ARTICLE (March 24 2010): The ongoing debate over introduction of Value Added Tax (VAT) from July 1, 2010 - at the command of IMF and World Bank - misses a vital point. The cause for concern is not its poor drafting by foreign experts (sic) or hurried imposition as a condition of IMF loan - as was the case with Income Tax Ordinance in 2001 - but it's devastating effects on our industrial and business houses as well as on the poor people.
The IMF and World Bank are also ignoring the fact that implementing the VAT in an undocumented economy - size of underground economy is monstrously high in Pakistan - will be disastrous unless accompanied by asset-seizure legislation as part of tax codes.
Our economic managers - in reality are now IMF and World Bank - have never considered using tax policy as a tool of economic development. Their sole stress on revenue targets has resulted into an economic quandary. Tragically, their single-minded approach has even failed to overcome the ever-bourgeoning fiscal deficit. An irrational tax policy has not only created fiscal imbalances but has led us towards socio-political disaster - a democratically elected government is facing destabilisation. No doubt our economic survival now lies in collecting taxes wherever due by abandoning the policy to appease the powerful and the rich.
However, the VAT is not an answer, being regressive tax it will push more people towards poverty. The rich will pass on the burden of this tax to the consumers. The real solution is taxing the rich and mighty by introducing asset-seizure legislation. If they fail to pay taxes on their un-taxed assets - kept in or outside Pakistan - these should be seized at once. This legislation will be true manifestation of democratic rule confirming an unshakeable determination, consistency and political will to curb the 65-year-old habit of defying tax laws, together with complete purge in the tax machinery.
The primary function of any tax policy and tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal of a development-oriented tax policy is to ensure that this function is discharged effectively and simultaneously reducing inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some of the means for achieving these ends.
In Pakistan, an opposite approach has been adopted: there has been a gradual shift from equitable to highly inequitable taxes. The shift from progressive levies aimed at removing inequalities, to regressive taxes favouring the rich - presumptive and easily collectable taxes, burden of which is transferred to consumers - has destroyed the entire philosophy of taxes, especially direct taxes.
In this backdrop, the VAT will be another step in the wrong direction. With its introduction, the dismal share of direct taxes in overall collection of taxes at the Federal level will shrink further. The immediate cause for anxiety for all of us - the government, parliamentarians, media and civil society - should be correction in tax-base - presently, it favours the rich and cruelly taxes the poor. Bureaucrats, sitting in the Ministry of Finance and the Federal Board of Revenue (FBR) should not be allowed to introduce foreign-drafted laws in the Parliament, especially when these are against the interest of our people.
It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax) and VAT-type sales tax. Since 1991, the burden of taxes on the poor is increased by 38% whereas on the rich, it is reduced by 18%. The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line - their number is now 48 million according to official figures.
The FBR has in its reports admitted that in the first half of the current fiscal year 2009-10, the share of indirect taxes rose to 72% and that of direct taxes dipped to 28%. It confirms that the taxation system of Pakistan, contrary to the rest of the world, is highly regressive. If we take into account the portion of so-called income tax collection, which is in fact indirect in nature, the share of indirect tax would not be less than 82 percent in the total collection of FBR.
The central goal of Tax Administration Reforms Project (TARP), funded by the World Bank and Department for International Development (DFID), was to improve the direct taxation collection and minimise the indirect taxes to make the taxation system just and fair. However, at the end TARP's tenure, the result is exact the opposite. This is how we implement reform programmes - responsibility should also be shared by the IMF and World Bank for poor monitoring and relaxed controls.
The FBR Chairman, before the Senate Standing Committee on Finance, conceded that "increase in direct taxes is one of the major challenges before the Board". Due to wrong policies of the successive governments - civil and military alike - the poor have been burdened with more and more taxes.
What makes the situation more painful is the fact that taxes collected are wasted by the rulers on their personal comforts and luxuries and the masses get nothing back from what they pay to the state. The successive governments have miserably failed to discharge their basic obligation of protecting life and property of its people, what to talk of extending social services free of cost.
Taxes collected are consumed by debt serving, defence, for the security of the rulers and their foreign tours. Besides regressive taxation, the government resorts to borrowing money at a high cost, from wherever available, to run the day to day affairs.
Interest payments on domestic and foreign debts during the ongoing fiscal year 2009-10 are likely to cost the national exchequer Rs 664 billion (48% of revenue target fixed for the year) that is 17 billion more than what was estimated in the budget. If the defence spending - including cost of 'war against terror' - is added, the entire revenue collection of Rs 1380 billion will be engulfed just by two items, meaning by for all other outlays more borrowings, domestic and international, will be made. It is a never-ending vicious circle.
The burden of indirect taxes like VAT is always passed on to the end consumers. These kind of taxes take a very small portion of a rich man's enormous income and a very large slice of a poor man's meagre earnings. The rulers - controlling the state and its resources - are not ready to pay income tax on their collossal incomes from agriculture, which they earn as absentee landlords.
They are unwilling to cut non-development expenditure at least by 50%. They are not ready to live like a common man and surrender all the perks and privileges they are enjoying at the cost of taxpayers' money. On the contrary, they are burdening the masses with more and more indirect taxes and that too for debt servicing, defence and luxuries. Realisation of actual tax potential of Pakistan, which by a very conservative estimation is not less than Rs 4 trillion, is the real challenge.
It can be met by introducing the following measures:
-- Reintroduction of progressive taxes eg wealth tax, estate duty, gift tax, capital gain tax.
-- Taxation of "agricultural income" of big absentee landlords.
-- Taxation of capital gains at stock market with incentive of lower rate for small investors.
-- Bringing into tax net speculative transactions in real estate.
-- Taxation of abusive transfer pricing transactions.
-- Abolition of section 111(4) of the Income Tax Ordinance, 2001 that protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance after paying a nominal premium of 1 to 2 percent of the entire proceeds!
The existing ill-directed, illogical, inequitable and regressive tax policy coupled with oppressive-corrupt tax system is widening the existing divide between the rich and the poor. The sole stress on indirect taxation - even under the garb of income taxation through presumptive tax regime on goods and services-without evaluating its impact on the economy and the life of poor masses is a lamentable policy.
In the name of higher growth in tax collection, measures like the VAT are proposed instead of progressive taxes mentioned above, and no seriousness is shown for better enforcement of tax laws - what is preventing the government to confiscate all un-taxed assets? This policy of taxing the poor for the benefit of the rich - employed by military rulers - is religiously being followed by Zardari-Gilani et al with the only difference that Shaukat Aziz stood replaced first with Shaukat Tareen and now with Abdul Hafeez Shaikh - all three nominees of the IMF and World Bank.
[The authors, tax lawyers, teach tax laws at Lahore University of Management Sciences (LUMS)].
Source: http://www.brecorder.com/index.php?id=1035109&currPageNo=1&query=&search=&term=&supDate=
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