REVAMP THE ENTIRE SYSTEM

Tax proposals for budget 2004 05 <!--[if gte mso 10]> Tax proposals for budget 2004‑05 REVAMP THE ENTIRE SYSTEM By Dr. Ikramul Haq, Advocate, Lahore Every year before announcement of the annual federal budget [which is nothing. but an official ritual bringing no positive change in the life of a common man] a plethora of tax proposals are received by the Central Board of Revenue (CBR) from trade and professional bodies, tax bars and other stake‑holders. These are given no serious thought by the all‑knowing CBR's tax bureaucrats, who have only one concern: how to achieve revenue targets, fixed by their foreign masters, through highhandedness, wickedly drafted amendments and onerous tax regulations. Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan, ill‑directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry and direct foreign investment during the last few years. Had the successive, governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today. It is impossible to enhance revenues with stagnation in economy, and over‑taxing such economy, as has been done in Pakistan, can destroy the revenue system as well. The priority of our rulers, military and civil alike, on achieving revenue targets, fixed ambitiously every year in utter disregard of how economy will behave, is the main problem. Fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where neither sari it afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers find themselves trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive place where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of host of tax benefits and other incentives, investors will never venture forward. The Central Board of Revenue (CBR), apex administrative revenue authority, has been single‑handedly destroying Pakistan's trade and industry by:‑‑ imposing withholding tax obligations without any facilitation and then taking punitive action or using the same as revenue collection tools; withholding undisputed‑refunds payable to the taxpayers; making excessive tax demands; and resorting to ail kinds of negative tactics and highhandedness to meet its budgetary targets. Theses actions of the tax machinery are detrimental for business and industry. The successive governments' onerous tax and regulatory policies have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan's undeniable geo‑strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest in. I am, therefore, not proposing cosmetic changes in the new Income Tax Ordinance, 2001, Sales Tax Act, 1990 or the Customs Act of 1964 [this has already been done by tax bars, trade and professional bodies in the form of annual budget proposals submitted to CBR]. This article suggests some key areas where paradigm shifts are needed at structural and operation level to ensure not only more tax revenue for the State but also social justice, economic equality so that honest taxpayers are not disillusioned by the benefits CBR has been extending to its dishonest friends in trade, business and industry. . COUNTERING TAX EVASION & MONEY LAUNDERING It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of, further undercover gains. What is more tragic is that this social evil inherent in our tax system gets doubly compounded as it necessitates greater and greater tax burden on those, who are law‑abiding. The most crucial problem faced by us in a fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life. Honest taxpayers need to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are paying nothing in connivance with their friends and mentors in the tax machinery. This unholy alliance between tax evaders and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system. The CBR, according to available data and indicators, is one of the most inefficient, incompetent and corrupt arms of the Government. Responsible for the collection of federal taxes, the CBR has miserably failed to introduce any tax intelligent computerized system, despite the fact that it has a market‑wage oriented company, Pakistan Revenue Automation Limited (PRAL), at its disposal, to monitor the economic activities of corporate/business sectors. This failure, coupled with corrupt practices (according to some estimates at least Rs. 200‑300 billion go annually into the pockets of tax officials) has contributed to generation of enormous black money in Pakistan. Large‑scale tax evasion and the existence of a large black economy while resulting in colossal loss of revenue to the State, tends to reduce the built‑in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise prices of real property. In the context of the prevailing grave challenge to combat terrorism, together with money laundering crises, and the problem of ever‑growing black money, (which according to official and independent experts is around Rs. 1.8 trillion: about 70 % of the total economy), there is an urgent need to launch a well‑thought for anti‑money laundering law to prevent this huge money from becoming a lethal weapon in the hands of mafias who now in control of economy as well as the Government. Before launching such a Jaw it is important I to identify the sources generating black money. If such sources are not blocked, black money will keep on thriving notwithstanding the existence of stringent laws. Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental policies, meeting trade deficits, fiscal deficit and balance of payment, and what not. One of the factors responsible for the present situation is the great speed with which black money is generated. The CBR is directly responsible .for this phenomenon as its mafia‑like operations has helped the people to avoid tax on incomes by paying them‑ "due share". Through the infamous system of SROs1, the CBR's top officials provide "legal"' ways and means to the mighty sections of society to amass huge wealth that is now threatening the very survival of the State. This black money in the hands of corrupt politicians, bureaucrats and terrorists has played havoc with the entire human community across borders. 