Death pills from IMF & World Bank

Huzaima Bukhari & Dr. Ikramul Haq

 

In recent days, the World Bank and International Monetary Fund (IMF) have suggested a number of changes in our tax statutes that are highly controversial and debatable—these intend to burden the less privileged segments of society whereas the rich will remain unaffected. Implementation of these proposals, without any public debate and assessing their impact on the poorer segments of society, will have ramifications—destroying the cherished goals of self-reliance, social justice and equitable distribution of income and wealth. The prescriptions of IMF and World Bank for our ills are not based on correct diagnosis. Their sole stress is on enhancing regressive taxes that take small portion of the big income of the rich and very large slice of the scanty income of the poor.

 

In none of its studies prepared for Pakistan, the World Bank has bothered to assess the incidence of Value Added Tax (VAT) on various income groups of society. No critical evaluation is made about what impact VAT will have on our ailing economy. The only point highlighted is that VAT—levied across the board—will generate extra revenue of Rs. 400 billion. The so-called experts of IMF and World Bank have no idea about our real tax potential which is not less than Rs. 4000 billion. Instead of suggesting restoration of progressive taxes—wealth tax, capital gain tax, estate duty, gift tax etc—that were once in existence in Pakistan, these institutions are supporting continuance of pro-rich tax policy. By levying fair and equitable taxes and withdrawing exemptions given to the rich, we can easily generate Rs. 4000 to 5000 billion per annum. But our ruling trio—crooked civil-military bureaucracy, shady politicians and greedy businessmen—resists any such move for obvious vested interests. Sadly, though understandably, the IMF and World Bank have also been working to further their cause.           

 

World Bank-funded tax reform process (sic) has failed to yield any positive results. This is evident from the fact that after five years of Tax Administration Tax Reform Project (TARP), the basic ideas (e.g. introduction of VAT and formation of Inland Revenue Service) are still being discussed. It is strange that things that had to be done in 2004 when 5-year TARP was started are at discussion stage in 2009. It confirms that from 2004 to 2009 borrowed funds of millions of dollars have been wasted. This is the sordid story of tax reforms in Pakistan. Now with the establishment of Inland Revenue Service, they think wonders will be achieved. This is just a change of nomenclature—cosmetic change. Unless mindsets of officers change, nothing will change. Process of change requires change of minds and hearts, something which is completing missing in FBR—the officers are incompetent, inefficient and corrupt, both financially and intellectually. No suggestions have been made by IMF or World Bank for curing this malady. Skilled tax administration is not possible with the existing lot sitting in FBR. 

 

In this milieu, the IMF and World Bank are insisting for enforcement of VAT that requires documentation at all levels. VAT is a specific turnover tax levied at each stage in the production and distribution process. Although VAT ultimately bears on the individual consumption of goods and services, liability for VAT is on the supplier of goods or services. VAT utilizes a system of tax credits to place the ultimate and real burden of tax on the final consumer and to relieve the intermediaries of any final tax cost. VAT is calculated by applying the applicable rate at a taxable stage to the appropriate taxable base of goods or services; it is then reduced by the VAT (as indicated on the invoices delivered to the purchaser), which has directly affected the cost of the various elements constituting the price of goods or services.

 

We wrote in these columns in 2000, “in Pakistan there are substantial deviations from pure form of VAT (as in vogue in Europe and some other developed industrial societies), because of exercise of various tax rates, exemptions and concessions for certain goods and services and specific provisions governing importation and exportation. It is therefore not VAT but VAT-type tax in Pakistan”. Now in 2009, the World Bank has just reiterated it in its “research study”—this is height of complacency. In its “research study” (sic), the World Bank did not tackle the most import issue: how VAT will be enforced in Pakistan where more than 50 per cent of economy is undocumented. IMF-World Bank experts say it will take us five years to enhance tax-to-GDP ratio to 15% [presently it is just 9%]. They are oblivious of the size of existing monstrous black economy, which if taxed at current rates, will enhance our tax-to-GDP ratio to 19 percent in just one year! Such taxation will expose the ruling trio that is the real owner and beneficiary of this black economy. Why do IMF and World Bank not suggest asset-seizure legislation to bring entire undocumented economy in tax net? They know it will end their control over our affairs—resource mobilization through these steps will make us self-reliant and end debt enslavement.   

 

The issue in Pakistan is not that of lack of revenue resources as wrongly portrayed by IMF and World Bank, but documentation of economy—ending the culture of tax evasion and fiscal frauds. The forces representing bazaar [different associations of traders], unscrupulous industrialists, absentee landlords and corrupt civil-military bureaucrats are the impediment. These segments are not ready to pay personal taxes on their colossal wealth and income—in most cases created from undeclared sources. They are not worried about VAT knowing that they can pass its burden to consumers. As under sales tax regime, they will not record honestly each and every transaction under VAT. If they will do so, their personal incomes in the process will get documented. Resultantly, they would have to pay income tax from their own “pockets”—incidence of direct taxes cannot be passed on. There has been a perpetual policy of appeasement towards these forces by successive governments—military and civilian alike. The IMF and World Bank want continuation of this policy. They have not suggested any measure to increase the share of direct taxes—presently dismally low at 23% in our total tax collection. In fact, they want that through VAT, the poor keep on paying taxes to fund the luxuries of the rulers.

