The Round table on August 26 was supposed to be on our economic woes and how these might be rectified. Once again I was unable to sit through the entire session when it became extended to the evening. However, for the duration of my attendance, with the exception of a few comments on the state of the economy in passing, the session was entirely devoted to taxation and the woes therefrom – this goes to signify the importance of tax reforms to the causes of our current economic crisis and why, without tax reforms, the economy cannot recover.
The comments on the economy, apart from bemoaning the present state of the economy and pointing out that the common man is just giving up, made a few important points about why investments in imports and exports are falling due to State Bank policies:
- Custom duties have been enhanced. This deters importers, for obvious reasons.
- While large scale importers of Pakistan have, over time, acquired a credibility and credit reliability with those foreign exporters whom they have regularly been doing business with; the same cannot be said of the medium and small scale importers. This category of importers import on an as-required basis and, therefore, do not acquire the credit reliability that large scale importers enjoy. The State Bank’s decision to disallow advance payments for imports, may not affect large scale importers but has made it impossible for medium/small scale importers to continue.
- Checking and preventing “Under Invoicing” is a specialist’s job, not that of an ordinary banker. The State Bank has instructed all branches of all banks to check under invoicing. The lack of understanding the intricacies of under invoicing among ordinary bankers, merely results in adding an additional bureaucratic hurdle that delays the process further.
- The world is moving increasingly to the principle that exhorts governments to adopt measures that facilitate “ease of doing business”. It seems that our bureaucracy ensures the opposite. [The foregoing comment deserves to be recorded here. However, it might not be entirely true. Certainly, quite a few of the officer-class bureaucrats i.e. Grade 17 and above, may now be endeavoring to facilitate business ventures, but the subordinates, and some officers continue their obduracy.]
- Dr. Rashid Amjad, an eminent economist, while commenting appreciatively on some of the steps taken by the present government, towards fiscal reforms, points out that bold steps are essential in economic reforms as well. And encouragement of economic growth is prominent by its absence at present.
- It is important to add here that our limping economy is surviving only due to the support provided by the parallel [Black] economy; which is about 36% of our total economy. We cannot afford to suffocate this economy and, simultaneously, we cannot permit it to continue thriving. In the latter eventuality, FATF will always be breathing down our necks. Somehow this has to be a) whitened [on a one-time basis] and b) for a permanent cure, brought on record and, into the tax net.
- Population growth was mentioned only in passing once. But this is a multi-pronged issue which can, all by itself, render us incapable of bettering ourselves ever. Consider the following:
- Our current population growth has now fallen but still hovers at over 2%; which means we add over 4 million mouths to our population annually. While our GDP growth in the year 2017/18 was just under 5%. This year, we will be lucky to record a GDP growth of 3%. This clearly implies that, if we continue at even a 5% growth rate of GDP a) in under 25 years we will double our population; b) unless our GDP growth rate grows exponentially per annum, our aggregate GDP growth will continue to fall. Water and food scarcity will increase exponentially and, every successive year, we will be worse off.
- Our youth bulge will continue to grow. Every year there will be an increasing number of people in their 20s, looking for employment. Unless our industrial growth is magical, there will be fewer and fewer employment opportunities. Greater unemployment will result in an immediate increase in crime-rates, increased violence and insecurity; which will, finally be impossible to control. This stage would already have been reached, were it not for the increasing millions of young boys and girls who are self-employed on the internet.
- While we are paying mere lip service to population control, we are doing less for development of human resources. Population growth must be decreased but, HRD could result in converting this threat into an asset. Reversion to Polytechnic Institutes which could, among other skills, impart computer skills to those technically proficient could help impart skills to those who cannot afford higher education or lack the inclination for it. The same institutes could assist them in finding employment domestically and abroad. Thus, simultaneously, bringing them in the mainstream economy and the tax net.
Let me begin with the admission that I have always been a mere soldier with no expertise of any subject, least of all did I know anything about taxation. Throughout my life I have been taxed at source, with no option of evasion. However, I have never complained before today.
Taxes, all over the world, are an onerous burden to the citizens. The American Revolution began on the cry “No taxation, without representation”. Tax evasion is, therefore an art and is considered a huge success by the evader. Many consider the evaded tax as additional earnings. Citizens, however, can be persuaded to pay taxes, less unwillingly, if they see their taxes being used to the collective good of all.
I recall that in my childhood, late 1950s/early ‘60s, I often had to collect goods from the market. Whenever I bought goods from a shop, as opposed to a street vendor, I got a receipt without asking for it, even for a few annas. Those were primitive days so, the receipt was carbon-copied by the shopkeeper. There was no concept of evading or trying to avoid documentation by issuing katchi receipt. And traders/shopkeepers also, obviously paid taxes not unwillingly.