1 Pakistan is a unique country where tax laws are controlled by an administrative authority, CBR, by issuing Statutory Regulatory Orders (SROs). Through these notifications unprecedented benefits are given to ruling classes e.g. exemption from duties in importing cars by President, Army Chiefs and Governors, just to mention a few. A conservative estimate is that Rs. 600 billion is generated every year in Pakistan by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs.300 billion and Rs. 500 billion. This amounts to a whooping Rs.1000 billion. When the presence of black money is so apparent, why its criminal accumulation and generation not revealed and the offenders punished, is a question which has been baffling the minds of honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws; or the pervasive stubborn indifference of the citizens towards their duties? Those who plundered the wealth of the nation were set free to have a good time in "exile" and those who abused powers are being invited to come again for ruling and looting whatever is left. Many renegades of Pakistan People's Party of Benazir Bhutto and Muslim League (Nawaz Group) who were facing trials for financial malpractices or plundering bank loans are now enjoying ministerial positions in the Jamali Government, backed by General Musharraf. During the last 25 years, money launderers in Pakistan hardly needed any international channel for money laundering. All support from the State was available at home. Even today, if anybody brings money (earned from drug trade or any illicit activity or even one's own untaxed money, hiring services of local money exchangers to depict it as remittance) in Pakistan through normal banking channels, the State Bank and tax authorities do not pose any question about the "source". Drug traffickers and terrorist apparatus remit millions of rupees into the country every year from bank accounts maintained in various countries in fictitious names. This money, in the hands of terrorist networks has made them invincible, besides making life harder and harder for those who earn from legitimate sources. The recurrent appearance of amnesty schemes and money whitening instruments/modes show that the State has conceded the failure of its tax machinery in performing its main function of collection of taxes. This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them. The people hooked on ill‑gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less an amount than what they would have been required to pay under the normal income tax/wealth tax regime. It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who are paying their taxes honestly at much higher rates than those offered to tax evaders (ranging between 5 % to 10%) under such Schemes, Even today when the Pakistani Government, under tremendous pressure from the United States and other States, is introducing anti‑money laundering law, the CBR is committed to giving a free hand to money launderers assuring them that no question would be asked if they remit their ill gotten‑money from outside through banking channels and surrender the foreign currency to the State and get Pakistani rupees as encashment. The CBR in its Letter No. F. 4(34)/ ITP/2002 dated 29‑02‑2002 reaffirmed that "the Department would adhere to its policy of not probing the foreign remittance" brought into Pakistan by arty "person". In the Income Tax Ordinance, 2001, promulgated on the dictates of IMF on 13 September, 2001, a special provision [section 111(4)] has been inserted giving a free hand to money launderers that no question will be asked to them if they remit their ill‑gotten money from outside through normal banking channels surrendering the foreign currency. to the State Bank and getting Pakistani rupees as encashment. This scheme presumably announced as a measure to bring huge foreign funds to Pakistani economy succeeded immensely as foreign reserves of Pakistan crossed the US$ 12 billion mark on 31st December, 2003. This scheme has been used liberally and cleverly by the Pakistani drug syndicates and tax dodgers to launder their money through State patronage. In the presence of this law, will any foreign State seriously view our so‑called announcements of combating money laundering and terrorism? The ugliest face of black money emerges in the corridors of power, political as well as administrative. No country other than Pakistan knows better the dangers of allowing money launderers and drug traffickers to get an upper hand. We are at present not only facing a drug‑abusing population of nearly 4 million, mostly young, but also many terrorist organizations, which by themselves are a threat to the Government. The fact is that a cartel or a group of cartels have become so powerful that they can work out agreements with terrorists and saboteurs to undermine the authority of the State. Pakistan has been facing a perpetual crisis of fiscal deficit for the last many decades. Amongst many causes for this malady is the ever‑growing size, of the underground economy. No serious effort has been made by successive governments, both military and civil, to determine the loss of revenue due to the existence of underground economy, not to talk of devising concrete counter measures to bring enormous untaxed money into the mainstream of economy. Rampant corruption and unprecedented tolerance towards black money has made Pakistan a grate where the very survival of public institutions is at stake at the hands of ruthless forces representing money power. One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth. This shatters the faith of the common man in the dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill‑gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its death. There is a need for a wider plan to document the entire economy once and for all. The present Government must remember that half‑hearted measures, typical of tax bureaucracy, will not yield the desired results. Firmness, consistence and steadfastness must be shown to counter money launderers, terrorists and tax evaders. Our survival now lies in freeing the society from the clutches of the corrupt. It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. According to an estimate by the World Bank, the country suffered a revenue loss amounting to 5.08 billion dollars in 1992‑93 because of smuggling. In 2003 its quantum was estimated at over 200 billion dollars. Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs 40 to Rs 45 billion in 1989‑90 and Rs.104 billion in 1995‑96. Apart from direct monetary costs of corruption, other significant costs, such as loss of Government credibility, spread of injustice, distortions in, resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan. According to figures released by CBR on 30 May 2000, the parallel economy is growing at an alarming rate of 22.93 % per annum. Every fifth rupee transacted in Pakistan is black, according to the volume of black money generated in the year 1997‑98 at Rs. 600 billion or 15 pet cent of Gross National Product meaning by that everyday tax fraud exceeds. Rs. 1.64 million. This is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling (e.g. huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic. Dr. Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission of Pakistan has stated in his research paper Tax Policy and Resource Mobilisation in Pakistan that 70 percent part of the economy consists of 36 percent‑ 'pure' black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy and 2.5 percent informal economy (unreported economy). His study shows that the problem in low resource mobilisation is the rigid system of taxation, and emphasis of the Government to increase revenue, ignoring the details of long‑term policy measures. Every now and then the State announces a tax amnesty, scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals. Such schemes are a spank for the honest taxpayers [making them appear as a foolish lot for paying taxes]. An extortionist in Karachi or Lahore can decriminalize his ill gotten money through such a scheme but the poor businessman who paid that extortionist due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return he situation needs to be corrected. The facilitation of whitening untaxed money should be restricted ONLY to genuine business investors so as to bring the capital back into formal sector by paying some percentage as tax (kuffara) and not for the criminals, corrupt and unscrupulous elements in society. The Government must announce Compulsory Public Disclosure of Assets Scheme requiring the following to make their assets and liabilities public: High ranking civil and military officials All the MNAs and MPAs Judges of the superior Courts Businessmen/Directors of all the companies who availed loans exceeding Rs.5 million from any financial institution Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc. The above privileged classes of society should act as examples for others. Their declarations can inspire the common people to pay their taxes honestly. The State needs to wage an all‑out war against burgeoning black economy, money power and corrupt politico administrative structures. This war must start from the mighty classes, as suggested above. Pakistan needs to develop a permanent structure in all the institutions specifically C.B.R.1, Federal Investigation Agency (FIA)2, Securities and Exchange Commission of Pakistan (SECP) and State Bank so that the money laundering issue can be effectively tackled. Special Courts should be established and Judges having expertise in financial and banking matters should be appointed, to hear money‑laundering cases. The Judges of such courts must be especially trained in the fields of accountancy, and money laundering. There is an urgent need for introducing policy and structural changes in the banks. It is unfortunate that 'Benami accounts3 are widely accepted in the public and private sector franks. Presently, there are 28.8 million accounts with the Pakistani banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes. The State cannot tap the real potential of revenue potential unless stringent measures are taken to combat money laundering and eliminating parallel economy through proper documentation. This will automatically broaden the tax base, besides freeing the society of many evils. 1 Apex revenue authority at the federal level responsible for collection of taxes and unearth untaxed money. 2 A federal law‑enforcement agency of Pakistan that is similar to FBI of the United States. 3 Benami is a Persian compound word consisting of (i) 'Be' which means 'without' and (ii) 'Nami' which means 'name'. It literally means 'without a name', that which is nameless or fictitious, and is used to denote a transaction which is really done by a person without using his own name (i.e. benami), but in the name of another. Nature of such transactions and their tax implications are discussed in detail in the following cases: 1. Narain Das Mohan Lai, In re (1933) 1 ITR 182 (All.). 2. Sovaram Jokiram v Commissioner of Income Tax (1944) 12 ITR 110 (Pat.). 3. Shapurji Pallanji v Commissioner of Income Tax Rawalpindi (1945) 13 ITR 113 (Bom.). 4. K.B. Sheikh Mohammad Naqi v Commissioner of Income Tax Rawalpindi (1945) 13 ITR 452 (Lahore). 5. Sree Meenakshi Mills Ltd. v Commissioner of Income Tax AIR 1957 SC 49,66. 6. Maulvi Brothers v Commissioner of Income Tax Rawalpindi (1980) 42 Tax 33 .(H.C. Lah). 7. Muhammad Azim v Commissioner of Income Tax, East Zone Karachi (1991) 63 Tax 143 (H.C. Kar) = 1991 PTD 658. FAST TRACK DISPUTE RESOLUTION/INDEPENDENCE OF THE APPELLATE SYSTEM It is vital for the Government's tax reform strategy that administration of the tax appellate system keeps pace with the changing business environment and the legislative programme, so that it is forward looking and business supportive. The Government should undertake a significant programme of modernization of the tax appellate system, aimed at creating the best possible way of resolving disputes between the taxpayers and tax collectors. The main aim of all tax reform measures should be promotion of investment and facilitating decision‑making that is driven by commercial factors rather than by tax considerations. The principles underlying tax reforms should not mean forcing unnecessary obligations on taxpayers, but to help them boost economic activities that would automatically lead to generation of more revenues. Secondly, the reforms of any kind imposing new obligations should be introduced after consulting the business community and securing their consent. The present tax dispute resolution system, based on conventional appeal and review system under various tax statutes, is on the verge of collapse. Everybody is totally dissatisfied with it. Those who have to impart justice complain of lack of facilities and