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Oversight of lawmakers’ tax record

March 11, 2013

IN a bold move to cleanse parliament of tax evaders and loan defaulters, the Election Commission of Pakistan has made it mandatory for the candidates in the coming elections to declare that they have paid income (including farm earnings) tax over the last three years.

Pakistan’s parliament is reputed to have as many as 70 per cent of lawmakers who refrain from paying taxes and utility bills. The ECP move will go a long way in improving the tax culture in the country. In fact, the members of parliament should have set an example of themselves as honest taxpayers.

The new nomination paper contains an 18-point declaration which, apart from meeting the needs of Article 62 and 63, requires of the would-be candidate to declare on oath: “I solemnly declare that I have filed all my income tax returns along with wealth statements and wealth reconciliation statements that were due during the last three years and no tax liability is outstanding against me on the date of filing of this nomination form-1.”

He has to further declare that no company of which he is a director or a shareholder of more than 10 per cent paid up capital is a tax defaulter; no applicable tax, including agricultural income tax, is payable by him under any federal or provincial law on the date of filing of his nomination form.

The draft nomination paper, which has yet to be approved by the government, also seeks information about National Tax Number, foreign trips of the candidate and his spouse and dependents, contribution given to or money received from the political party, and statement of assets and liabilities, etc. Since many of the existing parliamentarians have not filed the mandatory tax returns during the last three years, they will not be able to contest in the coming elections under the new rules.

This and other ‘harsh’ provisions, therefore, are likely to be amended to make them acceptable to most of the legislators when the government finally approves the nomination paper. Recently, the government and opposition had struck a compromise to reject the 30 days scrutiny period for nomination papers and verification of the degrees of 249 MPs. Such a compromise could also be worked out in the case of tax evasion.

The Election Commission, however, intends to go a step further. It wants to make public details of income, expenses and taxes declared by the candidates in their nomination papers and even invite objections against any possible concealment of facts. It will help voters know about the credentials of the candidates in their constituency so that they are able to choose an appropriate person to vote for. The candidates who give false information about their financial status would be disqualified even after the expiry of the period for scrutiny of nomination papers.

Governor, State Bank of Pakistan, has assured the ECP that the bank will provide details of loan defaulters of the banks. The FBR has also promised to provide a comprehensive list of tax defaulters and is willing to place some of its officers at the disposal of the ECP to scrutinise entries in nomination forms related to tax payments.

On December 10, Dr Abdul Hafeez Shaikh, the then finance minister, told the National Assembly that the government had granted tax exemptions and waivers to certain individuals/ groups and entities worth more than Rs650 billion during the past four years. The figure, which came as a surprise to the MNAs, is stated to be larger than the total foreign aid the country has received over the same period, and also larger than the amount borrowed from the International Monetary Fund.

The same figure, Rs650 billion, has been mentioned in a report titled, Taxing Pakistan prepared by the US International Growth Centre, and presented to the participants during a workshop organised by the Federal Board of Revenue in Islamabad on February 23. The amount is, in fact, the cost of the tax exemptions from taxation legally granted in the past four years. Some six million elite tax evaders have been identified and among them 2.5 million do not even have the National Tax Number (NTN) and 700,000 of them do have NTNs but do not file tax returns.

According to the report, the total cost of income tax exemptions during past four years exceeded the defence budget of 2012. The exemptions include capital gains from the sale of real estate unless that is the main business activity of the seller, income from mutual funds, investment companies or educational institutions, agriculture income (unless the taxpayer earns more than Rs80,000 of non-agriculture income), pension funds and export of information technology.

While these exemptions have narrowed the income tax base to a large extent, the availability of tax credits provides an opportunity to high-income groups to reduce the size of their tax liabilities. The report says the expected revenue from the agriculture income tax, if paid during 2010-11, would have been Rs80 billion. However, the fact remains that 3.1 per cent of the government revenues are collected from the income tax on salaried individuals, many of them belong to lower income groups. Besides, 92.2 per cent of the labour force does not make enough money to pay income tax under the current income tax regime.

After having failed to get the tax amnesty scheme passed from parliament, the FBR Chairman, Ai Arshad Hakeem, has now come up with his ‘Plan B’. Under the plan, the revenue body will send notices to 300,000 biggest tax evaders in a bid to broaden the tax base and collect Rs90 billion. Five per cent of this amount will be distributed among the FBR staff as reward money.

President Zardari, Hakeem says, would issue an ordinance to suspend the computerised national identity cards of these identified tax evaders if they fail to comply with the FBR notices. It is shocking to note that only 750,000 persons are registered with the income tax authorities. On the other hand, 100 companies alone pay 82 per cent of sales tax and that the taxes paid by one tobacco company are more than what the entire salaried class pays as income tax.