Tax Policy For Growth

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Qarz Ki Peetay Thay Mai Aur Samajhtey Thay Ki Haan, 

Rang Laavegi Hamari Faaqa-Masti Ek Din

Mirza Asadullah Khan Ghalib

(Hooked on borrowed funds for intoxication, yet kept harbouring false hope of wonders occurring someday)

The dilemma of our economic managers, especially the budget makers, under successive governments (military and civilian alike), has been what great poet of all times Ghalib expressed in the above couplet many years back. They have been painting a rosy picture of economy in utter disregard of the fact that Pakistan remained historically caught in deadly low-growth trap. The consequential effects of this malady had been fast declining exports, debts swelling alarmingly, fiscal deficit widening beyond expectations, inflation never receding, and abject poverty becoming reality for millions.  

The issues of pathetically low tax compliance and unemployment have been a permanent a source of disillusionment for the policymakers and overwhelming young educated population. There is a consensus among all that we need higher (over six percent) and sustainable growth for at least a decade to provide over three million plus jobs every year to our youth alone. However, the existing tax policy is the main reason for low savings and investment, needed for growth and prosperity.  

The Finance Act 2023, presented with the budget 2023-24 by the alliance government of Pakistan Democratic Movement (PDM), confirmed that the rulers representing a large number of political parties were oblivious to making the tax system equitable, levy taxes on the rich and mighty—especially absentee landlords. Resultantly, since the event days of April 9, 2022, the poor of the country were forced even to pay more for the luxuries of the privileged.  In all civilized societies, it is the other way around. The rich are taxed for the benefit of less privileged. For accelerating industrialisation and creating much-needed jobs, corporate tax rates are reduced to 20% and even less all over the world. Our economic wizards, on the contrary, imposed exorbitant super tax and income tax on bonus shares to further retard the growth of companies and discourage shareholders.

On the one hand, the PDM government pleaded for documentation and on the other levied 0.6% tax on cash withdrawals from banks by non-filers that in the past proved disastrous, leading to depletion of bank deposits and increase in money circulation. The Federal Board of Revenue (FBR) since long has not been willing to enforce tax compliance on all having taxable income and end “non-filer” regime. The legislators (sic) wanted to encourage and protect informal economy and shady transactions (proposed no questions would be asked for inward bank remittance up to US$100,000). 

The said proposal in the Finance Bill 2023 was dropped in the Finance Act 2023 after disapproval by the International Monetary Fund (IMF) exposing the intentions of the fourth-time Finance Minister, Muhammad Ishaq Dar, in contradistinction to his tall claims of documenting economy and revamping the outdated/decadent tax system.    

An equitable tax system ensures that tax payments are based on the amount of benefits received from government services—the Norwegian social democracy model is a good example to quote and follow. In social democracies, the cost of government services are apportioned amongst individuals according to the relative benefits they enjoy. In economic terms, this is called “benefit principle” that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. This approach was ignored in the Finance Act 2023 and overall tax policy.   

Tax policy should be aimed at achieving the cherished goal of distributive justice. The government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include subsidised/free medical and educational facilities, low-cost housing, and drinking water availability in rural areas, land improvement schemes, and employment guarantee programmes. 

Once people see the tangible benefits of their taxes, there will be better response to tax compliance. Taxes cannot be collected through obnoxiously higher rates, harsh measures and irrational policies as contained in the Finance Act 2023. By its actions any elected government must demonstrate to the citizens and taxpayers that money collected as taxes are fairly and justly is spent for collective welfare and not for self-aggrandizement

It is an irrefutable fact that despite resorting to all kinds of highhandedness, blocking of refunds and unjust withholding taxes, FBR has miserable failed to improve tax-to-GDP ratio at federal level. It is going to further decline in the fiscal year 2023-34 from existing 8.5%FBR was not able to collect even Rs. 7400 billion—the original target for fiscal year 2022-23 was Rs. 7460 billion, later revised to Rs. 7640 billion after mini- budget levying additional taxes of Rs. 170 billion through Finance (Supplementary) Act, 2023. 