huge number of cases the complainants cry for early orders but have to wait for years (sometimes decades), and the Revenue is always worried about the blockade of colossal amount of money in litigation process. There is thus an urgent need to provide a fast track `Tax Dispute Resolution System' aimed at: (1) expanding the availability to taxpayers of administrative means for resolving disputes, and (2) ensuring the availability of informal tax dispute resolution system for all taxpayers. If the CRP wants to modernize the appellate system, the best first step can be to provide fast track mediation in tax dispute resolution that may restore its much‑tarnished image in the eye of the public in general and taxpayers in particular. The following can be the salient features of a fast track mediation tax dispute resolution system: Fast track mediation can be offered to taxpayers universally without any conditionality. The programme should be designed to assist in resolving tax disputes arising from an assessment, audit, raid ‑etc. Taxpayers may not give up any legal rights available under the statutes by using fast track mediation. The decisions under this mechanism should be appealable, and any unresolved issues can move forward to another Court of law. In any society, administration and dispensation of justice should be the top most priority. A society without a sound, reliable and speedy judicial system that docs not ensure effective justice dispensation cannot survive for long. Administration and dispensation of justice under the various tax laws in Pakistan need serious attention. The entire system is now at the brink of disaster. There is an urgent need to ensure "justice", 'rule of law", "fairness", "equity" and independence of appellate authorities from administration. The alternate informal tax resolution system or the pattern of Fast Track Mediation in USA, UK and EEC countries can be of immense help to improve collection of taxes and restoration of public faith in our tax , machinery. 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 appeal against the order of the Deputy Commissioner of Income Tax (DCIT)/Assistant Collector of Customs/ Sales Tax before the Commissioner of Appeals/ Collector Appeals who works under the administrative control of Central Board of Revenue. It is a mockery of justice that an important functionary in the hierarchy of the judicial system is directly subordinate to Central Board of Revenue, which is the highest administrative authority under the Tax Laws. Everybody knows the attitude problems of these worthy Commissioners of Appeals/Collector of Appeals (sic!). They are part and parcel of revenue collection machinery. They work as a strong arm of the assessing officers/collectors and their fellow field Commissioners/ Collectors, who are assigned with budgetary targets. The genuine appellant, victim of arbitrariness of the DCIT/Assistant Collector, cannot get any relief unless he pays "due" share to the first appellate authorities. The judicial system under the tax statutes, or for that matter under any statute, should completely and truly be independent of administrative interference or control. It is an essential prerequisite for ensuring proper tax compliance and confidence of the 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 each other. This culture can only be changed if as effective judicial system is introduced and properly implemented. All appellate authorities should be part of the judicial service working under the administrative control of the Honourable High Court. The present working of Tribunal under the Ministry of Law is against the principle of "independence of judiciary". The Tribunal as well as first appellate forum (Commissioner/Collector Appeals) should work under the High Court of their territorial jurisdiction. The same system is presently in vogue for Civil Judges/Magistrates. The present pathetic state of tax administration can be measured from the fact that every year over 75,000 writ petitions/appeals are filed in Pakistan against the orders of the tax authorities. The litigants have to wait for years to obtain orders. On the contrary, in the civilized countries, only a few cases go for litigation to higher Courts. A case in point is the United Kingdom where the number of income tax payers alone is 30 million whereas the number of appeals reaching the Lord Chancellor is only around 30 in a year. This confirms the tremendous public satisfaction with the quality of law and fiscal administration. In Pakistan we have barely 1 million registered income tax payers but the number of appeals filed annually is in thousands. In addition to revamping our existing tax appellate structures, there is an urgent need that the CBR reviews its links with businessmen and provide them a fast track dispute resolution, system thus helping them instead of forcing them to enter into costly and time‑consuming litigations in Courts/Tribunals. Taxpayers, especially huge transnational corporations and foreign investors, want certainty on the tax treatment of transactions as quickly as possible (and preferably in real time). Closely related to this is a desire for transparent processes that enable businessmen to predict with reasonable confidence the Revenue's attitude to an issue. There will be times when a dispute is unavoidable but a mature relationship, built on mutual understanding and openness, should be capable of accommodating an element of business‑like disagreement. To` achieve this goal the CBR needs to introduce a fast track dispute resolution system without any further delay. POSITIVE CHANGE IN TAX POLICY There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investment‑oriented and business‑friendly tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle‑free from procedural implementation. The recent efforts of the Government to reform the tax system through IMF‑World Bank loans, recruitment of new members on market wages and relying on reports of the so‑called foreign experts have not yielded any positive results or acceptability from the taxpayers. It remains a closed door, bureaucratic exercise with no meaningful dialogue with the taxpayers, public pressure groups and tax experts who matter in the subject. In the absence of a well‑deigned tax policy, the agenda of tax