, Pakistan needs fundamental structural reforms leading to sustainable growth rates of at least 7 percent over the next three years. This is not possible without simplification of the tax system.” Fiscal Challenges and Reforms, (The News on Sunday, September 10).

The idea of restructuring the Federal Board of Revenue presented in Need for National Tax Agency, (Business Recorder, November 1, 2013) was later elaborated in various articles.

The FBR, or any other tax collection agency, needs to be administered by a competent board as a short-term reform measure before all such agencies are merged into a single National Tax Authority. Some of the past officers of the FBR have reportedly suggested the name: Pakistan Revenue Board. This body, whatever its name may be, should not only be responsible for collection of taxes for the federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes. Otherwise, tax compliance will remain a distant dream.

The citizens must get free education, quality healthcare, decent housing/ transport as well as social security, such as universal pension, disability allowance, old age benefits, income support and child support, to mention a few, in lieu of paying due taxes as suggested in Taxes For What (The News on Sunday, August 18).

The National Tax Agency can be assigned the task of collecting all taxes for the federation (levied in terms of Article 142 of the constitution read with the Fourth Schedule). This is necessary for reducing the monstrous size of multiple collecting agencies at federal and provincial levels that are marked with inefficiencies, incompetence and corruption and creating unnecessary compliance cost, rather than operating under one-window. Today, taxpayers have to deal with several tax agencies. This adds to their cost of doing business.

On March 12, 2020, according to a press release of the Ministry of Finance, the National Tax Council was established and its terms of reference approved. According to a press report, “The harmonisation of GST is part of the World Bank’s budgetary support loan of $750-$900 million.”

The report mentions that as suggested by International Monetary Fund, the Centre and provinces have finally agreed to establish the NTC “to resolve all tax-related issues, especially for the harmonisation of general sales tax across the country.”

This confirms that our governments do nothing unless lenders/ donors force them to do so. It was decided that the NTC would have technical-level representation from the federation and the federating units to resolve tax-related issues without amending the constitution.

The NTC has an executive committee, comprising the federal finance secretary, the FBR chairman, the provincial finance secretaries and heads of the provincial revenue authorities, namely, the Punjab Revenue Authority, Sindh Revenue Board, Khyber Pakhtunkhwa Revenue Authority and Balochistan Revenue Authority.

The executive committee of the NTC, despite repeated requests by these scribes in various articles and books, has failed to recommend the establishment of a National Revenue of Board to the Monitoring Committee of the National Finance Commission. This could have been done by amending the Federal Board of Revenue Act, 2007, and passing of resolutions by the provincial assemblies under the constitution. Now it is not possible until the provincial assemblies come into existence after general elections, which under the normal circumstances were due not later than October 12, 2023, but have been delayed due to premature dissolution of three assemblies, ongoing political uncertainty and inefficiencies at the Election Commission of Pakistan.

The NTC should seriously consider the models of Swedish revenue authority (Skatteverket) and Canadian Revenue Authority that not only collect taxes at all tiers of government but also extend benefits like social security, food stamps, universal pension and income support. Linking the databases of various bodies with the NRB (complete digitisation) can be a great step towards an e-government model for the country.

The complete roadmap for achieving this goal was discussed in A Tax Policy For Growth, (The News on Sunday, June 18), Prudent Fiscal Management, (The News on Sunday, February 12), A Tax Policy Proposal, (The News on Sunday, January 1), Challenges on the Fiscal Front, (The News on Sunday, November 20, 2022), as well as some other articles.

In the forthcoming federal and provincial budgets, hopefully to be prepared by elected governments, the policymakers and legislature need to restructure the tax system to tap the real tax potential at national level. At the same time, they must provide quality social services to the citizens, drastically cut wasteful expenditures, get rid of the mess in the energy sector and stop further bleeding of public funds through loss-bearing state owned enterprises.

Pakistan has outdated, colonial-style administrative and judicial structures. The bureaucrats are virtual parasites and since rent-seeking is accepted as a norm, even the private sector is neither a growth catalyst nor ready for innovation.

We must assign top priority to fundamental structural reforms to dismantle the elitist and rent-seeking economic system. Inclusive growth for prosperity of all citizens is not possible under this system.

Dr Ikramul Haq, an advocate of the Supreme Court and writer is adjunct faculty at the Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA. 

Towards a federalised tax structure