By Dr Ikramul Haq & Huzaima Bukhari
Published in The Business Recorder, July 12th, 2016.
Wasteful expenditures continue unabated Contrary to the claims of austerity and “fiscal discipline”, Finance Minister sought post-facto approval of Parliament for Rs 261 billion ‘supplementary budget’ to cover massive governmental expenditure overruns in FY 2015-16, almost 28% higher than the figure approved last year. Had such expenses been curtailed, there would have been no need to levy additional taxes of Rs 150 billion. Many of these overruns are extravagant and avoidable, for example, about Rs 15 million was spent on the purchase of vehicles by the Prime Minister’s Office and an additional Rs 15 million paid to ministers and ministers of state as TA/DA. Taxpayers’ money was also wasted on meeting colossal losses of nearly Rs 500 billion of Public Sector Enterprises (PSEs). Do people pay tax for luxuries of rulers and bureaucrats sitting in ministries/attached departments/PSEs?
In these columns, for the last many years, we have been suggesting measures for fundamental reforms in the tax system for accelerated growth of economy that will automatically yield more taxes. After all, taxes are by-products of growth. We need at least 8% growth rate to provide 1.5 to 2.5 million jobs every year. For achieving this target, we have written a policy paper, ‘Towards Flat, Low-rate, Broad & Predictable Taxes’, published by Prime Institute, a public policy think tank. This study is available on http://primeinstitute.org/. As expected, this has not been considered by Mr Dar and the Tax Babus sitting in FBR. They even did not bother to consider many useful suggestions made by Tax Reforms Commission. The reason is that Babus want to exert a despotic control which is possible only through complex codes and cumbersome procedures. Our paper gives a roadmap for collecting revenues of Rs 8 trillion at federal level alone and this will make Pakistan self-reliant. Obviously the political masters behind IMF also do not want it. They want to keep us trapped in debt prison and our rulers are obliging them with open heart.
The issues and problems relating to tax system can only be tackled by way of a professional, scientific and empirical approach. Among other things, the most important and urgent task is to analyse the causes for inefficiency and rampant corruption in the tax departments and to take concrete steps towards establishing a tax apparatus which is efficient, responsive and friendly. The present tax system portrays the worst possible oppression a state can resort to in an era of Enlightenment where every civilised society adheres to the principles of human respect, justice and equality. The following aspects of the prevalent tax structure will show where the actual fault lies and how the State should initiate a process of introducing a people-friendly tax system and tax culture where the masses can pay taxes as their human duty and not as helpless subjects subservient to oppressor rulers.
1. Lack of justice system In any society the administration and dispensation of justice should be the top most priority. A society without a sound, reliable and speedy judicial system which does not ensure effective justice dispensation cannot survive for long. The administration and dispensation of justice under the tax laws in Pakistan need serious attention. The entire system is now on the verge of collapse. The tax machinery is becoming ruthless with every passing day and almost every taxpayer has now become a victim of abuse of powers (arbitrary as well as unlimited!) by tax officials. Those who do not pay taxes in connivance with tax collectors are satisfied and safe. For them it is preferable not to pay to the State but to tax collectors because it is mutually beneficial. This is a pathetic state of affairs we are facing these days. It testifies to the fact that tax administration in Pakistan is a complete failure. The tax machinery has failed to tap the real tax potential (billions are evaded in taxes annually due to unholy alliance between tax collectors and tax evaders) and those who are paying (though not according to their actual incomes) are sick of ever-increasing harassment. Tax collectors want to achieve their unreasonable (sic) targets from them without bringing into tax net those (presumably their “friends”) who do not pay and for them Ishaq Dar has solace by just paying some extra bucks as non-filers. Why are they not being prosecuted for non-filing of tax returns? This question could be raised by the Opposition during the budget debates but their own hands are not clean and FBR is ready to look the other way even with the knowledge of where their assets are concealed!
Appellate authorities, as a matter of law and principle, should be independent in the true sense of the word. At present, the taxpayer, if aggrieved, can file an appeals against the order of the Deputy Commissioner of Income Tax (DCIT) before the Commissioner of Appeals [CIT(A)] who works under the administrative control of Member Judicial, FBR. It is a mockery of justice that an important functionary in the hierarchy of judicial system is directly subordinate to FBR, which is the highest administrative authority. In a civilised society such an important function cannot be perceived to be performed by an administrative authority. Time and again the taxpayers and professionals have demanded that there should be independent Tax Tribunal working under the control of judiciary. The judicial system under the tax laws, or for that matter under any statute, should be completely and truly independent of administrative interference or control. It is an essential prerequisite for ensuring proper tax compliance and confidence of taxpayer in the system.
The present tax culture is based on “bad faith” between the taxpayers and the tax collectors. Both are victims of self-interest and their main aim is to cheat one another. This culture can only be changed if an effective judicial system is introduced and properly implemented. All appellate authorities should be part of judicial service working under the administrative control of the Supreme Court. The present working of Tribunal under the Ministry of Law is against the principle of independence of judiciary.