reform will remain lopsided. The civilian Government should not allow the IMF‑World Bank nominated finance minister and his henchmen to make any legislative and administrative changes through the budget 2004‑2005 till the time a transparent tax policy is evolved by the elected representatives of the people through debate and consensus in the Parliament. Such a policy then should be announced to secure support of all those who are directly/indirectly affected by it before its actual implementation. Over the period of time our tax system has become rotten; oppressive, unjust and target‑oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy and not mere achieving of targets set out unreasonably on the dictates of foreign donors. Our potential is much higher than these targets, which can never be achieved with the present incompetent, inefficient and corrupt tax machinery. We should get ourselves free from the figure game of the IMF and World Bank. The existing tax policies have not only failed to reduce the fiscal deficit but have destroyed our industry and business. If we manage to formulate a rational tax policy and implement it through consensus and riot coercive treasures, there is every possibility that we would rid ourselves of IMF in a short span of time. However, if we keep on following their prescription, we will neither realize fixed targets, nor achieve the cherished goal of self‑reliance through resource mobilisation. Our annual tax potential is not less than Rs. 600‑800 billion provided the tax base is made equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn. EQUITY PRINCIPLE If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability‑to‑pay taxes. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability‑to‑pay principle views tax policy issues in isolation to incidence of public expenditure. Many regard this principle as the most equitable and just method of taxation. It is emphasized primarily for its redistributive role. We in Pakistan have completely deviated from this principle, which is a Constitutional obligation of the Government must follow the Quranic Injunctions in this regard which unambiguously and unequivocally command us to spend in Allah's way whatever is surplus after the fulfillment of one's legitimate needs [2:219]. There is no room of concentration of wealth in a true Islamic society. The existing tax system itself is a worst expression of colon heritage. It is highly unjust. It protects establishment and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. The common man is paying an exorbitant sales tax of 15% (18% in case of non‑registered persons and as high as 23 % on certain items notified by CBR) on essential commodities but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes, courtesy exemptions they have granted to themselves, as they are the rulers, but not taxpayers. It is painful to note that the present, structure of presumptive taxation has complicated the poverty problem of Pakistan. According to an Asian Development Bank study, the tax system of Pakistan, which was progressive till 1990, was converted into a regressive regime in 1991 with the introduction of certain withholding, provisions in the Income Tax Law ( most of which are retained even in the new law ,promulgated in 2001) and VAT‑type tax in the Sales Tax Act, 1990. The result is that during the ten years' period (1991‑2000), tax burden on the poorest households was estimated to have increased by 7.4 percent, while it declined by 15.9 percent on the richest households. This study of ADB is an eye‑opener for the target‑oriented CBR's stalwarts (sic) that in their frenzy of showing higher figures to their foreign masters they have put extra burden of taxes on the poor of Pakistan. History will never forgive them for this senselessness and treachery with their own people. Determination of a tax base capable of measuring an individual's ability‑to‑pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from this policy to unequal sacrificial rule where the mighty civil and military bureaucrats (now an integral part of our landed aristocracy by earning State lands as awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled on the directions of the IMF to pay GST of 15 % [it is as low as 2% to 4% even in Japan and Singapore which are affluent societies] and ever rising costs of public utilities and POL products. Being directly violative of Quranic Injunctions, the Government must immediately take due cognizance and try to remove these dichotomies. Taxes should be meant for the welfare and benefit, of public at large and to make the State invincible; not for the luxuries of rulers and State functionaries. BENEFIT PRINCIPLE According to this principle, an equitable tax system is one under which tax payments are based on the amount of benefits received from Government services. In other words, the cost of Government services should be apportioned among individuals according to the relative benefits they enjoy. Clearly, implementation of the benefit principle presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. Thus it encompasses issues of both tax and expenditure policies. Our successive Governments have failed to convince the people that payment of taxes is their collective responsibility. All the civil and military governments alike remained engaged in wasteful expenditure, never bothering to live within their means and failing to even protect the life and property of the people, not to talk of providing them basic needs of health, education and civic amenities. Are they justified to ask people to make sacrifices when their own life style is Shahana (emperor like)? Tax policy should be used as a tool 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 subsidized/free medical and educational facilities, low‑cost housing, and drinking water facilities in rural areas, land improvement schemes, and employment guaranteed programmes. Once people see the tangible benefits of the taxes paid, there will be better response to tax compliance. Taxes cannot be collected through harsh measures and irrational policies. The rulers and tax bureaucrats have to demonstrate by their actions a credible and an exemplary inspirational model for the taxpayers to motivate them to pay taxes honestly and, diligently. Earmarking, a fiscal practice under which revenues from one or more sources are pooled into a separate‑independent fund to be used to finance certain pre‑determined public, services, has never been followed in Pakistan for reasons best known to financial managers. The purpose of earmarking is to ensure stable funding for important public activities. Another objective of earmarking is to introduce market prices into the budgetary process. In this sense, earmarked taxes become an indirect form of market prices charged for public services rendered. Among the conditions for successful earmarking, the following are more important: 1. There should be a clear‑cut linkage between the tax levied and the benefit received. 