 

The prescriptions given by the IMF and World Bank will not solve our problems rather further compound them. The rich and mighty segments, identified above, will pass on the burden of VAT on poor people and will still avoid personal taxation—they know how to grease the palms of the corrupt tax officials. In 1990s, IMF and World Bank caused a crushing deathblow to our industry when on their advice we introduced exorbitant sales tax rate of 21 per cent—within a short span of 2 years we had hundreds of sick industrial units. Later on rate was reduced to 18%, then 15% —again raised to 16% in 2009— but the fact remains that heavy indirect taxation has pushed 45 million Pakistanis below the poverty line. IMF and World Bank, fully aware of this fact, are still insisting on VAT. The agenda is obvious: destroy our industry and push more and more people below the poverty line. VAT will be a death pill for us. We can generate extra revenue of Rs. 800 billion by just taxing speculative transactions in shares, real estate and collossal income of absentee landlords. This taxation will also not involve any complicated enforcement issues that is the case with VAT due to constitutional distribution of taxation rights between the Centre and provinces.

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The writers, tax lawyers, are visiting professors at Lahore University of Management Sciences (LUMS).

How to democratize governance?

 

 

Huzaima Bukhari & Dr. Ikramul Haq

Civil servants performance reflects the performance of government. Your role must be that of “enablers” and “facilitators” rather than just “regulators” — Prime Minister, Yousaf Raza Gilani, addressing 90th National Management Course and 5th Senior Management Course at National Management College Lahore on July 25, 2009.

In our Land of the Pure, the poor masses are subjected to heavy and cruel taxation — cumulative incidence of various indirect taxes alone is as high as 40 percent—to finance the luxuries of the politicians, civil-military bureaucracy and the rich and mighty — who enjoy all possible facilities at subsidized rates. The way they waste and plunder the taxpayers’ money is no secret — shamelessness is the most appropriate word to explain their conduct. No serious effort since independence has been made to reform our mighty civil-military complex and its henchmen — the corrupt politicians and businessmen. On the contrary, numerous committees and commissions were constituted to “rationalize their pays and perquisites”. The politicians, who openly and vehemently profess differences on all the major national issues, always unanimously vote for manifold increases in their pays and lucrative perquisites.

Prime Minister, Yousaf Raza Gilani while speaking to grand gathering of senior bureaucrats asked the Pay and Pension Commission, notified on 6 April 2009, to come up with concrete suggestions for a reasonable pay and pension package for the government employees. Our worthy prime minister has not established any commission to assess the unbearable incidence of taxes and cost of basic services to the ordinary citizens and how to give them relief. But he is very concerned to give further benefits to the mighty bureaucrats, enjoying unfettered powers and making the lives of common people miserable. It is a strange form of democracy where the privilege classes do not pay due taxes but want more and more share in taxpayers’ money. In other democratic countries, the rich are taxed for the benefit of the poor. In Pakistan it is the other way around.

Our civil servants and politician feel that they are economically deprived! They always look for enormous emoluments and fringe benefits!! The sense of economic deprivation is certainly true for the majority of low-paid employees—though most of them are also involved in corruption — but the top-notches have enormous assets and money — hidden kept outside or within the country in the names of others. They have legitimate right to get the reasonable pay and security of job. The State must fulfill its duty of good Pay master towards them. They in turn should be the public servants in real sense of the word and not the Gora sahibs—the legacy left by the colonial masters.

A system of check and balance — under which asset and tax declarations of civil servants, judges, generals and politicians are open to public — is a sin qua non for the establishment of a true democratic culture and polity. The monetizing of all the fringe benefits available to the government employees, judges, generals, ministers, advisers must be done forthwith — it will not only be cost-saving but a first step towards the democratization of governance. It is the high time that the government should devise and implement a well-thought-for programme for democratization of governance.

The other day a powerful officer in Federal Board of Revenue (FBR) — known as seasoned bureaucrat and extraordinary tax administrator — was complaining about rude and incompetent politicians. He commented: “governance is not the politicians’ cup of tea they all are law violators by nature. Look at their election expenses and declaration the file with the Election Commission”. He said “double salary given to FBR employees is just peanuts when compared with “huge money” wasted on “worthless” elected members—each one is costing over Rs. 4 million per year. Besides, the money they plunder from various schemes and funds allocated to them as political bribes.

