Presidential ruminations or recriminations?
Addressing the 20th Convocation of the National Defence College (NDC), President Farooq Ahmad Khan Leghari expressed serious reservations about the taxation system of the country, to quote “a system that requires the political leadership to impose additional taxation simply to offset its own “drag” is not worthy of keeping. The tax collection machinery needs a total overhaul and the structure of taxes must be changed to achieve at least unitary elasticity. We require expansion in the tax base, plugging of loopholes, better tax administration, lowering of statutory rates, documentation of the economy and other steps to modernize the tax system. We fail to achieve deficit targets because the tax efforts get swallowed by an inefficient, corrupt or leaking system”, unquote. Brave words indeed by the Pakistani Head of State, an extremely severe indictment of the prevailing system of taxation that shows up how ineffectual successive governments, military and political, have been in dealing with this major problem. Mismanagement, maladministration and inefficiency have all been dwarfed by corruption, the result is that the entire fiscal and monetary balance of the country is under threat of disruption. Some doomsday soothsayers are even predicting a “crash” of the economy, one opines that even if we do not “crash” but “slide” we are in deep trouble, almost the entire burden will be borne by the common man.
To understand the deep financial hole we are in because of the failure of our taxation machinery, let us go over thought by thought the Head of State’s speech at the NDC, the first being “a system that requires the political leadership to impose additional taxation simply to offset its own “drag” is not worth keeping’” unquote. What does the President mean by the term “its own drag” as applied to political leadership except that it is critical of their quality of their management? In aviation terms, there are four forces acting on an aerofoil (aircraft), thrust, drag, lift and weight. In economic terms, the thrust is given by the “engine” of government which is fuelled by tax collections, “lift” may be equated with “development” when a portion of the collected taxes are earmarked to improve the socio-economic infrastructure of the State. “Weight” can be equated to the built-in inertia of the massive government machinery that is subject to the force of gravity. The President has talked of the political leadership imposing additional taxation to offset its own “drag”. In layman’s language, this “drag” is created when governments are inefficient and corrupt, a nation (like an aircraft) can only “fly” when the two positive forces are greater than the two negative forces. Since the government in power is a PPP regime headed by his former party boss, Ms Benazir, the unambiguous message conveyed to the senior military and civil officers assembled at the NDC, was that the current government is putting additional burden on the common man because of its own glaring inefficiency and corruption. This is a critical period for this regime, was this observation of the President just another “horses for courses” rhetoric meant to comfort a specific audience so as to lull their aroused interest back into complacency, a complacency bordering on the criminal that has allowed corruption to be institutionalized as a part and parcel of democracy in the upper reaches of leadership?
The Head of State has made a scathing criticism of the machinery of tax assessment and collection, to quote “we require expansion in the tax base, plugging of loopholes, better tax administration, etc” unquote. Expansion of the tax base directly refers to the fact of 800,000 individuals (almost all from urban areas) bearing the revenue requirements of 120 million people. The tax net must be lowered on the rural-based citizens who presently do not pay any direct taxes. Allowing the benefit of international prices of products to the farmers has been justified by increase in sales, confirming their contention that the agriculture sector was suffering from unfavourable terms of trade. On the other hand it also increases the justification of bringing the farmers within the tax net. Income and Wealth Tax may be a federal subject and agriculture is a provincial matter but this is rather a lame excuse not to tax this sector and to let feudalistic elements continue to benefit on both counts, increased profits and no taxation. The Federal Government has repeatedly indicated its determination to impose income/wealth tax on agriculturists but the Provincial Governments have not responded with any real will or effectiveness. Moreover, it must not be expected that just by this method alone, Pakistan’s revenue deficit will be finally overcome. The maximum estimates (without snags and defaulters) expected from rural based citizens is Rs.28-30 billion in the face of a Rs. 200 billion requirement in increased revenues. To overcome this the Federal Government has rightly gone in for increased documentation of commercial ventures across the board but is adopting the wrong method by keeping it under a Federal purview and not de-centralizing it to the Provinces. The Federal Government apportions to the various Provincial Governments around Rs.100 billion plus as their share of Federal taxes, customs and excise duty and approximately Rs.100 billion is earmarked for development of the socio-economic infrastructure in the country. What the Federal Government can do is to decentralise taxation on a specific basis i.e. keep the salaried class and corporate taxes under its aegis but allow the Provincial Governments to tax the self-employed, whether of the agriculture class or non-agriculture because they are better placed to do the tax assessment and collection of the self-employed living within the Province. Collecting the Income and Wealth Taxes of the self-employed directly, the Provinces do not need any share of the revenues collected by the Federal Government. On the same analogy, dedicated development work in Provinces should be carried out by the Provinces themselves except where the requirement is of the country as a whole i.e. Federal projects such as Motorways, rail lines, telecommunications, etc.
The Federal Government has decided to “privatise” taxation on an experimental basis, beginning with Liberty Market in Lahore, believed to have been given over to a company owned by MNA Ghurki. Criticism could have been avoided by employing a private company of credible reputation. Association with Ghurki makes the scheme seem to be no better than “Bhatta” (protection money), most of it could land up in Ghurki’s deep pockets (and his mentors in the Federal Capital) instead of the Federal coffers. Instead of progressing into the 21st century we are bringing back into fashion the feudal system of medieval times when feudal lords collected taxes from their peasants and paid over a requisite share to the monarch. Specialised private companies should verify whether the Income Tax/Wealth Tax Returns filed by individuals/entities in a particular area are correct or otherwise, being paid on a direct renumerable basis by a percentage of the additional tax assessed, if found correct. The tax collection should be left to the government machinery as there is every likelihood of abuse of power on the pattern Ghurki is already rather infamous for. If we have to “privatise” taxation why not as a first test case commission private companies to carry out verification of the returns of revenue officials, paying the companies a percentage of the additional tax assessed, if found correct. One particular senior revenue official in Karachi is awash in “Chughtai” paintings, each worth a cool Rs.1 million plus, this exercise could conceivably net the Federal Government a minimum of Rs.4-5 billion each year, 10 times the Rs.400 million GoP expects to collect by taxing the perquisites (perks) of the salaried class.
The Head of State is an honourable man who seems to have recently begun to comprehend that the Presidential seat of power requires him to rise above party lines and restrain the excesses of government from destroying the State of which he is head of. This is surefire method of not being nominated as the Party’s candidate for a second term. As the ultimate protector of the common citizen of the country from the predators that abound within any government whether they be political or bureaucratic, this is a risk he has to take. All the wrongs cannot be laid at the doorstep of the Bhutto regime but in any environment where corruption is endemic and is now almost an open practice acceptable in the upper reaches of government, down the rung it gathers momentum as everyone and his uncle climb onto the bandwagon to take advantage of the “anything goes” atmosphere. The Head of State is looking more Presidential not only in his ruminations but also in his recriminations but he must do something more concrete instead of indulging in mere rhetoric if we are to avoid economic apocalypse. The President has some real pluses under his belt, the most important achievement being to spare us from the naked ambitions of the bespectacled “great warrior” who had never heard a shot being fired in anger while in uniform and as behoves a rank coward continues to fight his battles by proxy from behind the scenes by spreading false propaganda and disinformation about his “enemies”. It was Leghari who balked from being forced to “de-notify” the Chief Justice and it is the same Leghari who is now talking about the “drag” of the present political leadership creating economic burden for the common citizens. In front of the knowledgeable and precocious NDC audience, the President spoke his mind as a Head of State should, should we expect that he is going to do something about it?
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