What happened since? Constant looting, misuse and squandered waste by successive governments has disillusioned citizens. No one is convinced that taxes will be used for the collective good of the country. They will have to be made to pay and yet, I fear, only from what is public knowledge, the government is going about it the wrong way.
Our national problem is that a) we are in hock up to our nose and, consequently, taxes will only help pay off some debts. And, therefore, we cannot make extravagant promises of undertaking projects that will visibly improve the quality of life as inducement; and b) our tax base is among the smallest in the world and in desperate need of enlargement; and c) despite all efforts, so far our tax collection this year has been less than the previous year’s. FBR has boasted of an increase [this year] in the tax base of a quarter of a million individuals. Out of over 200 million non-tax payers?
Note: It is important to point out here that all government employees are actually service providers to the citizens. But, they conduct themselves like masters; not friends [or service providers – which would mean they are the peoples employees]
Some Basic Facts on Taxes
- Direct taxes on incomes will tax only wage earners. Whereas, indirect taxes will tax the public at large and, consequently, burden even the very poor, and thus, might cause inflation. Consequently, indirect taxes should be minimized.
- However, indirect taxation is the sole method whereby governments can influence consumer preference while purchasing and thereby, encourage one industry or one product/utility, against another. However, it must be used as sparingly as possible. Taxes on essential utilities like fuel, gas, and electricity effect every single commodity in the market. The poor, therefore are taxed multiple times; first in their own utility bills and thereafter, in every purchase they make. For a country in the early stages of an economic recession, which we are, indirect taxes will only decrease purchasing power of citizens, thus accelerating towards a depression. So said John Maynard Keynes.
- As far as possible, taxes should be affordable, without inconveniencing the poor to middle class tax payers; the vast bulk of the people.
- Direct taxes should generally be on a rising scale [the principle of Vertical and Horizontal Equity], with low income earners paying at a lower percentage than the higher wage earners. In fact, as the income increases, so too should the percentage of tax deduction. However, there is a proviso. The more the earnings of an entrepreneur/industrialist/agriculturist, the greater his savings and, therefore, the greater is his ability to reinvest and earn more. If, tax percentage continues to increase; beyond a certain stage it will reach the stage of “optimal returns” beyond which lies “diminishing returns”; i.e. beyond a point, additional percentage of tax will become a disincentive to the entrepreneur preventing him from reinvesting and earning more.
- In the paper on agriculture, I mentioned that agriculture should also be treated like an industry. But, its rules on taxation should be framed separately.
Some conclusions from the RT
The most glaring fact that was repeatedly driven home to me was the extent and depth of the mutual distrust between the potential tax payers and the tax collectors. Without repeating their words, both sides continued to repeat themselves, with the visible frustration that comes of repeating yourself for the umpteenth time, with no expectation of making any difference.
One of the participants made a most interesting comment which is borne out by the mutual distrust. The words are mine but [I think] the gist is his. “At partition we inherited a working wheel for tax collection. Then successive governments began denting it and then tried repairing it. Now it has multiple corners and refuses to rotate. Maybe we need a new wheel”. I agree. This wheel can no longer work; not with these tax payers and these tax collectors; nor their children.
Second, the corollary that flows from the above is that the entire tax reporting and collection system must be simplified so as to make it least inconvenient for the tax payer to pay. Many measures have already been taken by the collectors but the payer distrusts all these measures. Ease of doing business should extend to ease of paying taxes.
Third, all payments, larger than the fixed maximum e.g. PKR 25,000/- must be by check and, as far as possible, all purchases digitalized.
Fourth, some of the rules don’t make good sense e.g. one of the prescribed measures for deciding whether a trader falls in the category of large, medium, or small, is the size of his shop. Perhaps his/her utility bills would be better indicators of the size of his/her business.
Fifth, the parallel [Black] economy must be brought in the tax net. According to FBR records, registered property dealers in the entire country are in hundreds and not all pay taxes; these are certain to be in millions [In case of property dealers, a Contract Law Regulation might help]. As also are small traders. Online traders and online businesses are not even registered. Tax on services of all kinds is extremely lax.
Sixth, there should be only one tax collection agency.
Seventh, governmental support and concessions for goods imported from China are adversely impacting our traders and business.