Total budget sanction for National Assembly and Senate for fiscal year 2009-2010 is about Rs. 1.5 billion and Rs. 0.7 billion. This does not include perks and perquisites of ministers, state ministers and advisers. This poor country has army of ministers, state ministers and then advisers! A minister enjoys salary, allowances, financial benefits, rights, privileges and concessions. There are ‘equipment allowances’, travelling expenses for the minister and his family, cost of transporting personal servants, cost of transporting house-hold effects, sumptuary allowances, a furnished residence, travelling allowances for touring in Pakistan, Business Class air fare for him/her and his/her spouse, travelling allowances for tours abroad, First Class air fare, unlimited medical allowances and reimbursements, police escorts, fuel expenses, security, personal staff, office staff, utilities, entertainment allowances, entitlements of staff and telephone allowances—the list is yet not exclusive.

The total amount spent on military establishment — not for defence needs but for the luxuries of the generals and other high-ranking officers — is nearly Rs. 125 billion. The cost of running the offices of president, prime minister, ministers, all the ambassadors-at-large, advisers and governors (supported by huge staff) in a year is between Rs. 130-145 billion — 60 percent of it is extending a host of fringe benefits. The entertainment budget alone of Prime Minister and President House is Rs. 70 million and Rs. 95 million respectively.

One minister costs around Rs. 60 million per year; whereas we spend Rs 144 per Pakistani per year for health; and Rs 145 per Pakistani per year for education! We beg money from all and sundry — its use for non-productive purposes is more painful. No sustainable growth has been achieved even after borrowing billion of dollars. People are dying of hunger — majority is living in miserable conditions — and our privileged public servants (sic), public office holders, generals and judges are not ready to give away their perks and benefits. Why they cannot live like ordinary people?

According to a Press report, “in the locality sprawls over an area of 1,514 kanals of Mozang, Lahore, the largest house in the area, over 52 kanals, is the designated house for the Lahore High Court Chief Justice. The Commissioner’s House is the second largest house covering 26 kanals. The Chief Secretary’s House covers 12 kanals and the Chief Minister’s House covers 5 kanals.

“The Punjab government has earmarked Rs 841.52 million in the Annual Development Programme (ADP) at the disposal of the Services and General Administration Department (S&GAD) out of the total outlay of Rs 160 billion. The S&GAD would complete 51 ongoing schemes at the cost of Rs 475 million and Rs 366.4 million would be used to initiate and execute 25 new schemes during the next fiscal year commencing from July 1. The lion’s share of the funds would be used for the renovation, alteration and landscaping of GOR-I to facilitate the civil, police and judiciary officers living in the residential locality. The government has allocated Rs 10 million to construct 13 residences in GOR-I for officers in BS-20 and above. The renovation of Punjab House in Islamabad, Karachi, Murree and Rawalpindi is also a part of the budget. The government has allocated Rs 28.39 million for upgrading a gymnasium in GOR-I, Rs 0.66 million for the improvement of parks and playgrounds, Rs 0.39 million for the renovation of external water supply lines, Rs 1.16 million for the construction of cabins for security, Rs 5 million for the construction of an over-head water reservoir and installation of a turbine, and Rs 5.23 million for the installation of a diesel generator to ensure uninterrupted water supply to GOR-I”, the Press report reveals.

The government has also allocated Rs 27 million for the construction of the Chief Minister’s (CM) Secretariat at 8-Club Road in GOR-I, Rs 2.5 million for uplifting the facade of the Punjab Civil Secretariat and to build a gymnasium there for secretariat officers. The government has allocated Rs 1.2 million for installing a diesel generator for uninterrupted power supply to Punjab Hall and the Chief Secretary’s Office, and has set aside Rs 20 million for furnishing the Minister’s Block at the Civil Secretariat”, the Press report further adds.

 

This is the story of good governance in the Punjab—where the Chief Minister prefers to be called Khadim-i- Aala (Chief Servant)! The situation in other provinces and the federal government is no different—rather worse. Huge sums are wasted for providing privileges to the high-ranking government officials and politicians. The situation is same in the military establishment. The style of living of our generals is unmatched in the world. In the post-colonial period they became not only political masters but also the main beneficiaries of country’s major resources [see facts in Military Inc by Ayesha Siddiqa]. In the prevailing scenario, democratization and decentralization of governance in all institutions, including the army and judiciary — two scared cows in Pakistan — is vital if we want to progress.

While the government servants blame politicians for plundering and wasting the money, they allege that bureaucracy is the root cause of all the ills. They claim that a secretary of government costs at least Rs. 500,000 per month to national exchequer with lot of facilities and perquisites in kind. If rent-free accommodation given to him in Islamabad alone is evaluated on market basis, the benefit is not less worth Rs. 150,000 per month. In addition, he exercises unfettered powers and defy the orders of elected members of parliament and even sometime of ministers.

