Forget politics. It’s inhuman to burden the crushed ordinary folks with additional levies when the government fails to deliver on its basic responsibility of delivering amenities and security. It’s about time to revisit the highly regressive tax framework and tap into piles of unearned wealth accumulated by the elite classes in Pakistan.

Pressed by circumstance, the government did something that failed to grab headlines or capture public attention. An amendment in the Finance Act 2022 ruled to tax capital gains on the sale and purchase of property, including gifted and inherited estate.

Experts believe that, in effect, the government has revived inheritance tax through the said amendment. Some opposed the move declaring the capital gain tax on a gifted and inherited property a violation of the Constitution. Corporate Pakistan saw the step as yet another attempt to pile additional tax burden on people and companies already in the net. It repeated its appeal to broaden the tax net instead.

The fact is that for 29 years, Pakistan had an inheritance tax called Estate Duty Act 1950. A quick glance at the said Act revealed that assets under Rs100,000 were exempted at the time. However, the tax rate was determined by the legislature on an annual basis in the Finance Bills.

Businessmen weigh in on whether the capital gain tax on a gifted and inherited property is progressive or burdens those who are already over-taxed

General Zia ul Haq abolished the Estate Duty Act 1950 soon after assuming power as he projected it to be in conflict with the Islamic Jurisprudence.

The information on how much revenue this tax actually mobilised was not readily available. The said levy was completely forgotten in the relevant circles and faded from the collective public memory. When approached, the current crop of tax lawyers and officials were caught unaware.

Tariq Chaudhry, Member of Appellate Tribunal Inland Revenue, Lahore, who held multiple important positions in the Federal Board of Revenue (FBR), was an exception. He shared the online link to the 1950 Act that he said was repealed in 1979 “without any debate or deliberations”. For further details, he pointed towards Pakistan Legal Decisions (PLD) federal statutes in lawyers’ libraries.

M Abdul Aleem, Secretary General, Overseas Chamber of Commerce and Industry, recognised the utility of inheritance tax in developed countries but said that Pakistan, with roughly over 40 taxes, including provincial and local ones with dismal recovery record, is not yet ready for it.

“A less than 10 per cent tax-to-GDP ratio is insulting and reflective of our ability and capacity to collect taxes. Traders, the feudal class, realtors and other rent seekers are exploiting the situation. No more new taxes, please. Reduce the number of taxes and focus on a full collection without exceptions.”

Saroop Ijaz, a prominent lawyer associated with the Human Right Watch, rooted for inheritance tax and dismissed grounds as flimsy for its opposition. “Zia ul Haq regime’s scrapping of the Estate Duty Act was part of a larger attempt to take an about-turn in the nation’s march towards progressive taxation.

“Other examples include gift and capital gain tax. It was yet another example of the cynical use of religion to perpetuate an elite capture. Zia regime also blocked the decision made in 1977 by the Parliament to tax agricultural income and tax large and absentee landlords. His decision belie the spirit of Islam and enabled the worst form of elite-led crony capitalism.”

Ahmed Qadir, who teaches Economics at the Lahore University of Management Sciences, commented: “in his 2013 book ‘Capital in the Twenty-First Century’ Thomas Piketty, a French Economist, proposed a wealth tax to help reduce inequality and increase social mobility. He argued that inherited wealth should be taxed at a higher rate than earned wealth to create a more egalitarian society. He also proposed a global wealth tax to be paid by billionaires and redistributed to those in need.”

Musadaq Zukqarnain of Interloop, amongst a few model entrepreneurs, opined: “in societies where tax compliance is good, inheritance tax can add to state revenues. We must first bring the sectors currently out of the tax net into the net and move towards documentation of the economy. Inheritance tax will mainly hurt the existing taxpayers. Others will find ways to bypass it.”

An FBR officer shared his take: “entry number 46 pertaining to estate duties was dropped in the 4th Schedule by the 18th Constitutional Amendment during the PPP rule in 2010 as the tax on the value of immovable properties was a provincial subject, and an estate duty tax was in conflict with the Muhammadan inheritance law.”

Dr Saad Shafqat, a reputed neurologist with a keen interest in socio-political issues, said: “we have a working age population of 100 million, out of which hardly half are gainfully employed, and barely 2m pay direct taxes. A reckoning was long overdue. Stringent International Monetary Fund terms are actually a huge favour as it has forced us to consider fundamental adjustments.”

In much of the developed world, inherited wealth beyond a notified threshold is taxed progressively, with the maximum tax at quite a high rate. In the case of Japan, the maximum rate of inheritance tax is cited to be as high as 75 per cent of the value, online background research revealed. India abolished the inheritance tax in 1985, and currently, except for Iran and Turkiye, none of the regional nations Bangladesh, Sri Lanka, Saudi Arabia, Malaysia, Qatar, etc, have this tax.

The inheritance and gift tax rates vary between 5-65 per cent in Iran and one to 30pc in Turkiye.

The writer can be reached at asubohi@hotmail.com

Published in Dawn, The Business and Finance Weekly, February 20th, 2023