The ability-to-pay principle is regarded as the most equitable and just basis for taxation
The failed experience of tax reforms in Pakistan is well documented in a book, The Role of Taxation in Pakistan’s Revival, edited by Jorge Martinez-Vazquez and Musharraf Rasool Cyan, containing nine chapters. These are, in fact, studies conducted over seven years [December 7, 2004 to December 31, 2011] for Pakistan Tax Administration Reform Programme (TARP), carried out at a total cost of $149 million, out of which $102.9 million came as a loan from the World Bank.
The TARP was a great failure as on its conclusion not only did the tax-to-GDP ratio fall substantially, there was also a tremendous decrease in the number of return filers. After reading the book, the irresistible conclusion is that the prescription of the World Bank and International Monetary Fund (IMF) suggesting “more taxes” without growth, equity and delivery of social services to the citizens is a lethal pill.
None of the studies in the book has highlighted the most painful aspect of Pakistan’s oppressive and unjust tax system. On one hand, the State is least pushed to provide free education and health facilities and on the other, individual income taxation is insensitive to family circumstances to determine ability to pay, in utter violation of Article 3 of the Constitution of Pakistan.
Imposition of regressive, high-rate taxes, especially sales tax on essential items, in an underdeveloped, informal and struggling economy has been the tax policy of Pakistan, following the dictates of International Monetary Fund and World Bank and the disastrous results are before us—see detailed analysis in The sordid story of tax reforms, The News on Sunday, Political Economy, September 25, 2016.
In most democratic countries income tax laws recognise the cost of living alone or with family — expenses to nurture children are always taken into account. The laws, thus, allow deductions/ allowances according to size of family. In Pakistan, the Federal Board of Revenue (FBR) not only denies any such allowance or deduction, but extorts advance income tax even from the low-income earners and their family members having no income, on facilities like mobile phones.
Adding insult to injury, the FBR expects them to file tax returns to get refund of the money withheld as tax, whereas the cost to get it is much more than the amount due and chances of harassment after filing a return are obnoxiously high.
The so-called experts on Pakistan’s taxation system, at home and abroad, do not try to comprehend the basic elements of a repressive system, let alone suggesting ways to reform it. Their popular slogan is more taxes to improve tax-to-GDP ratio, but no concern for utilisation of money collected as taxes and its ruthless abuse for providing extraordinary perks to the ruling elites. They want what is prevalent in the West without studying and considering the mundane realities of Pakistan where the State is not providing even security of life and property, what to speak of taking care of higher needs of all citizens—the denial of fundamental right of free education to children under Article 25A is the most glaring example of State’s apathy.
The real issue of taxation in Pakistan is lack of a judicious balance between direct and indirect taxes. Appeasing the rich and mighty and lavish spending on comforts of elites is the main cause of the huge budgetary gap. Such policies are continuously increasing miseries of the people, 30 percent of Pakistan’s population now lives below $2 per day, which is categorised as extreme povertyNon-collection of taxes from the rich and generously extending exemptions/concessions/amnesties is the root cause of injustice our tax system.
In the book, Jorge Martinez-Vazquez and Musharraf Rasool Cyan fail to dislodge the FBR claim that the share of direct taxes is about 40 per cent. They blindly adopt the FBR figures without examining their authenticity. They are unable to show that under Pakistan’s Income Tax Law, overwhelming collection was through indirect taxes that are camouflaged as direct taxes. These presumptive and transactional taxes have nothing to do with the income of a person—the incidence of these is passed on to the clients/customers.
No expert hired by the World Bank or the IMF as the book shows, was aware of the realitythat the main incidence of taxes in Pakistan has been on the middle-low-income groups, while the beneficiaries of taxpayers’ money are the rich and public office holders who get enormous tax-free perquisites and benefits. The State, captive in the hands of a few, is facing enormous challenges on fiscal front.
The IMF and the World Bank have been dictating our economic managers their prescriptions. Under the previous programme, they always pleaded for more regressive taxes never caring even if the Government of Pakistan Muslim League (Nawaz) raised sales tax rate to the extent of 50 percent on high speed diesel oil, 30 percent on kerosene, 29.5 percent on light diesel oil, 26 percent on motor spirit excluding HOBC and 24 percent on HOBC through statutory regulatory orders (SROs).
They knew that such actions were not only burdening the poor and destroying the export industries but were also in violation of Articles 77 and 162 of the Constitution of Pakistan. In their countries, they talk about “rule of law” and in Pakistan they ignore our rulers’ blatant violations of the supreme law of land. The Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v. Federation of Pakistan and Others (2013) 108 TAX 1 (S.C.Pak.) held that:
“Parliament/Legislature alone and not the Government/Executive is empowered to levy tax. As far as delegation of such powers to the Government/Executive is concerned, the same is for the purpose of implementation of such laws, which is to be done by framing rules, or issuing notifications or guidelines, depending upon case to case, as we have come across some of the cases noted hereinabove. But in no case, authority to levy tax for the Federation is to be delegated to the Government/Executive. Therefore, arguments so raised by learned counsel have no force and the same are repelled hereby.”
The IMF, in its parleys with the Pakistani team, has never raised the issue of violation of constitutional provisions and burdening the lower-income groups with unprecedented taxes on petroleum products. Why should they? They are mainly concerned with getting their own money back. The fault of course, lies mainly with our ruling elites, who beg thrive on borrowed funds and taxes paid by the masses.
The existing tax system is not taxing the super-rich and the collection is mainly from indirect taxes. Resultantly, income and wealth distribution disparities are rapidly widening. Under the given scenario, efforts are needed both at federal and provincial levels to enlarge the size of the pie by shifting to growth-oriented taxation—see details in Chapter 16 of Return to Prosperity by Arthur B Laffer and Stephen Moore.
Though many authors, including ourselves, have presented suggestions for reforming the tax system and raising taxes to the level of Rs 8 trillion at federal and Rs 4 trillion at the provincial levels has already been given—Towards Flat, Low-Rate, Broad & Predictable Taxes [Prime Institute, 2016]—our more-loyal-than-the-king stalwarts sitting in Ministry of Finance and the FBR want “advice” and “assistance” only from the IMF and the World Bank although it has miserably failed in the past.
The present tax system and policies, adopted as such by the coalition government of Tehreek-i-Insaf despite their claims to reform the same, are detrimental to economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa.
The ability-to-pay principle is regarded as the most equitable and just method of taxation and emphasized upon primarily for its redistributive role. In Pakistan, successive governments have deviated from this principle which is in fact, a constitutional obligation of the government.