The politicians complain that bureaucrats do not implement their orders and keep on tarnishing their image in the public. The expense of monstrous government establishment — at federal and provincial levels — is very high and on top of that corruption and rent-seeking is the order of the day. The following details will certainly be eye-opener for public at large and extremely painful for the honest taxpayers, who are fleeced to pay for the luxuries of the mighty government servants and the rich:

Out of total consolidated current expenditure of Rs. 2066 billion for fiscal year 2008-2009 of federal and provincial governments, the amount spent on perquisites and benefits of government servants was enormous; Federal government spent Rs. 140 billion, Punjab Rs. 55 billion, Sindh Rs. 40 billion, NWFP Rs. 17 billion and Baluchistan Rs. 12 billion.

184 high ranking officers inhabit 12,644 kanals of land for their palatial residential buildings. Sitting in these palaces, these people consider themselves Gora sahibs above any accountability. They decide the fate of Pakistani people on the streets.

Majority of government functionaries lives beyond means spending far more than salaries it receives.

The above facts call for immediate right-sizing — closing down of all the unnecessary departments, divisions, sub-divisions and allied paraphernalia [see list in Capital Suggestions, The News, January 04, 2009, by Dr. Farrukh Saleem]. The list is long and astonishing. At Constitution Avenue, Islamabad, one can count 30 useless government establishments that are doing nothing but have imposing buildings and huge staff. The same is true everywhere — in all parts of the country one finds governments office, overstaffed, wasting money and time and making the lives of the citizens difficult. This is in nutshell the story of our civil service — the worst remnant of colonial legacy.

Living in sprawling bungalows with army of servants, the mighty bureaucrats and generals are least pushed to bother how the common man is living (or dying)—even totally indifferent towards their own fellow low-paid employees. The civil-military structure in Pakistan is class-oriented and against the basic precepts of democracy. They make policies while sitting in the air-conditioned rooms for poverty alleviation and what not. The other day, the FBR issued rules making it mandatory for all firms to file statements and returns electronically without realizing the non-existence of internet facility at the remote places of the country, and even in big cities for want of electricity supply!

All indicate that democratic form of governance is an alien concept in our peculiar socio-political milieu — State of Pakistan since independence is either directly run or controlled by a strong civil-military complex. It has proved to be crueler that colonial masters — in terms of oppression, denying the people their fundamental rights and being highly inefficient and corrupt. Since independence political elite, playing in the hands of civil-military complex has also shown strong indignation towards pro-people decentralized governance. Our governance model — under civil or military rules alike — has proved to be even worse than many developing countries where decentralized governance has brought benefits for the people at gross root level — during our recent visit to Chile we experienced the great advantages of democratization of governance with government official getting all the emoluments in cash and living as happily as their fellow citizens in same localities, using the same public transport and their kids going to public schools meant for all. Our elitist system has made civil servants, judges and military bureaucracy masters. The low-paid employees in civil service hardly meet the both ends but their bosses live like kings! Democratization and decentralization of governance needs serious consideration if we really want to move forward — democracy is not electioneering per se. One of its essential elements is rule for the person which is missing totally in Pakistan.

The first and foremost step towards democratization of governance should be undoing the legacy of Raj. The immediate action should be right-sizing of huge government machinery and monetizing of all the fringe benefits and perquisites in kind given to the employees [see detailed recommendations by Dr. Ishrat Hussain, Shahid Kardar, Nadeem Ul Haque and many others]. Democratization and decentralization of governance necessarily requires complete reform of our civil service and military establishment as well as accountability of public office holders. The State must withdraw from all its employees and public office holders all facilities like houses, cars, servants, telephones etc. All perquisites given in kind should be monetized. Let the government servants, especially the senior bureaucrats, live with the ordinary citizens of Pakistan and not in GORs or other posh colonies. It will give them real insight how the policies should be made and what are the real problems of the ordinary folk.

The government servants should construct their own houses or take residences on rent as other citizens do. Grand housing scheme by the State should be for all — no separate palaces for bureaucrats. The lucrative properties on The Mall in Lahore and elsewhere in the country are not the jagirs of bureaucrats. These belong to the masses and they should be the beneficiaries of their assets. Why the ministers live on the sprawling houses on The Mall and designated placed in Islamabad and in other cities. Why in GOR, The Mall, judges get huge bungalows. They should also live like ordinary people.

Why the Corpse Commanders have houses right in the cities in acres. Why the governor houses in all the four provinces are so huge. These questions are important from the standpoint of democratization of governance. The existence of such luxuries for the rulers and privilege segments of society is derogatory to Constitution and democracy. In other countries such buildings are open to public—as museums or functional places. In Pakistan, these are outbound for the common man. These should not be available as perquisites to anybody.

The government must revise pay structure of its employees but all fringe benefits/perquisites in kind should be monetized. This will be the starting point of change in society — beginning of the democratization of governance. It is the Constitutional duty of the State to treat all the citizens equally and provide them the facilities of education, health and transportation. Since all the money is spent on the luxuries of the rulers and their henchmen, the State has persistently been failed to fulfill its main responsibility. Those who manage and perform State functions — public office holders and civil servants — must be made part of the masses. The colonial concept of master and servants relationship must end now. 14th August 2009 — marking 62nd anniversary of independence—is close and it is the high time that we should make a beginning of democratization of governance.

