Budget, taxes & development
Huzaima Bukhari & Dr. Ikramul Haq
“About 60% of the population falls in the “transitory poor” category (Bukhari and Haq, 2019) it means a substantial population has no access to luxurious items; their needs revolve around basic necessities. The rules for indexation to the CPI have several potential disadvantages. They prevent real wage and employment adjustment in the presence of real shocks, causing suboptimal employment.”—Pay Indexation in Pakistan by Saud Ahmed Khan and Amena Urooj and Ahmad Fraz
In the wake of tax proposals sought by the Federal Board of Revenue (FBR), there has been an avalanche of proposals, as every year it so happens, from trade and professional bodies, tax bars and even individuals, running tax firms—many published in the print media, discussed in pre-budget webinars and social media. We know all these will go in the waste baskets of Revenuecracy. The budget for fiscal year 2021-22 and Finance Bill 2021 will be just an annual ritual. It remains a closed door-bureaucratic exercise. The central theme is abiding by the agenda of International Monetary Fund (IMF). More taxes to cripple the growth, agreed by the coalition Government of Pakistan Tehreek-i-Insaf (PTI).
Interestingly, the fourth Finance Minister of PTI Government, Shaukat Fayaz Ahmed Tarin told the nation that no new taxes will be levied and target agreed with IMF of Rs. 5.8 trillion will be achieved by broadening the tax net and making FBR efficient while electricity tariffs will net be increased. However, the Special Adviser of Prime Minister on Revenue and Finance, Dr. Waqar Masood, told the Standing Committee on Finance of National Assembly on May 27, 2021: “The government will try to impose less than Rs. 500 billion worth of additional taxes in the budget, while increase in the power tariffs has been deferred only for the time being”. It shows where the power lies, with IMF and not Shaukat Tarin.
It is an established fact that our economic managers, faithful to lenders/donors never think of using tax policy as a tool for economic development. Their sole stress remains on increase in revenue targets at the time of making annual budgets, without any strategy for growth and development. The result is 13 bailouts and 22 IMF’s programmes in 60 years—elaborated in Decades of subjugation, TNS, [Political Economy] The News, August 9, 2020.
This year’s budget, expected on June 11, 2021, as per tradition will be no different. As the consultants of IMF and World Bank have no workable recipe for our economic woes, these will keep on increasing. The research papers and books by local researchers will be ignored by policymakers.
What a mockery on the part of legislators that they rely on tax collectors to prepare proposed amendments in the existing tax laws, whereas under the Constitution it is their own responsibility. The existing complex tax codes and inefficient tax machinery are the main impediments in resource mobilisation and successive governments continue making them more complex, cumbersome, anti-poor and anti-growth.
The persistent failure of our economic managers, under both civil and military governments, in overcoming fiscal deficit has pushed the country into debt enslavement. How to come out of it was discussed in More on the fiscal fiasco, TNS, [Political Economy] The News, February 28, 2021. Those who matter in the land ignored it and resultantly we are facing a disaster on debt front where its servicing alone is eating up 75% of total resources.
The Ministry of Finance in Annual Debt Review & Debt Bulletin for FY2019-20 complying with section 7 of the Fiscal Responsibility and Debt Limitation Act of 2005 covering the second year of the coalition Government of Pakistan Tehreek-i-insaaf (PTI) confesses that total public debt-to-GDP ratio “has increased from 86.1% in June 2019 to 87.2% in June 2020”. The limit fixed in Fiscal Responsibility and Debt Limitation Act of 2005 is 60% of GDP. The solutions to overcome debtocracy and enslavement are inclusive growth, development of natural and human resources, drastic cut in wasteful expenses, fundamental structural reforms for good governance, fair taxation that is beneficial for masses at local government level and self-reliance.
The have-nots, instead of being made hooked on meagre cash handouts from Ehsaas and others, must be trained in various vocations to become self-reliant as well as participants in growth and not just liabilities forever. Tax incentives should be used to induce investments in human resource and infrastructure development, rather than free and concessional plots to judges, generals and civil servants in grades 21 and 22.
Agricultural land is a tremendous source to ensure food security, provide jobs to millions and create exportable surplus of billions of dollars as well as rapid industrialisation through value-added agro-based industries, for which comprehensive plan is given in System of crop intensification for more productive, resource-conserving, climate-resilient, and sustainable agriculture: experience with diverse crops in varying agroecologies, published by International Journal of Agricultural Sustainability.