2. Expenditure is well defined so that the taxpayers can identify its obvious benefits. 3. Linkage between earmarked revenue (e.g. from motor vehicle tax) and predetermined expenditure (e.g. on construction and maintenance of municipal roads and bridges) is tight. 4. Revenue is in the form of direct user charger/benefit tax (e.g. a toll). Traditionally, financing of road expenditure from out of tolls, motor vehicle taxes, and fuel taxes has been considered an area with a strong economic rationale for earmarking. Similarly, airport tax is generally levied to meet expenditure on airport maintenance. The principle of earmarking could be applied to such municipal services as water supply, and sewage disposal by linking them to water, and sewer charges which. in many cases, are components of the property tax in the sense that the base for these charges is the same as used for property (e.g. annual rental value). In recent years a number of countries have utilized taxes for establishing `employment zones' and this earmarking has produced excellent results. In Pakistan all the governments since independence remain totally oblivious of this important fiscal practice. The citizens never come to know where the taxes paid by them are actually employed by the State. Resultantly, they are never convinced that paying taxes is their national duty. It is an established fact that despite resorting to all kinds of highhandedness, illogical policies and unjust withholding taxes, the successive governments to Pakistan have failed to improve the tax‑GDP ratio (which remains hovering around 11 % to 12.5%). The burden of many presumptive five taxes levied under the Income Tax regime (which are nothing. but a form of indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have distorted the whole tax system, destroyed the economic, growth and made the consumer/client the ultimate sufferers. Moreover, these despotic, short term, myopic and figure‑oriented revenue collection measures have even failed to reduce budget deficit not to talk of bringing any meaningful change in the common man's life. The country has been facing an ever‑worsening unemployment crisis and a perpetual challenge of rapid industrial growth. But no Government has ever thought of `earmarking of revenue' for `employment zones'. Such employment zones can cater for: Creation of employment Technological renovations Export promotions Town renovations; and/or Experimentation with new economic management systems. Pakistan is in dire need of establishing a number of "Employment Zones', which should be low‑tax or tax‑free for corporate income and for companies creating new jobs. It will be an effective tool to reduce the mounting unemployment burden and to help boost industrial/business growth. The Government should identify areas where structural employment is particularly high and then earmark revenue for establishing employment zones in those areas. Out of total federal collection of taxes for current fiscal year, at least 25 % should be transferred directly to an independent fund for establishment of employment zones . The Central Board of Revenue (CBR) has collected Rs.310 billion in tax revenue in the first eight months of this fiscal year i.e. from July, 2003 to February, 2004, while another Rs 200 billion are required to be collected in the March‑June period to meet the annual target of Rs. 510 billion. An allocation of Rs. 125 billion in fiscal year 2004‑05 for creation of `Employment Zones' in areas where structural unemployment is very high can be a good beginning to show the citizens of Pakistan that the government is keen to utilize taxes paid by them for national progress. TAXPAYERS BILL OF RIGHTS The Government, before imposing any new obligations on the taxpayers at the instance of IMF, must restore the confidence of the taxpayers by immediately promulgating a Taxpayers' Bill of Rights, as was done by a number of countries including USA and UK in 1980s. The provisions of the Bill must:‑‑‑ ‑‑‑ safeguard and strengthen the rights of taxpayers; ‑‑‑ ensure equality of treatment; ‑‑‑ guarantee privacy and confidentiality of their declaration; ‑‑‑ provide right to assistance by the State in tax matters; ‑‑‑ ensure that tax collectors should act as facilitators; ‑‑‑ facilitate elderly taxpayers, low income taxpayers, retired people and the like who cannot afford services of consultants, to be assisted by the tax department; ‑‑‑ guarantee unfettered right of appeal through an independent tax appellate system; and ‑‑‑ provide facilities for independent judicial review of disputes with tax authorities. ASSIGNMENT OF TAX Assignment of a tax means transfer of taxation power from a higher level to a lower level Government. Taxation power includes the following: right to levy tax, collect tax, and appropriate proceeds from the tax. Thus, there can be three interpretations of assignment of a tax. Firstly, higher‑level Government may levy and collect a tax but handover the entire proceeds to lower level Governments. Secondly, the higher level Government may levy a tax but allow the lower level Governments to collect it and retain fully the proceeds therefrom. Finally, the higher level Government may transfer a tax to lower level Governments, a situation which defines assignment of a tax in its strictest sense. Our tragedy is that on the one hand we have too many taxes in the country (federal, provincial and local, although the last two only generate negligible national revenue) and on the other the benefits of revenue collection do not reach the poor masses. The few rich are the real beneficiaries