 

 

 

Rapid growth and social justice

Every year before the announcement of annual federal budget, plethora of tax proposals are received by the Federal Board of Revenue (FBR) from trade and professional bodies, tax bars and industry’s representatives. These are hardly given serious thought by the tax managers, who have only one concern: how to achieve revenue targets through wickedly drafted amendments and onerous tax regulations.

 

Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations for the last many years have caused a dampening effect on the industrial and business growth.. 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. This is a vicious circle in which our policymakers are now 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 come forward.

 

It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scare, 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 tax system gets doubly compounded as it necessitates greater and greater tax burdens on those who are law-abiding. The most crucial problem faced by us in 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. The honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that tax evaders are not paying anything with the connivance of their friends and mentors in tax machinery. The unholy alliance between the tax evaders and corrupt tax officials has to be eliminated as a first and the foremost step if we want to initiate any meaningful change in tax system and achieve the goal of rapid economic growth.

 

Every now and then the State announces a tax immensity scheme that favours tax evaders, smugglers, corrupt, extortionists, drug barons and criminals. Such schemes are a spank for the honest taxpayers [proving them the most foolish for paying the taxes]. An extortionist in Karachi can decriminalize his ill gotten money through such a scheme but the poor businessman who paid it due to shameless failure or connivance of law enforcement apparatus cannot even claim it as an expense in his tax return! The situation needs to be corrected. The facilitation of whitening the untaxed money should be restricted ONLY for genuine businessmen to bring such capital back into disclosed/formal sector by paying some percentage as tax (as kafara) and not for the criminals, corrupt and unscrupulous elements in society.

 

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 to be understood and hassle-free from implementation perspectives. In the absence of a well-designed tax policy, the agenda of tax reform will remain lopsided. The new government should get itself free from the figure game of the FBR. Our tax potential is not less than Rs. two trillion provided the tax base is made wider and equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn. The following steps are inevitable if we want to make Pakistan a competitive place in today’s world:

 

1.      Establishment  of democratic institutions both in form and substance coupled with a truly independent justice system.

2.      Dispensation of justice without delay should be the top most priority of the State.

3.      Revamping of entire education system and ensuring revolutionary measure to take society out of jahalat [ignorance]. Our problem is not only illiteracy but also ignorance. Even the so-called literates are jahil of worst order, as they do not demonstrate by their actions any norms of a civilized society. The foremost stress should be on Iqra [knowledge] and technological advances.

4.      Elimination of bigotry, religious intolerance and violence by taking concrete measures to ensure social development of society based on higher values of life and humanity.

5.      Devising long-term and short-term strategies to break the shackles of debt-trap.

6.      Determination and political will to control wasteful, non-developmental and defence expenditure.

7.      Strict laws and their effective implementation to curb money laundering, plundering of national wealth, political write off of bank loans and leakages in revenue collections.

8.      Reform of technical, institutional and organizational dimensions of public finance.

9.      Improvement in public sector effectiveness.

10.  Reform and strengthening of management of public finances.

11.  Transparent public sector spending.

12.  Efficient public sector performance.

13.  Revitalization of tax machinery.

14.  Simplification of tax laws and procedures.

15.  Good governance and corrupt free government structures.

16.  Reduction in excessive marginal tax rates making them compatible with other tax jurisdictions of the world, especially in Asia.

17.  Substantial reduction in corporate rate of tax.

18.  Elimination of onerous tax and other regulations for corporate sector that are the main stumbling block for new direct foreign investments.

19.   Sufficient openness and accountability in the government to enable citizens to understand and participate fully in the process of national integration. This includes live telecast of the assembly proceedings.

20.  Complete transparency in government and private financial transactions.

The juxtaposition of economic policymaking and political reform [democratization] of society is necessary. The agenda for reform and survival should entail a comprehensive, well-integrated and unified plan that alone can assure its success. The reform in one sector ignoring the ills in the other, resorting to improving something at the cost of leaving aside the one interlinked, will not yield desired results. The case of tax reform divorced to elimination of black economy is the point in focus. The main cause of fiscal deficit is existence of an unprecedented size of underground economy and the share of incompetence and inefficient tax machinery is significant, but reform in tax administration alone without routing the causes of parallel economy is not going to improve GDP-tax ratio [which is below 10% for the last 10 years].

In the same manner mere constitutional changes giving more powers to Prime Minister will not improve the political culture. We cannot achieve the cherished goal of self-reliant Pakistan unless rule of law and democratic behaviour in practice is clearly demonstrated. In the presence of US-imposed and supported President, the goal of independent Pakistan free from the political clutches of Washington cannot be materialized. For a strong economy, resource mobilization through a growth-oriented tax policy is a prerequisite. Tax policy should induce rapid industrial growth, ensure equitable distribution of wealth and incomes and give the provinces due share in national resources and powers to levy taxes within their territorial jurisdictions.

