Pakistan’s real dilemma

According to the spokesman of the Federal Board of Revenue (FBR), the collection of Rs1,664 billion till February 15 – against collections of Rs1,404 billion – in the corresponding period of the last fiscal year, is impressive. This 18 percent increase was caused by holding refunds worth billions of rupees (at least Rs250 billion), imposing exorbitant indirect taxes on petroleum products (ranging from 60 percent to 95 percent) and enhancing regulatory duty on hundreds of items.

In December 2015, the government announced a third mini budget, at the behest of the International Monetary Fund (IMF). In the wake of the Rs40 billion shortfall in tax collection during the July-September 2015 quarter, the IMF gave only one option: ‘introduce additional taxes’. Our worthy finance minister, instead of levying taxes upon the rich, opted for regressive taxes that are fuelling inflation and increasing the cost of doing business. Our exports were the worst affected – and are becoming more and more uncompetitive, paving the way for other regional countries to take advantage and snatch business from our traditional markets.

The spokesman of the FBR did not reveal these facts while making tall claims about the extraordinary performance of his institution, which he said would soon be “at par with the tax authorities of the developed countries”. The reality is quite the opposite. Exporters and other taxpayers have been denied their bona fide refunds for the past many years. There is now unconfirmed news that bonds will be issued in lieu of refunds of billions because the government has no liquidity.

Commerce Minister Khurram Dastgir, while giving a detailed briefing on Free Trade Agreements with Iran and Turkey to the Senate Standing Committee on Commerce on February 16, 2016 said, “I do not have any idea about the issuance of bonds against overdue refunds. This is up to the FBR to devise a strategy for payment of refunds to exporters. When it comes to refunds we are the advocates of exporters and the business community. When [the] prime minister held a detailed meeting with the business community, we strongly advocated payment of refunds.” Is this how the FBR will be brought to par with the tax authorities of developed countries?

The FBR is very happy that withheld refunds and unjust, excessive and exorbitant withholding taxes, like Section 236P of the Income Tax Ordinance 2001, are yielding extraordinary revenues. Such erratic taxation, in fact, protects the rich and those who do not file their tax returns. By having to pay ‘higher’ rates of withholding taxes, the rich will never disclose their actual incomes.

The rich who do not file tax returns pass on the burden of higher withheld taxes to customers and clients. They are much better off than those who are diligently filing tax returns and paying taxes on actual incomes, the majority of whom belong to the salaried class or fixed income groups subjected to presumptive taxation. The blockade of refunds is highly detrimental for business growth, and even the prime minister is concerned. Yet, he cannot force his finance minister to pay the amount in cash.

The poor and middle class are victims of oppressive indirect taxes, including income tax in the garb of presumptive, minimum and transactional taxes. The economic managers have failed to realise that excessive and illogical taxation on savings does not increase government revenues. Once income has been taxed, savings and transactions should not be taxed. Is there any other country in the world where banking transactions and the withdrawal of cash are taxed?

All service providers, shopkeepers, traders and businessmen are paying advance income tax as commercial electricity users with electricity bills and their data is available at the FBR. Non-filers can be issued notices using the data of electricity distribution companies. Why the FBR has failed to do so is not understandable. This fact falsifies the claim of the FBR that the real motive behind Section 236P is to widen the tax base and facilitate documentation.

The so-called policy of penalising the non-filers is a hoax to grab more income tax which, in substance, is transactional tax. It cannot be called a direct tax. The FBR bosses, loyal to their political masters, are happy to extend tax amnesties to powerful traders. Other powerful elements are facilitated in paying ‘extra’ withholding taxes in lieu of filing returns and pass the burden to the customers.

Why is the FBR not prosecuting non-filers, when it possesses a complete record of advance taxes paid by them and amounts collected by educational institutions, banks, Wapda, telecommunication companies, travel agents, airlines, etc.? This inaction speaks volumes about the FBR’s performance. In reality, the current government is helping the rich to amass more wealth and is shifting the tax burden of taxes onto the ordinary masses.

The real dilemma of every government in Pakistan has been the ruthless wastage of resources, regressive taxes, unabated borrowings to meet budgetary deficit and the perpetuation of elitist structures. Billions are wasted annually on the inefficient government machinery (consider the tax-free perks and benefits given to high-ranking officials) and public-sector enterprises. Funds are made available for futile projects that are politically rewarding, but there is no will to spend adequately on human capital, the social sector and infrastructural improvements.

The biggest hurdle facing the progress of Pakistan is the control of businessmen-turned-politicians over the state apparatus and economic resources. Not a single political party in parliament is interested in dismantling these elitist structures and bringing reforms for socio-economic justice and to bridge the growing class divide.

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

Email: ikram@huzaimaikram.com

Twitter: @drikramulhaq