Eighth, and finally, it is essential, no, imperative that we have a Public Awareness Program. All mediums, radio, print, TV, even social media could be activated to make people aware of their real tax liability, how, and when taxes will be collected and by whom. While the extent of the mutual distrust on tax matters has been stated here, the extent and depth of the mistrust between the government and the governed is even greater. This program might even help begin a decrease in the latter mistrust also; given time.
While this, the last point here, is not concerned with tax or the economy but it was raised by a participant, in some context. The Ministry of Planning is supposed to be planning for the future. To be able to do so, it must be able to understand where the future is headed in what matter. Consequently, though not the most attractive assignment for a minister, it should be headed and manned by people with a better than average intellect.
A Suggested Solution
- Let me state at the outset that I base my solution on a comment by Lt Gen Aamer Riaz, President NDU, made in a conversation with me. I state this NOT as a means to support what might seem as an outlandish idea [which is mine], but merely to acknowledge that I have expanded on another’s thought.
- I am convinced that both, the FBR and IT Departments have, over the years, become engineers of corruption and bureaucratic hurdles. The kind of harassment that tax payers are subjected to, is unbelievable. This by no means implies that every individual in these departments is corrupt. I know some who are not. But those who are honest and dedicated to their duties are not many and, they consist almost entirely of the officer class, not their subordinates in pay grade 16 and below. And, the latter remain unpunished by their superiors, even the honest officers patronize corrupt staff, based on a false concept of being loyal patrons to their staff.
- The vast majority of our populace is not even educated, let alone being computer literate. These individuals can neither fill forms nor can they afford to take out time from earning bread to waste it trying to satisfy an irate tax official. For a transparent Tax collection system, it must, therefore be multi-lingual and facilitated so as to least inconvenience these tax payers.
My Principles [or Parameters] for a new Tax Policy
- Many an economist and specialist on taxes, including Dr. Syed Ehtashamuddin Ahmed, avers that the basic requirement for any tax policy to work, is honesty. An honest leader who wants it to work; and, can find an honest person to implement the policy; who will also ensure that his subordinates remain honest. And the corollary which can make that happen is a) that tax collectors are paid commensurate to their responsibilities, so as to reduce temptation and b) punitive action against the corrupt is swift, sure, just, and deterrent.
- It must be as simple as possible. As far as possible, there should be only one tax, instead of numerous duties, taxes, Cess, etc. which are differentiated merely by the mode of declaration and payment of each. The necessity of a separate Customs tax for import, and octroy duties for usage of a facility provided by the state, is understandable; but their procedures can also be made simpler and the incessant corruption eradicated.
- It should seek to extend the net of those who pay tax to every individual who earns more than the subsistence level. For emphasis, it is again pointed out that, it must be extended to include the parallel economy.
- Tax should be affordable, so as not to burden the poor.
- Tax collection should, ideally, be so facilitated that an individual sitting at home should be able to pay his tax over the phone. However, since this might not be possible immediately, a viable alternative may be considered.
- Tax collection must be devolved. Ideally, to the community/Commune level but, under the local bodies.
- All taxation must be through representation.
- To support all this, a massive and aggressive Awareness Program, which ensures that every single citizen is made aware of his/her tax liability, why taxes are essential, what these are utilized for, where and how these can be paid, and where and how to lodge a complaint or request assistance.
The Suggested Policy
On Policy Formulation
As a first-time measure, the national policy must be formulated at the national level under the central government. However, policy makers for this policy should not be government employees. They should consist of a few [up to five/six] acknowledged economists, one each nominated by the central and provincial governments, and be provided with the Principles or Parameters, such as laid down above and may or may not be provided a suggested policy.
No Taxation without Representation
Ideally, fixing the sum of tax for each [fixed tax] category [stated below] is the domain of the provincial government. However, on this, the initiation of a maiden venture, the committee suggested above should be so authorized. These individuals should be empowered to consult with some communities, associations, unions, local bodies of each province, of their choice to reach their conclusions, but within a specified and limited time.
- Due to the extent of corruption and the all-pervading mutual distrust between everybody, the ONLY way things might work is where there is still a level of trust: the communities the Associations, and the local bodies. Even here, if mishandled it might not last too long. Which is why checks and balances must be emplaced earliest possible and should be accessible. Tax Ombudsmen should, therefore, be elected at the level where taxes are collected; so that people know him/her, and can reject the individual. So too should the tax collector, if required.
- Tax collection should revert to being a provincial subject but, its system of functioning, tax collection and monitoring [Ombudsman] approved and laid down according to policy down to lowest level.
- Collection must be devolved to Local Bodies. Where necessary, assisted by communes.
