Tax Justice – A case of Tax Responsibility Pakistan

Tax justice is a principle, about how taxes are raised and how taxes are spent. Taxes should be raised progressively, based on ability to pay, and spent according to need. Tax is not only government money, it is redistributed wealth, so a just tax system is one where money is not only raised fairly, it is spent fairly.

Because of aggressive tax avoidance and illegal tax evasion by companies has such a clear impact on human rights. If a government is starved of tax revenues, it cannot deliver to its people on development, health, education, housing, access to water and other human rights.  Indeed, Christian Aid said in a 2008 statement that the lives of 1000 children a day are being lost to disease and poverty in poor countries because of illegal tax evasion.  Action Aid noted in a September 2009 statement that poor countries lose more money to tax evasion by multinational firms than they receive in aid.

If I am asked to identify emerging business & human rights issues that will likely get much more attention in coming years, I would put tax avoidance at or near the top of the list.  The most respected local and international NGOs are giving this issue high priority.  Companies could eventually pay a reputational price if they ignore it.

For introduction purpose, there is a need to understand the significant elements of tax justice. Tax justice philosophy revolves around three areas i.e. progressive taxation, transparency and fairly spent. Progressive taxation characterize as including:

A)    Progressive Taxation

  1. Income taxes should have progressive rates (i.e., increase with higher rates of pay)
  2. General Sales Taxes (or GST) should operate with exemptions to protect the least well off in any society;
  3. Social security contributions should not be capped;
  4. Capital gains taxes should be part of all tax regimes, and should not offer significant tax incentives when compared to income taxes (i.e., no avoidance by restructuring affairs to characterize income as capital gains);
  5. Wealth or inheritance taxes should be in operation;
  6. Tariffs and trade taxes should used when needed to protect fledgling industry, natural resource exploitation or when they are cost effective alternatives to charges on the poorest members of a society.

Progressive taxation means that it is opposed to regressive taxation. Regressive taxation they characterize as including:

  1. Flat taxes;
  2. Income taxes with capped liabilities;
  3. GST without exemptions;
  4. National insurance regimes that cap contributions;
  5. Low rate capital gains tax regimes;
  6. the absence of wealth related taxation;
  7. Substantial allowances and reliefs available only to the well-off meaning that they pay lower than average real rates of taxation;
  8. Benefit systems that create high effective marginal rates of taxation.

B)    Transparency

 

In relation to transparency, the philosophy includes as:

  1. Relevant company details being made publicly available for inspection, wherever the company is incorporated in the world. This would include details of its constitution, ownership, management and accounts. This requirement would extend to all other entities created by law including charities, foundations, trusts, partnerships with limited liability as well as material entities run by individuals and partnerships without limited liability;
  2. Banning the use of all nominee arrangements whether for ownership or management;
  3. Wide disclosure by groups of companies of accounting information;
  4. All tax accounting to be made available to tax authorities;

Tax avoidance undermines the ability of the tax system to fulfill its core purpose: to raise revenue to fund public services and to redistribute wealth. Indeed, how companies made such tactics that:

1.   Heavy Budgets for advertisement & publicity

2.  Cash Transactions

3.  Foreign Remittances

4.  Provision of Bad Debts

5.  Loss on sale of Securities & Shares

6.  Depreciation on Assets

7.  Provision of Non Performing Loans

8.  Charge of Gratuity

9.  Vehicles to Directors  & Executives

10. Zakat & Charity

11. Under Invoicing for Imports

12. Over Invoicing for Exports

13. Double Accounting System

14. Loan to Directors  & Executives

15. Travelling & Transportation to Directors  & Executives

A case of Pakistan

Unfortunately as the problem of tax injustice is so big and complex in Pakistan, so it is hardly being touched by CSOs. There are serious gaps and distortions in taxes and their regulations which infer grave violations and exploitations of humans and financial resources in Pakistan.

The Pak tax system has been largely dependent on Indirect Taxation. Even today, the total Indirect Tax Collection (Sales Tax, F.E.D & Customs Duty) is much greater 61% than the

Total Direct Tax collection 39%. In the legacy system it took us 43 years to collect the first Rs. 100 billion (1947-48 to 1990-91); Within the next four years, this amount was doubled and crossed Rs. 200 billion in 1994-95; Another seven years, the collection crossed Rs. 400 billion in 2001-02; In the next five years CBR exceeded the target of Rs. 835 billion for 2006-07. In 2007-08 & 2008-09 FBR Collection exceeds Rs 1Trillion.