of every luxury that is available. Fiscal gap is increasing every year despite IMF‑World Bank's bitter prescriptions bringing more miseries for the common people of Pakistan. We have utterly failed to reform our tax system, a process initiated as early as 1990. The Pakistani nation is one of the most heavily and cruelly taxed nations of the world. They are liable to over 50 local and provincial taxes and levies. These exclude federal taxes and levies. What makes the situation more painful is the fact that the system of taxation is unfair, complex and, costly, which punishes the honest and detracts savings and investment. The various taxes applicable at local level in different situations are: Local taxes:‑‑‑Export tax, district tax, union council tart, market tax, road cess (on sugarcane), road light tax, fire tax, local metropolitan tax, trade licence fees, water tax, conservancy tax, ground rent and tax an vacant plot. Note: These are only important ones at the local level and the list is by no means exhaustive. Levies: Import registration fee, export registration fee, drug registration fee, drug manufacturing licence fee, stamp duty, Zakat and Ushr, fuel adjustment charge, group insurance, cost of living allowance workers compensation, fee for deposit and registration of trade marks patent fees, registration fee of trademarks, registration fee of joint stock companies, share transfer fee, airport tax, foreign traveling tax, tax on travel by air, toll tax, trade profession calling, abiana on agriculture, royalties, tax on ,duty‑free shop, market committee tax, and advertisement tax on TV. Provincial tax: Property tax, betterment tax, surcharge on property tax, additional surcharge on property tax, professional tax, motor vehicles tax, entertainment tax, cotton fee, paddy development fee, excise enactment, hotel tax, marriage hall duty, duty on hospitals licence fee on motor vehicle dealers, licence fee on video dealers, social security, education cess, capital gain tax and electricity duty. Tax culture cannot flourish in Pakistan unless taxpayers get quality service and facilities in return, which unfortunately do not exist at present. A basic change in our three‑tier tax system‑‑‑‑central, provincial and local that is fraught with multiplicity and complexity ‑‑ is needed. Replacement of the current tax system with a fair, simple and transparent one will certainly increase economic growth and national productivity. If we really want to progress only four local provincial taxes payroll tax, municipal tax, property tax and stamp duty should replace the 50 odd taxes which are at the moment destroying our development as the entire population is suffering at the hands of corrupt tax officials. The federal highhandedness in tax matters (by using both federal and concurrent lists) has destroyed the financial and economic rights of the provinces. The provinces‑have the exclusive right to levy taxes on goods and services within their respective physical boundaries, but the Federal Government blatantly encroached upon their undisputed right by levying tax on goods and services in 1991 (a process which is persisting till ‑today) under sections 80C, 80CC and 80D of the repealed Income Tax Ordinance, 1979. Such taxes are no more taxes on income (which the Federal Government is empowered to levy under item 47 of the Federal List) but tax on goods and services. It is a great tragedy that this argument was not addressed in the Supreme Court when the constitutionality of these provisions was challenged, the matter only revolving around academic discussions over the concept of income. If the Federal Government can treat tax on goods and services as tax on income, as upheld by the apex Court per incuriam, then what will be sanctity of division of fiscal powers provided in the Constitution of Pakistan? Generally, the purpose of tax assignment is to augment the resources of lower level Governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower level Government to levy tax assigned to it. Not only this, the lower level Government may not have powers to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing the tax rates within a minimum and maximum range prescribed by the higher‑level Government. There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal and taxing powers between the federation and provinces. True provincial autonomy can only be guaranteed if assignment of tax principle is followed in both letter and spirit. Merely by electing some people under the local body elections and asking then to dislodge the District Management, provincial autonomy cannot be achieved. Let the provinces have exclusive a right over their resources and finances. Let us transfer taxes to local governments so that grass root democracy and funds for public services can be guaranteed. BUOYANCY AND ELASTICITY OF TAX REVENUE Tax revenue may change through automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying tax parameters (bases, rates etc.) are called discretionary changes. Variations in the tax yield flowing from combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax. It is computed by dividing percentage change in tax yield by percentage change in national income. The Pakistani experience in this regard has been very disappointing as admitted in the following paragraph of an official document i.e. Economic Survey. 