On Tax Collection and Facilitation
Note: [It is a pitiable state of affairs that, e.g. property dealers in Pakistan, registered with tax authority number in a few hundreds and not in the million or more that there certainly are. So, the first part is to get the numbers right. Lt Gen Aamer said that in the last census they have necessary details of shops, traders, and other businessmen. So, assuming that the same data was collected over the entire country, collecting that information should not be difficult.]
Where and for those who do not appear in the census, they are almost certainly registered with their respective Associations, Unions, etc. and should not be difficult to discover. As too should service providers and on-line businessmen.
- The first task for local body’s politicians is to list the total numbers of possible tax payers, judging from utility bills, living style, with the help of associations/unions and Community leaders etc.
- Then, based on their likely incomes, divide them in two basic categories i.e. the Elite who are e.g. those with an annual income in excess of PKR 6 million and those with less. The former category should be taxed on a rising scale based on their income of each year [but with an upper limit that does not go beyond Diminishing Returns and without unnecessary harassment] and the others; who will be further sub-divided into numerous categories and each category will be taxed on a fixed scale.
- Lists of tax payers, their sub-category, tax liability, and when it is due will be compiled and communicated through all mediums to all individuals. Since cell phones are now connected to the CNIC and the CNIC number is also the tax number, those with cell phones can be informed by text and a multi-lingual automated call providing them all necessary information—-the call must be made from a recognizable GOP phone number. Those without cell phones can be informed by letters. After collection, a list of those who failed to pay must also be publicized with the punitive action for non-payers.
- Payments to be remitted to any bank, deposited to one account number, common to all banks. Apart from the deposit receipt from the bank, each tax payer must get an acknowledgement by phone/letter.
On Service Provision
The tax policy should specify the services to be provided at each level of governance i.e. local communication facilities and utilities, tehsil/district level responsibilities and provincial/central governmental responsibilities.
Annual Finance Award
Obviously, this will now lay down the share that local bodies will retain and the proportion they will surrender to the province. Similarly, the award will lay down the share of the province and what it must surrender to the central government.
Instead of remaining an annual dispute, this should be laid down in the tax policy, to start with. Obviously, this policy will need to be approved by the provincial and central parliaments. Naturally, the award will be commensurate to the allocated duties and responsibilities at each level. And, equally obviously a method of amending this award, whenever necessary, will need to be laid down by the committee which is acceptable to all tiers of governance.
All governments must use every medium of communication: print media, pamphlets, TV, Radio, personal visits by politicians to their respective audiences to explain the entire system of taxation. Tax payers [low and medium level only] should be grouped into Categories to pay a fixed sum as annual tax. Individuals may be allowed to be paid monthly/quarterly or annually. And each individual should know his and every other community member’s tax liability. The method of payment must be known to each individual, where and how he/she will receive acknowledgement of payment. Every imaginable detail must be publicized until its known to every single citizen.
The list of tax payers with their Category, tax liability, etc. should be made public and, after collection, a list of those who failed to pay.
TV and Radio should continue this Awareness Program for a few months, entertain feedback by live telephone calls etc. till the people begin to express their satisfaction. Every single query, complaint etc. must receive a response, until some credibility of the government has been restored.
- First, stop exacting taxes from every aperture of each citizen: we pay taxes on every utility bill, on every item we purchase or eat at a restaurant. Instead, build all these taxes into the income tax of each tax payer. Since, after the foregoing process your income tax base should jump from the current 3 or 4 million to well over 100 million, presumably those being taxed now can afford them, if you make sure of that.
- If, e.g. all these sundry taxes are removed, if you ask the lowest wage earner [who gets a mere PKR 17,000/- a month] for a couple of hundreds monthly, even he will pay willingly. I am quite sure I will never grumble if my income tax is tripled but these sundry taxes stopped. And the governmental tax collection will also quadruple. Lt Gen Aamer said that if, based on the census, we only taxed the small traders as little as PKR 1000/- annually, it would add something like USD 6 Billion to our tax revenue.
The foregoing document is incomplete. If it is found to be of some interest to those who are in the decision-making position, its bones can be filled. Some clarifications are listed below.
- The role of the central tax departments, other than customs, should conclude with the formulation of the new policy and the compilation of a fresh list of tax payers. Thereafter, all officers and staff employed by these organizations can be absorbed by the provinces and at other assignments.
- Remuneration for the local ombudsman and tax collector, if and wherever required, should be commensurate to his/her duties and responsibilities.
- I repeat. I am a total novice at this subject. To an expert, this is likely to seem like simplistic idiocy. I think that something akin to this could work. There are bound to be hitches which will need smoothing out but if tries with honest dedication, it should work.