The tax and non-tax revenues projected for the current fiscal year 2023-24 are not enough to meet current expenditure, what to speak of funding federal development outlay of Rs. 950 billion. The net income of the federal government, after transfer to the provinces under the 7th National Finance Commission (NFC) Award is budgeted at Rs. 6887 billion. Thus, even for payment of estimated debt servicing of Rs. 7303 billion, Rs. 416 billon needs to be borrowed. This amount will be much larger as debt servicing may reach Rs. 8 trillion, if not more.  It means all current and developmental expenses are being met from costly borrowed funds, both internal and external. This is the worst one can expect from any budget. The unsustainable accumulation of debts, internal and external, by successive governments has pushed the country into a deadly debt trap for which no remedial measures were suggested by the PDM in the budget 2023-24.  

The alliance Government of PDM, during its 16 months rule after assuming power on April 10, 2022, pushed the country towards a fiscal fiasco. It is evident from the Summary of Consolidated Federal and Provincial Fiscal Operations, 2022-23 [“the Summary”], released by the Ministry of Finance (MoF) for the period July 1, 2022 to June 30, 2023 [FY 2023]. 

The most startling fact revealed is: total federal and provincial revenues (tax and non-tax) of Rs. 9.63 trillion against total expenditure of Rs. 16.15 trillion. Net revenues available with federal government after transfer to provinces were short by Rs. 1.18 trillion to meet even single head of expanse, debt servicing of Rs. 5.83 trillion, meaning thereby that the entire defence spending of Rs. 1.59 trillion was met through expensive borrowed funds. It portrays more than a fiscal fiasco—a distress alarming signal, posing a threat to economic viability and national security of the state. 

The disastrous outcome of mindless and costly borrowing, both external and internal, has resulted in 45 percent increase in debt servicing in just one year. According to the Summary, in FY 2023, total expenditure on debt servicing was Rs. 5831 billion against Rs. 3182 billion in FY 2022. Resultantly, fiscal deficit, mother of all ills, reached Rs 6.5 trillion or 7.7 percent of the GDP (Rs. 84.658 trillion). 

The FBR collected Rs. 7.16 trillion in FY 2023. After transferring Rs. 4.22 trillion to provinces under 7th National Finance Commission (NFC) Award, the net available to federal government from tax (Rs.7.169 trillion) and non-tax revenue (Rs. 1.710 trillion) was Rs. 4.65 trillion, whereas debt servicing alone was domestic Rs. 5.07 trillion and foreign Rs. 760 billion. In FY 2023 all provinces together collected only Rs. 649.56 billion of taxes and Rs. 165.88 as non-tax revenues. 

Knowing the above precarious situation, the PDM government provided nothing in the Finance Act 2023 to ensure collection of taxes of Rs. 16 trillion—the real tax potential of Pakistan at federal level even under the given economic conditions [Budget 2023-24: The way forward, TNS, [Political Economy] The News, June 4, 2023]. 

The above potential can increase manifold if we achieve rapid industrial and commercial expansion, with overall economic growth rate of 7% to 9% during the coming ten years. Such a growth rate would not only increase tax-to-GDP ratio to 25% but eliminate our dependence on foreign and domestic borrowings. Collection of taxes, if properly made and utilised, can also reduce economic inequalities through redistribution of income and wealth—the cherished goal of social democracy for better human society, peace and tranquility.  

There is a national consensus that existing tax policy has been stifling economic growth and widening the rich-poor divide. It needs to be reformulated to provide an equitable, pragmatic and investment-oriented environment, integrating efficient tax administration with simplified tax laws that are easily comprehensible and hassle-free from implementation perspectives. 

________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of TaxationHe is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis)

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

Twitter: DrIkramulHaq

 

Dr. Ikramul Haq
Dr. Ikramul Haqhttp://www.thescoop.pk
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialisation in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served in the Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He has co authored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions available at: https://www.amazon.com/dp/B08RXH8W46 and https://aacp.com.pk/product/pakistan-tackling-fatf-challenges-solutions/ He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi poetry 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad. X: (formerly Twitter): DrIkramulHaq

1 COMMENT

  1. The article, very aptly, highlights the pressing issues of Pakistan’s low economic growth, fiscal deficits, and inadequate tax policies. It criticizes the Finance Act 2023 for not addressing the need for a more equitable tax system. The writer, Dr Ikramul Haq, very convincingly argues that a fair tax policy should support welfare-oriented programs, reduce unemployment, and tackle poverty while demonstrating transparent use of tax revenue. The article correctly emphasizes the importance of increasing tax collection to reduce economic inequalities and stimulate sustainable growth. Reforming the tax policy is deemed essential for promoting an environment that integrates efficient tax administration with simplified, comprehensible tax laws.
    Anyone with a genuine academic curiosity should make it a point to read the article.

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