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June 14, 2019

Raising Rs10 trillion


June 14, 2019

The prime minister of Pakistan, in his brief address to nation on June 10, 2019 – a day before the announcement of the budget for fiscal year 2019-20 – asked the rich and mighty to declare their hidden and/or benami assets at home or abroad. Obviously, the poor have no such assets.

The prime minister once again blamed the previous governments for accumulating enormous debt for which the nation is now paying heavily as 50 percent taxes go into debt servicing alone. He emphasised the need to collect Rs10 trillion to become a respectable nation in the world.

Prime Minister Imran Khan, however, did not mention that the governments – federal and provincial – have been lax in taxing the rich and mighty. In Khyber Pakhtunkhwa, where the PTI ruled from 2013 till 18, not a single tax was levied on the rich; after the 18th Constitutional Amendment, progressive taxes like wealth tax and inheritance tax fall in the provincial domain.

The rich and mighty of society enjoy extraordinary tax-free perks and perquisites, while derisory allocations are made for health, education and other social services to mitigate the sufferings of the poor that are increasing day by day. Millions are pushed to become what Franz Fanon called “the wretched of the earth”. Due to pro-rich policies, wealth is concentrated in a few hands.

The dilemma of Pakistan is cronyism, greed and corruption on the part of the elites. They are parasites and not growth catalysts or innovators. By improving compliance and broadening tax base, it is not at all difficult to raise funds of over Rs8 trillion at the federal level and Rs2 trillion at the provincial levels. To collect Rs8 trillion at the federal level, we need to restructure the existing tax machinery, withdraw concessions/immunities and crack down on tax evaders and plunderers of national wealth.

We need a simple, fair and predictable tax system: 10 percent tax on individuals (with alternate minimum of 2.5 percent on net wealth), 20 percent on companies and other entities, and 8 percent sales tax on all local supplies (for exporters, no tax). This will fetch us tax of Rs7 trillion (Rs4 trillion income tax and Rs3 trillion as sales tax). We can get Rs1 trillion by levying 2 percent customs duty on all items (exporters importing raw material to get refund once export proceeds are realised by the State Bank).

Former finance minister Asad Umar, while presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018 followed the traditional babu approach to balance the books. He failed to fulfil the promise of collecting Rs8 trillion by the PTI. In fact, the target of the Federal Board of Revenue was reduced by Rs169 billion to Rs4.72 trillion – a reduction of 3.5 percent. He obviously did not study the paper ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016) that gives a detailed roadmap and step-wise action plan for raising revenues of Rs8 trillion at the federal level alone.

The PTI government is following its predecessors and borrowing more from local and foreign sources. Our debt-to-GDP ratio has already crossed the danger mark. It is heartening to note that the government under the new economic team has taken some measures to levy taxes on the import of luxury items. But it has yet not imposed special surcharge on wealthy classes and levy excess profit tax on cartels in different sectors.

The federal government must impose excess profit tax on cartels that earned billions by manipulating prices; they were fined by the Competition Commission with evidence that was irrefutable. If this is done, the government can easily raise additional funds of Rs400 billion. The provincial governments should also levy progressive taxes (for example, wealth tax on the rich) and must collect agricultural income tax from the rich absentee landlords. This alone can generate revenue of over Rs200 billion. Provincial governments have been wasting funds received as share from divisible pool, but have shown no inclination to generate funds themselves by introducing progressive taxes (like capital gain tax on transfer of immovable property, gift tax, inheritance tax etc) on the rich and on unproductive transactions.

The following two measures alone can generate extra revenue of Rs500 billion at the federal level – out of which provinces will receive 56 percent as per the existing NFC Award:

One, excess profit tax on cement, sugar, fertilizer, flour mills, and banking and telecom sectors would generate extra tax of Rs300-350 billion. All persons having income exceeding Rs2 million should also be asked to pay 10 percent extra surcharge for helping the poor; that will generate Rs100-130 billion. This amount should be deducted from taxable income to avoid double taxation.

And, two, a one-time de-logging litigation scheme should be introduced. Taxpayers be asked to pay 25 percent tax arrears with pending cases before appellate authorities and courts deemed to be settled. In 1998, India through a similar scheme [Kar Vivad Samadhan] generated revenue of over Rs900 billion, while disposing the huge backlog of cases in the country. Such a scheme – with time limitation up to June 30, 2019 – would not only generate immense revenue but also help drastically in reducing the workload of tribunals and high courts.

The above two measures alone can generate extra funds of Rs500 billion that the federal government requires to keep the fiscal deficit within a safe limit. These measures will not burden the common people as incidence of tax would fall on the rich. Any enhancement in indirect levy – sales tax etc – becomes beneficial for businessmen; they collect it from people but do not deposit the full amount in the government treasury. The federal government should stop looking for more borrowed money and take immediate steps for resource mobilisation to overcome fiscal deficit, the mother of all ills.

The provincial governments can also raise substantial revenues by levying taxes on rich absentee landlords. They should also impose transactional taxes on speculative dealings in real estate and expenditure tax on luxury consumption (people are paying millions to five star hotels for social events). They can generate adequate funds if these tax measures are introduced. The real tax potential of Pakistan – a cursory look at undeclared income/wealth would prove it – is not less than Rs8 trillion at the federal level. If we manage to collect this level of tax, our reliance on domestic and foreign loans can decrease significantly and diminish after a few years provided we achieve growth rate of at least 7 percent for 10 years.

Note: this article was written before the announcement of Budget 2019-2020. Its main argument, though, can add to the ongoing budget debate.

The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.

Email: [email protected]

Twitter: @drikramulhaq