 

                                                     Pakistan Tax Conundrum

Econ Sector Share in GDP (%) Share In Taxes (%)
Agriculture 20.2 1.2
Mining and Quarrying 1.9 4
Manufacturing 17.1 62.2
Construction 2.2 2.9
Electr & Gas Distribution 2.4 5.3
Transport, storage and Comm 13.8 4.5
Wholesale & Retail trade 16.9 2.8
Finance and Insurance 3.2 3.9
Ownership of Dwelling 2.5 0.3
Public Admn & defense 5.2 5
Services 8.3 7.8

 Source: M. Munir Qureshi made presentation on tax administration in Pakistan in 2011 at Lahore Tax Academy

Pakistan Selected Economic Indicators

    Baseline Program Comments
Real GDP at factor cost Growth (%) 3.3 2.5 Running  tight fiscal and monetary policies will compromise growth-tough political economic decision
Consumer prices (period average) Growth (%) 8.8 7.9  
Consumer Prices (End of Period) Growth (%) 10.5 10 Strict NFA and NDA targets along with reign on note printing will result in subdued inflation, although year average seems too optimistic considering tariff rationalization and new gas levy
Gross Saving % of GDP 12.5 14.3  

Government

% of GDP -4.5 -2.2 There is some hope to spur investment by reducing deficit
Revenue and grants % of GDP 13 14.4 Some stringent measures to be announced to enhance revenue, plus higher grants to be disbursed with IMF’s nod
Expenditure % of GDP 20.8 19.9 The idea is to do away with subsidies by restructuring PSEs
Budget balance (including grants) % of GDP -7.8 -5.5  
Primary balance % of GDP -3 -0.9 Too ambitious target. Compromised growth is the repercussion. Good in the long run.
Total General government debt % of GDP 69.2 66.6 Lower deficit means less burden on debt- good omen
Net foreign assets Growth (%) -0.7 3.9 This implies some higher program loans by other multilateral agencies after acceptance by the Fund
Net domestic assets Growth (%) 18.4 12.2  
Broad money Growth (%) 17.7 13.8  
Reserve money Growth (%) 14.2 13.4  
Private credit Growth (%) 8 8.5 Restricting government borrowing as Fund expects less deficit and expects government to rely a bit on non-banking channels. This will lower inflation and give some room for private credit growth
Exports Growth (%) 9.6 11.4  
Imports Growth (%) 7.3 6.9  
Current account balance % of GDP -1.6 -0.6  
REER   -4.8 -7.7 Some boost in export s and lower imports expected as currency may depreciate along with higher interest rates to curb domestic demand
Gross reserves ($ mn) 2283 9566 A healthy amount is anticipated by other multilateral agencies along with IMF money and that may help attract some foreign investment to flow in as well
GDP at market price (Rs bn) 25415 25351  
GDP at market price ($ mn) 235.6 229.9 Currency is expected to be at Rs 110/USD with the program as against Rs 108/USD without it

 

The above illustrated facts demand a broad tax justice policy in Pakistan which identify and remedy the deficiencies of existing tax policy framework. Indeed, promotes more local campaigners for tax justice and stimulate and organize research and debate on tax havens cause poverty. Moreover, there is strong need to work on tax justice agenda which will be promoted among global institutions such as the UN, The World Bank, IMF, the G20, OECD and EU.

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One response to “Tax Justice – A case of Tax Responsibility Pakistan

  1. my dear,jaffery sahib i agree with ur writing it is a good struggle, sir, i am in two fields one is journalism,editor of international law magazine the LORDS and no two i am tax lawyer since 1999. my dear, i agree with ur new visions in tax arena, in my view there should be a political will also to collect the tax from the big crocodiles first,and for the political will there is a need of an honest prime minister and his cabinet, the question arises that whether we have this? iwill wait for ur reply and plz write for our magazine also if possible. thanks.

    regards.

    M.Zulfiqar Ali khalil Advocate high court & supreme Court,corporate lawyer.advisor karwan social work organisation KPK, you can contact on email. Tehkalay@gmail.com and cell:03219081325 and facebook is lawyer zulfiqar khalil,

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