One hopes that in the forthcoming budget, mindless and isolated changes will be avoided to further destroy our tax system unless tax policy imperatives discussed above are given due consideration. The change mania without proper direction can be counterproductive or even disastrous. This is what tax baboos of FBR have been doing for the last two decades.

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The writers, tax advisers, are visiting professors at Lahore University of management Sciences (LUMS). They can be reached through their website www.huzaimaikram.com

Benefitting the rich

Huzaima Bukhari & Dr. Ikramul Haq

 

 

“Loss leaves us empty – but learn not to close your heart and mind in grief. Allow life to replenish you. When sorrow comes it seems impossible – but new joys wait to fill the void.”

Pam Brown

 

 

Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of ex-Prime Minister-cum Finance Minister Shaukat Aziz before taking charge as Finance Minister of Pakistan. He being an intelligent man was fully aware of the fact that by virtue of his status as resident in Pakistan, his world assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis. After 9/11, since the country was in a “critical state” (as portrayed by Musharraf) where the services of one individual were totally indispensable, the repeal was shown to be justified despite tremendous revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan.

 

Today, our financial wizards are talking about financial impediments inter alia fiscal deficit of 9 % of GDP and extra borrowing of over Rs. 5 billion, mercilessly wasted on the endless non-developmental expenditure, lavish perquisites of the ruling elite and to make good this loss, the only option in their view is raising the prices of oil (knowing very well that such raise triggers rise in cost of living pushing the poor strata further down the poverty line). Instead of resorting to recovering all losses from the poor and hapless of this country why is not any attempt being made to recover from those who are actually responsible, some being beneficiaries of loan write-offs? Is it because in doing so, they themselves will have to bear the burden as well?

 

In 2002 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemption given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US$ 60 billion) started pouring in from all over the world remitted by all and sundry without any fear of being investigated, courtesy amnesty given in section 111(4) of the Income Tax Ordinance, 2001.  Influx of enormous wealth was directed to the stock exchanges where the dominant stake-holders continued to gobble the small investors through unholy maneuverings; or was used to enhance real estate dealings. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity.

 

This also soared up investments in non-productive sectors, with people refusing to take risks on industrial projects that could have proved more beneficial to the masses. The high tendency to make easy money through stock exchanges and land dealings has resulted in retardation of economic growth for the poor, whose life is totally dependent upon earning daily wages. The last five years have negatively flung Pakistan’s economic condition not just ten years back, but many decades. With marked rise in population, with no attempt to increase resources or even improve the existing ones, with the divide between the rich and poor touching dangerous levels, with continuous political turmoil and to top it all, reliance on an extremely regressive tax system, one can confidently say that our country is now on the threshold of economic collapse unless serious measures are not adopted to veer it off this perilous track.     

 

What is preventing our elected coalition government’s highly qualified finance ministry from recuperating billions of worth of taxes by restoring the Wealth Tax Act? Instead of increasing oil prices (where per litre tax component is over Rs. 25) why is there no attempt being made to impose heavy taxes on those who enjoying colossal wealth and enormous income do have the ability to pay?

 

Looking at the Press reports, it is disturbing to see that some of our retired generals are adjudged as the richest in the world by TIME magazine. Besides, our elected representatives in the past have proved that they are far better at asset and wealth management than fund managers and investment bankers of Pakistan. These people are extremely competent at creating personal wealth but prove utterly hopeless in increasing national wealth for now nearly 180 million people of this country. The rich Prime Minister-cum-Finance Minister did not establish any charitable institute by giving donation out of his mega wealth, nor are the present ones ready to do so. On the contrary, the National Police Foundation “allotted” two plots to him in E/11, Islamabad at throwaway prices of Rs. 1.1 million and Rs.0.24 million which, within a year’s time attained market price of Rs. 12.5 million and Rs. 1.5 million and in 2008 rising to thirty times the original price paid! Supreme leader of King’s party, PML(Q), Chaudhry Shujat Hussain, another exceptional wealth manager who pole-vaulted from net wealth of Rs. 74 million to Rs. 146 million in just 12 months (see his latest declaration before the Election Commission). These two examples are merely illustrative of the over-all pattern of phenomenal increase in the wealth of ruling elite: powerful civil-military complex, greedy politicians and unscrupulous businesspersons.

 

Over the last many years, tax policies have been formulated serving the interest of billionaires (including the ruling elite, wealthy generals and high-raking civil bureaucrats, industrialists and rich property owners) and that too at the expense of the poor.

 

• In the last two years alone, revenue loss on account of income from property is estimated at Rs. 80 billion as per survey of the PT-1 forms of the Excise and Taxation Department of the Government of Punjab.
• Increased dependence on presumptive taxation has deprived the exchequer of Rs.150 billions of rupees in the pharmaceutical sector alone.
• From 2003 to date, according to a conservative estimate, we have lost Rs. 50 to 70 billions worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life.