It is the need of the hour to free the judicial system from the administrative clutches of FBR and Ministry of Law. It must work as an independent judicial service under the Supreme Court. It is absolutely essential if we really want the people to pay their taxes honestly and diligently. No system can work unless it has an effective check and balance mechanism. An independent judicial system alone can guarantee the proper collection of revenue in Pakistan.
2. Interference in judicial work FBR, the apex administrative body, enjoys only an advisory jurisdiction and it cannot constitute itself as an assessing authority. In practice, however, the FBR stalwarts (sic) have assumed a self-styled role of “lawmakers” and “assessing officers”, though both the functions are alien to powers given to FBR.
Way back in 1992, Supreme Court of Pakistan in Al-haram Builders (Pvt) Ltd v. Income Tax Tribunal [(1992) 66 Tax 147 (S.C. Pak) = (1992) SCC 950 held that assessment proceedings are quasi-judicial and “guidance” to officers should not be interpreted to mean “interference” in judicial work. This case and many others following the same give a clear direction to lawmakers and FBR, but they are perpetually violating the same. FBR continues to interfere in quasi-judicial functions of its subordinates. Recently, a number of complaints appeared that FBR even directed the appellate authorities “not to give any relief” in cases where “substantial” revenue is involved. It depicts a sorry state of affairs. Over the period, FBR has emerged as a new East India Company.
The Lahore High Court in (1998) 77 TAX 127 (H.C. Lah.) passed a strong stricture against FBR in the following words:
“It is matter of some regret that the Central Board of Revenue while issuing the circulars does not follow the law declared by the Supreme Court of Pakistan……the CBR will be well advised to desist from issuing such circulars which influences the decisions of the adjudicating authorities.”
It is well established law now that the judicial power of the assessing officers cannot be controlled by any administrative instructions by FBR or other tax authorities. The FBR is not competent to give directions regarding the exercise of any judicial powers by its subordinate authorities. It is a pity that in the presence of these judicial pronouncements binding under Articles 189 & 201 of the Constitution, FBR is still resorting to judicial interpretation of law and issuing unlawful instructions to appellate authorities.
In the frenzy of meeting unrealistic budgetary targets, FBR has been violating all norms of justice, fair play and equity. The outcome is complete bad faith between the taxpayers and tax collectors. The sole responsibility for this erosion lies with FBR. Any attempt for tax reform, therefore, needs to be started with setting the house in order ie complete dismantling of FBR and its replacement with National tax Authority (see details in ‘Towards Flat, Low-rate, Broad & Predictable Taxes’).
3. Politics of giving ‘fiscal incentives’ Nobody is above the law, neither is FBR nor the Federal Government. The politics of giving tax relief or imposing taxes through Statutory Regulatory Orders (SROs) is the most disturbing aspect of tax administration in Pakistan. This delegated exercise of powers is, in fact, ultra vires of the Constitution of Pakistan in terms of Article 162. This issue is of great public importance. The increase in public revenue is the cry of the hour but FBR (especially during the Nawaz Sharif governments) has been giving so called “fiscal incentives” to a few selected ones, which, even if necessary, should only have been done through a proper constitutional procedure. The cost of exemption in the last three years was around Rs 560 billion whereas for tranches of much lower quantum we have been begging before the IMF.
4. Budgetary targets – how achieved? The issue of fixation of budget targets and how these are achieved is another area which exposes the great fraud committed with the nation by the so-called democratic governments through FBR. Refunds of billions of rupees are illegally withheld. Law requires that wherever any refund is due it should be paid within the stipulated time. The FBR itself issued instructions through Circular No 3 of 1978, Circular No 10 of 1985 and Circular 5 of 2003 to issue refund vouchers promptly. Officers in the field say that to show higher collection bosses verbally instruct not to comply with law and these instructions.
FBR has issued these instructions as mere lip-service to satisfy the taxpayers. In reality, it is party to administrative highhandedness of holding back bona fide refunds. Every year bonus and cash rewards are given to tax officials for achieving targets (sic), but the collection never reflects the money due to taxpayers. The whole nation is shamelessly hoodwinked by the FBR. Year after year they show gross collection as “target achieved.” What about the money payable as refunds? If all the refunds due in a financial year are issued, the net collection would be the correct “figure as target achieved.” Does the chairman FBR, possess enough courage to give us the correct figure for the year ending June 30, 2015 of gross collection and refund due but not issued which would alone determine what was actually collected. Will he do the same when this fiscal year is closed? The Auditor General has a constitutional duty to investigate this matter. FBR has been projecting exaggerated figures of collection ie not to reduce gross collection by refund due but not paid. This is a criminal act of hoodwinking the people by avoiding payment to taxpayers with ulterior motives.