2002‑2003: "Although successive governments have made attempts to narrow the revenue‑expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the 'overall fiscal deficit. Why is it so? Pakistan tax system is still characterized by a narrow and punctured tax base, over reliance on distortionary import‑related taxes, high taxes on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effect of these structural weaknesses resulted in low and stagnant tax‑to‑GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilization efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure." Buoyancy estimates assess the overall success of Government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income. In the absence or weakness of elasticity attribute of the tax system, a Government will have to revise tax rates and tax bases every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws, reduce administrative efficiency and are also politically inexpedient. This is what happened in Pakistan for the last 50 years. It is high time that we must have a paradigm shift in out tax policy to avoid these kinds of negative effects. Therefore, tax structure should be so redesigned as to impart reasonable degree of elasticity to the tax system. Taxation is a potent instrument to shape and influence the socioeconomic polices of a country. It is, therefore, imperative for us to formulate a nationally acceptable tax policy keeping in view our own peculiar conditions and not by taking dictates from IMF and other donors, who are only suggesting what suits their vested interest. Our tax policy must take into account: Present stage of our economic development. Objectives of economic policy. Priorities of, economic policy continually change with the changing economic, social, and political milieu. It is necessary for us to use the forthcoming budget as a tool for CHANGE and not as protector of status quo. In taxes, we need to bring sonic fundamental structural and operational changes. Mere amendments here and there will serve no useful purpose. New .tax strategy should entail the following three components: SOURCE MOBILISATION AND GDP GROWTH. The first and foremost objective must be to raise resources for public authorities for administration and development. Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idly or squandering them on luxurious consumption. According to Roy Gobin, "the revenue criterion is usually the dominant consideration, since governments in developing countries have become increasingly aware of the active role which budgetary measures can play not only in initiating and promoting growth but also in maintaining political power. Not only are higher revenue levels needed, but also tax yields should be increased at a faster rate than income, if infrastructural investments and social welfare expenditures are to be financed without generating unacceptable inflationary pressures and/or increasing reliance on foreign assistance." The revenue performance is in fact the best and optimal use of resources. Since the composition of investment is an important determinant of growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing high tax rates on luxuries and other low priority items (such as motor cars, air conditioners, and jewellery), the Government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors. Conversely, offering tax concessions or even subsidies can encourage production of necessities of life and employment‑oriented industries [The IMF is suggesting just the opposite and we are following their prescription at the cost of our national interest]. DISTRIBUTIVE JUSTICE Distributive justice or economic justice is an important function of tax policy. Economic justice relates largely to distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, racial and religious tolerance in a society. Tax policy is a democratic method to influence the distribution of income and wealth on desired lines. The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high‑income groups, and (c) subsidies (negative taxation) on goods purchased by low‑income groups. In Pakistan we are moving from progressive taxation to regressive taxation, on the dictates of foreign donors. It is a dangerous step that is bound to force us to civil strives, as our society is already divided on economic, geographical and religious divisions. 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, remained high during the last decade and the revenue targets fixed annually were revised downwards many a times and even then the same could not be achieved. The Tax‑GDP ratio remained dismally low. The second equally important function is: To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has transferred the burden of taxes from the rich to the poor. . STABILIZATION Initial developmental efforts are generally marked by inflationary tendencies in an economy. Inflation, if uncontrolled, may thwart all development plans and bring misery to the poor. A reasonable degree of price stability should be a primary concern of a Government's economic policies. The overall level of economic activity in an economy depends upon aggregate demand, relative to capacity output. At times, the level of aggregate demand may be insufficient to secure full employment of labour and other factors of production. At other times, aggregate demand may exceed available output at full employment level. Government intervention in both the cases becomes essential to correct such disequilibria in the economy. The evaluation of our existing tax system with reference to the foregoing objectives is a difficult task because various other policies (like public expenditure policy) may be geared to achieve the same objectives. The Task Force on tax reform, headed by Mr. Shahid Hussain, did not concentrate on these questions but rather confined itself to superficial aspects of the tax system suggesting just a few procedural changes here and there. The IMF is insisting on implementation of his recommendations that hardly touched the fundamental issues faced by our tax system. To what extent the re distributive objective has been served and what was the relative role of tax policy in it is a difficult question to answer. Moreover, the various objectives of tax policy may not always work harmoniously. Rather, they are often in conflict with each other if not mutually exclusive. Since the tax system of a country grows out of the interaction between political judgment and economic rationale, the process of compromises and trade offs is influenced by political expediency and economic logic, the former, in most cases, having the upper hand. In fact, political requirements and economic thinking change with time, giving new directions to tax policy. As Richard Bird has observed, "Tax reform is, therefore, a never‑ending process, not something that can be brought about once and for all and then forgotten." One hopes that in the new budget, to be announced in the second week of June 2004, mindless and isolated changes will be avoided leading to further destruction of our tax system unless tax policy imperatives discussed above are given due consideration. The mania for change/reform without proper direction can be counterproductive or even disastrous.