 

Claim of the authorities that wealth tax was useless as it did not contribute much to the exchequer (see government-fed report in Business Recorder dated 3^rd May 2008) speaks of the rigid target-oriented mindset that taxes are only meant to raise revenue. They forget that wealth tax may be an outdated levy in civilized countries of the world (after achieving the supreme goal of creating an egalitarian society) but was specifically introduced in the Sub-continent because of the tendency of third world nations to invest in unproductive areas as gold, real estate, bank balances or even cash tucked away in hidden vaults. It was meant to discourage hoarding of precious wealth and directing it towards constructive sectors and economic growth, for which innumerable incentives were provided in the Act. What to talk of ordinary people, many of our own political elite have been found to be owners of unfathomable wealth, safe in Swiss banks and foreign countries. If they claim to be true representatives of the people, they owe it to this country to bring back all this wealth and if not surrender to the nation, at least be prepared to pay tax, due on it.

 

Besides, it is a fallacy which we have proved many a times that tax authorities can investigate into unexplained investment, expenses etc. Section 111(4) of the Income Tax Ordinance has rendered them helpless as it allows the taxpayers to whiten illegally earned income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium of 1 to 2 percent of the entire proceeds!. It is irrelevant to delve into such details at this juncture but suffice to say that section 111 is no remedy vis-à-vis taxing enormous wealth generated from untaxed and/or ill-gotten income/wealth.

 

The nation desperately owes explanation from all those in power:

 

• Why the privileged are continuously being favoured and poised against their own poorer brethren?
• Why is it that ordinary taxpayers having income of more than Rs. 500,000 are required to submit annual wealth statements whereas rich and mighty politicians, who have exempt agricultural incomes have not yet made public their declarations of assts?
• Why do they hesitate from paying wealth tax but charge Rs.25 per litre tax on petroleum products knowing very well that it is massively consumed?
• Why not restore earlier subsidy on petroleum products and make good the loss by levy of wealth tax?
• Why not curtail unnecessary and extravagant expenses on the establishment starting from the President house, to fill up the void?
• Why not reduce the number of ministers/advisers instead of following policy of appeasement and doling out public offices as if this nation was not burdened enough by worthless and incompetent bureaucrats?

 

Despite the bleak scenario, there is always a ray of hope that wisdom will prevail and someone whose heart is fraught with patriotism in the true sense of this word will rid this nation of the neo-colonial subjugation to those who are constantly dictating their terms to a leadership that is oblivious to the people’s woes and misery.

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The writers (ikram@huzaimaikram.com), tax advisers, legal historians and authors, are visiting Professors of Lahore University of Management Sciences (LUMS).

 

 

Causes behind Graet Divide

Huzaima Bukhari & Dr. Ikramul Haq

Political economy is the theory of wealth and of how wealth is created and shared out in society. Its key concepts are production, distribution, exchange, and consumption. Historically, political economy is a response to the rise of capitalism and capitalist society. Its concepts are refined, redefined and added to as capitalism progresses from the mercantile or merchant capitalism of the sixteenth and seventeenth centuries, to the agricultural and manufacturing capitalism of the eighteenth century, to the industrial capitalism of the nineteenth century, from rise of unipolar world power, to quest for monopolies in the 21^st century.

In the 1790s, when “the labouring poor” become a major issue, economics begins to divide along partisan lines. Bread riots and the actions of “the mob” defend, in the words of the historian E. P. Thompson, a “moral economy” of customary rights, fixed prices, and the right to subsistence. While accepting the free market, Tom Paine advocates a programme of social services (family allowances, old age pensions, maternity benefits, workshops for the unemployed) in his Agrarian Justice (1795). In Pakistan even in 2008 these are missing! More radical is Thomas Spence’s Pig’s Meat (1793-5): private property in land is the root of all social ills, and people are urged to take the land into their own hands by force. On the other side, speaking as a commercial farmer, Edmund Burke in his Thoughts and Details on Scarcity (1795) defends laissez-faire, claiming that the “labouring people are only poor, because they are numerous”, that labour “is a commodity like every other, and rises and falls according to demand”, that wage-labour should be subject to the laws of the market, and that to force a farmer to pay his labourers a minimum wage is “but to make an arbitrary division of his property among them”.

Thomas Malthus in his Essay on the Principle of Population (1798) claims that population has a “constant tendency to increase beyond the means of subsistence” and that the existing poor laws, by encouraging labourers to have even larger families, are an incentive to idleness. The perfectibilitarians and meliorists are therefore deluded. Together Malthus’s “law of population”, the laissez-faire economics of Smith and Ricardo, and the utilitarian philosophy of Bentham encouraged an assault on outdoor relief to the able-bodied poor, leading to the abolition of the old Elizabethan poor laws in the Poor Law Amendment Act of 1834.