Taxes affect growth in two ways. First, by influencing the aggregate supply of the main factors of production by raising or lowering their net (after tax) returns; and second, by influencing the efficiency of resource utilisation (total factor productivity). We keep on saying that low tax-to-GDP ratio is our main problem, whereas the reality is that agricultural sector contributes negligibly in direct tax collection and tax expenditure is as high as 40% of total tax collection at national level! Lotz and Morssan analysed a sample of 72 developed and developing countries to examine the relationship between tax ratio variations and differences in per capita income and degree of openness. The sample included a wide spectrum of dissimilar economies ranging from Nepal to Singapore. They prove that it is erroneous to compare Nepal’s high rural and agricultural economy with a high commercial and industrial city-state of Singapore.
The higher ratio for industrialized countries is primarily due to the higher level of revenue from social security, payroll taxes, corporate taxes and taxes on domestic consumption while taxes from international trade and non-tax revenue are lower. In contrast, Pakistan, like many developing countries, gets the major portion of revenue from indirect taxes, particularly taxes on international trade and domestic consumption, while direct taxes have a lower share.
Tax increases with growth and present system of multiple taxes (mostly collected at import stage and/or advance tax including dozens of withholding tax provisions) and fragmented administrations to collect the same are a few impediments for growth of economy. An unshakable determination, consistency and political will are required to dismantle harmful and growth-slayer tax policies and to revamp the entire tax administration as elaborated in the following books and studies:
- Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, December 2020): https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/)
- Tax Reforms in Pakistan: Historic & Critical View, https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf (PIDE)
- PIDE Reform Agenda for Accelerated and Sustained Growth, https://pide.org.pk/Research/PIDE-Reform-Agenda-Report.pdf (PIDE)
- Doing Taxes Better: Simplify, Open & Grow Economy : https://www.pide.org.pk/pdf/Policy-Viewpoint-17.pdf (PIDE)
- Growth inclusive tax policy: A reform proposal https://www.pide.org.pk/Research/Tax-Policy-2020.pdf (PIDE)
In the coming budget the PTI Government must devise a tax policy based on research cited above so it can be a catalyst for development. The primary function of a 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 in development strategy as regards taxation policy is to ensure that this function is discharged effectively.
Performance of the Pakistani tax managers is highly disappointing as fiscal deficit in the last two years was over 9% of GDP if losses of Public Sector Enterprise (PSEs) and circular debt and blocked refunds by FBR are also taken into account. It has remained high during the last many decades as the tax targets fixed annually for FBR were revised downwards many times while budgeted expenditures exceeded multifold—Fiscal Policy Statement 2021.
We need paradigm shift in fiscal policy. The collection of fair taxes wherever due, by abandoning the policy of appeasement towards the powerful and the rich by extending exemptions, concessions, waivers and tax amnesties, and socio-economic justice for all.
It is essential to dismantle elitist structures and lease out expensive state lands in the heart of cities, occupied by privileged classes, for high rising commercial and residential blocks for growth, fetching billions for state and jobs for millions—Doing Development Better by Nadeem Ul Haque, Hanid Mukhtar, Nohman Ishtiaq and John Gray.
Note: the abridged version without hyperlinks for references was published at: https://www.thenews.com.pk/tns/detail/845120-budget-taxes-and-development
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Ms. Huzaima Bukhari, MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram and Huzaima Ikram & Ijaz, leading law firms of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals.
She has coauthored with Dr. Ikramul Haq many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, 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 Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions
available at: https://www.amazon.com/dp/B08RXH8W46
She regularly writes columns/articles/papers for Pakistani newspapers and international journals. She has contributed over 1500 articles and research papers on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.
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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, IT, intellectual property and international tax laws. 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 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).
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
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.
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The joint and individual books and articles of the writers can be seen at:
https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf
https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/
https://primeinstitute.org/towards-low-flat-broad-and-predictable-taxes-2016/
https://petiwalabooks.com/huzaima-dr-ikram-ul-haq?orderby=6
https://www.amazon.com/Books-Huzaima-Bukhari/s?rh=n%3A283155%2Cp_27%3AHuzaima+Bukhari
https://www.brecorder.com/authors/77911/dr-ikramul-haq
https://www.brecorder.com/by/byline/huzaima-bukhari-and-dr-ikramul-haq/
https://www.thenews.com.pk/tns/writer/huzaima-bukhari
https://www.thenews.com.pk/tns/writer/dr-ikramul-haq
https://dailytimes.com.pk/writer/huzaima-bukhari/
https://dailytimes.com.pk/writer/dr-ikramul-haq/
https://nayadaur.tv/author/huzaimabukharianddrikramul-haq/
https://www.thefridaytimes.com/author/huzaima-bukhari/
https://surkhiyan.pk/author/huzaima-bukhari-dr-ikramul-haq/
https://surkhiyan.pk/author/dr-ikramul-haq/
https://dunya.com.pk/index.php/columnist/doctor-ikram-ul-haq/114
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