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).