A socialist political economy emerges in Charles Hall’s The Effects of Civilization (1805), which announces a theory of exploitation. It continues in the writings of Thomas Hodgskin, in John Gray’s The Social System (1831), and in John Francis Bray’s Labour’s Wrongs and Labour’s Remedy (1839) which calls for workers’ cooperatives. Writing to Francis Place in 1818, Hodgskin states that capital “is merely the saving of labour” and of itself “produces nothing”. All the capitalist offers is his “power to command those necessaries of life, which are necessary to the workman while he produces something which is sufficient to replace what he has consumed during the time of producing and to leave an overplus for the capitalist”. In Labour Defended against the Claims of Capital (1825) he draws on Ricardo’s labour theory of value to show that wealth is produced by living labour, that circulating capital (wages) comprises no “stored-up stock of commodities”, and that fixed capital (tools, machines, etc.) remains useless and inert without living labour. In his Popular Political Economy (1827), he regrets that “sentimentalists” have decried political economy as “repugnant to the impulse of the heart” when, if it is a science, there can be no reason to despise it.

Marx’s Contribution to a Critique of Political Economy (1859) was followed in 1867 by the first volume of Capital. For Marx, bourgeois political economy fails to analyse the way in which the capitalist mode of production alienates the workers not only from the means of production, but from what they produce. Under conditions of capitalist competition, the commodity becomes a mysterious thing. This, says Marx, is “because in it the social character of men’s labour appears to them as an objective character stamped upon the products of that labour; because the relation of the producers to the sum total of their own labour is presented to them as a social relation, existing not between themselves, but between the products of their labour”. Thus, “a definite social relation between men” assumes, from their point of view, “the fantastic form of a relation between things”. In this topsy-turvy world, those who produce the wealth are unaware of their productive powers and of their relations with each other as workers. They relate to each other through that which is alien to them, namely the market, where their products are bought and sold. Thus the relations “connecting the labour of one individual with that of another appear, not as direct social relations between individuals at work, but as what they really are, material relations between persons and social relations between things”. Alienation, reification, and what Marx calls the “fetishism of commodities”, where the products of physical and mental labour appear to take on a life of their own, are part of Marx’s fundamental critique of an alienating, dehumanising economic system.

Study of Pakistan from this political economy perspective is very crucial as our society is moving towards a dehumanising characteristics unfettered and unchallenged. We are facing economic disparities, starvations, scarcity of eatables, and lack of essentials services. The Great Divide in today’s Pakistan is between the rich and the poor. The wealth of the nation is confined to a few families. The burden of taxes is increasing on the less privileged classes and the rich are not even ready to share a very negligible portion of their collossal wealth with the have-nots. The Election Commission of Pakistan has released a few reports in the past revealing the declaration of assets and liabilities of the elected members of parliament. Interesting, we still have no public disclosure of assets of top military brass, honourable judges and grade 21and 22 civil bureaucrats.

 

Looking at the Press reports, it is disbursing to see that some of our retired generals adjudged as the richest in the world by TIME magazine. Our elected representatives in the past proved that are far better at asset and wealth management than the fund managers and investment bankers of Pakistan. These people are extremely good at creating personal wealth but too bad to increase national wealth for the 160 million people of this country. The rich Prime Minister cum Finance Minister did not establish any charitable institute by giving donation out of his mega wealth. On the contrary, the National Police Foundation “allotted” two plots to him in E/11, Islamabad at through away prices of Rs. 1.1 million and Rs.0.24 million, which within a year time attained market price of Rs. 12.5 million and Rs. 1.5 million and now ten times the original price paid! Supreme leader of King’s party Chaudhry Shujaat Hussain is another exceptional wealth manager who had jump from net wealth of Rs. 74 million to Rs146 million just in 12 months. These two examples are just illustrative of the over all pattern of phenomenal increase in the wealth of ruling elite: powerful civil-military complex, greedy politicians and unscrupulous businesspersons.

 

According to a study conducted by the Centre for Research on Poverty and Income Distribution (CRPID), there are 63% of poor in Pakistan in the category of ‘transitory poor’. The State Bank of Pakistan (SBP) also admitted this fact saying in its annual reports that the standard definition of ‘transitory poor’ includes those households that are below the poverty line for most of the time but not always during a defined period. The rest of 32% and 5% of the population that subsist below the poverty line have been found to be ‘chronic’ and ‘extremely poor’, respectively. Chronic and extremely poor are households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13% and 21% of total non-poor (above the poverty line) were classified as ‘transitory vulnerable’ and ‘transitory non-poor’, respectively.  This portrays an alarming situation as more and more people are moving from transitory category to chronic category, courtesy inequitable distribution of wealth, unjust economic system and regressive tax policies. Rulers in Pakistan never showed any concern for redistributive economic and social justice as their political goal. One wonders if new government, badly trapped by the forces that matter in the land in various issues, is cognizant of this state of affairs and devising some practical means to overcome it.

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The writers (ikram@huzaimaikram.com), tax advisers, legal historians and authors, are visiting Professors of Lahore University of Management Sciences (LUMS).