5. FBR’s change mania The tragedy of our policy markers has been that they believe in achieving economic progress through promulgating new laws and by introducing amendments in the existing fiscal laws. The Legislature and the rule-making authority alike share this perception. FBR has become almost pathological in its ‘change’ mania. It is normal for it to issue hundreds of SROs with the Finance Bill and keep on adding the same even after the adoption of the Finance Act. They notify dozens of rules under delegated authority on monthly basis. Various forms are changed overnight. Year after year, the Finance Bill continues the fatuous tradition of introducing experimental provisions most of which are absolutely illogical, whimsical and badly drafted in haste. They legislate first and think afterwards. Amendments are introduced which are never enforced, because they are repealed or amended before the date they are scheduled to become operative. The laws passed by the Parliament are either overruled or held in abeyance through delegated legislation in utter violation of Article 163 of the Constitution of Pakistan.
Every year with the adoption of the Finance Bill complexity is heaped upon complexity and confusion becomes rampant. This state of affairs needs immediate attention if we want to reform the tax system.
6. Credibility of system In the United Kingdom, there are 30 million income-tax payers, but the number of appeals filed in the High Court is only around 30 in a year. In Pakistan we have less than one million taxpayers (which in itself is a shameful indicator in a population of around 200 million), but the number of appeals filed in our Higher Courts is over 15,000 a year, in addition to more than 25,000 writ petitions. The figures reflect the tremendous public dissatisfaction with the quality of law of fiscal administration. Our law reporters testify to the fact that generally a case reaches High Court for hearing in 15 years and the Supreme Court in 20 years, after the relevant assessment year. The situation is getting worse by the deluge of annual amendments through Finance Bill-the indigestible verbiage; and the flood of litigation is becoming more and heavier every year.
7. Mindless tinkering with laws Two things strike the students of Pakistani fiscal laws with trepidation and amazement-the precipitate and mindless tinkering with the law by bureaucrats, who are the de facto legislators of Pakistan, and the anaesthetised patience of the Pakistani public. It appears that we the Pakistanis have been forced to become a “law arousal” nation. We have been made to endure injustice and unfairness with feudalistic servility and fatalistic pessimism. The poor of Pakistan endure inhuman conditions, the likes of which could have triggered a bloody revolution in many parts of the world. The rich endure foolish laws and sickening amendments that benefit none except the legal and accounting professions, and they instinctively prefer to circumvent the law rather than fighting for its repeal.
8. Unashamed abuse of power There can be no doubt that the line between the lawful exercise of constitutional authority and the unashamed abuse of power was crossed by introducing presumptive and minimum taxes in the Income Tax Law since 1991 which are on the increase on yearly basis. The Income Tax law is no more a direct tax law in nature-the substantial part of it is now either consumption or transactional. What a shameless attitude of the so-called public representatives that income is deemed when stock-in-trade is just imported, regardless of the actual profit which may or may not be made in the future. The honourable apex court held these provisions valid in 1997 and there was a mood of jubilation among the FBR stalwarts and those who conceal real incomes and pass on burden of these taxes to the customers/clients. Since then FBR has been legally playing havoc with the economy of Pakistan. The pace of economic growth since the adoption of these laws has decreased significantly. The slowdown in business we are witnessing these days is the direct result of retrogressive fiscal laws.
Most is lost to the State by way of damage to taxpayers’ morale, which is very valuable though a fragile national asset, than is gained by such arbitrary and cruel taxation. Every Government has a right to levy taxes but no Government has the right, in the process of collecting taxes, to inflict misery and harassment on the public and the gnawing feeling that he is made the victim of palpable injustice. Taxes are the life-blood of any government, but these cannot be so collected or imposed in a manner to suck the blood from the arteries of the public through proven-corrupt tax managers. The transfusion needs to be accomplished in accordance with the principles of justice, equity and fair play.
In the Finance Bill 2016, the government has only done patchwork here and there making the system more complex and unfair as well as increasing the cost of doing business. It has avoided fundamental reforms to fix the maladies stated above. The reason for avoiding fundamental structural reforms is obvious-the political-bureaucratic unholy alliance is against the masses to ensure their control over the system.
An efficient model for growth requires removal of irritants prevailing in the tax codes, procedures and implementation processes. The paper, Towards Flat, Low-rate, Broad & Predictable Taxes, is an attempt in this direction. It emphasises that the real issue is lack of willingness to make the system simple making cost of voluntary tax compliance less than cost of evasion or avoidance. It is possible only through a revenue agency that can ensure: “We collect money to fund the public services as our duty fixed by Parliament. We give you a service that is even-handed, accurate and based on mutual trust and respect. We also want to make it as easy as we can for you to get things right.” Only by winning the trust and support of the public, tax compliance is possible, coupled with efficient availability of public services in lieu of taxes. It would certainly persuade people in discharging their tax liabilities voluntarily and happily. There is nothing in the Finance Bill 2016 that will persuade people to pay taxes diligently, especially when they know whatever is collected is squandered by rulers for their comforts and luxuries and not spent for public welfare