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RESEARCH PAPER ON

SELF SUFFICIENT PAKISTAN

BY:MUHAMMAD MUNIR QASIMmmqasim@gmail.com

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ACKNOWLEDGEMENT

It was a wonderful learning experience for me of doing research on a very challenging topic. Probably no one could ever bring forward a recipe of making the country self-sufficient. This study leads to new beginning of Countrys and my futurealike. In conformity of my oath, I considered this study as a chance of serving the nation. The study may exceed the given words limit but due to sensitivity and objectivity of the research, it was considered more appropriate to cover all necessary aspects of the research for the sake of completeness. Famous Scottish Physicist James Clark Maxwell said, "What is done by what is called myself is, I feel, done by something greater than myself in me". Having done this research work, I have the same kind of feelings. This preface provides a welcomed opportunity and chance to acknowledge the help and assistance of people who with their intellectual insights and constructive criticism have helped me to develop this research. I would like to express my sincere gratitude to Directing Staff of Air War College for their valuable supervision, never-ending support and encouragement during this process. I am thankful to Gp Capt Zafar ul Asim, Senior DS for giving me a marvelous opportunity of presenting my original research based work before people of high intellect at Air War College. I am extremely thankful to Sqn Ldr Rabbia Usman Rab, DS English for her able guidance during the course of preparation of this research paper. As the subject matter of the research paper relates to International Relations also, I had to seek guidance from Flt Lt Zahid Yaqoob as well on few matters. He has always been very helpful with his rich knowledge and positive response to support me in IR related areas, covered in this paper. Although all the research work is done by me single handedly yet it remained a fact that able guidance of all faculty members of Air War College was a driving force for me to complete my research work. Acknowledging their support, I am thankful to all of them for sparing their time and sharing their rich knowledge.

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EXECUTIVE SUMMARY

1. A country of 180 million people having four seasons and all types of crops, rich in natural resources, exporter of best brains to rest of the world and first Muslim nuclear power is at the verge of default. Fiscal deficit of the country during 2012-13 was Rs 1.105 Trillions1 and Rs 1.651 Trillion2 in 2013-14. As per State Bank of Pakistan, country is under total debts of Rs 17,355.60 billion3. Therefore, every Pakistani is under debt burden of Rs 96,420/-. Budget deficits are on persistent increase due to narrow tax base and growing expenditure. The gap is being filled through external debts at the cost of so called war on terror and printing of more currency notes. Former is causing a civil disobedience like situation in the country due to anti US sentiments of general public and later is causing persistent price hike and devaluation of local currency.

2. Although tax rates were at persistent increase during last five years yet FBR could never meet its targets. In a latest report of SBP it said that Although there has been a consistent gap between FBRs budget targets and actual outcomes in the last few years, but FY13 gap of Rs445 billion is exceptionally high. In fact, this is more than the cumulative shortfall of Rs349 billion during the last five years. Weak tax generation capacity is the fundamental economic problem faced by Pakistan. There is an urgent need to initiate and implement comprehensive tax reforms4. Comprehensive tax reforms had been done in past years as well but results of those so called reforms as presented above are obvious. It is a proven fact that FBR and its tax collection system is a time tested failure. .

3. Albert Einstein said Insanity is doing the same thing over and over again and expecting different results. He further said We cannot solve our problems with the same thinking we used when we created them. Since last 66 years we are relying on the same old taxation system. Why cant we turn the table over and think differently. Main idea of the research is based on introduction of new approach toward tax collection with an aim to obviate all economic problems of Pakistan. Apparently, it sounds weird that this research can reveal something which was beyond 1 Budget in brief (Page 48), published at http://www.finance.gov.pk/budget/Budget_in_Brief_2012_13.pdf2 Budget in brief (Page 47), published at http://www.finance.gov.pk/budget/Budget_in_Brief_2013_14.pdf3 Pakistans Debts and Liability Summary, published at http://www.sbp.org.pk/ecodata/Profile.pdf (Top right figure).4 Para 60 of monetary policy statement, November 2013 published at http://www.sbp.org.pk/m_policy/2013/MPS-Sep-2013-Eng.pdf.

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comprehension of best brains of Pakistan but logical analysis, based on official financial facts/figures and established economic rules will prove that self sufficiency is not far away if intention of Government exits. The nation is capable of being self sufficient and free of all local and foreign debts with in short span of time.

4. Through all its efforts FBR collected Rs 1939 billion5 Tax revenue during FY 2012-13against projected expenditure of Rs 3110 billion6. In this research, it will be established that Taxesamounting Rs 16088.24 billion per year can be collected without levy of any of the prevailing direct or indirect tax except the one which will be proposed. This amount will be sufficient to pay off External Debts of Rs 6406 Billion7 and Internal Debts of Rs 10950 Billion8 with in a period of one and half yearsafter setting aside Budget of Rs 3985 Billion9 per year. Just after one and a half years of implementation of proposed taxation system, country will be having surplus of Rs 6850.87 Billion and it will be a debt free, self sufficient country.

5 Page 5 of Year Book issued by FBR and published on http://download1.fbr.gov.pk/Docs/2013923169417516RevenueDivisionYearbook2012-13(20Sep13)Final.pdf6 Page No 6 of Budget in Brief 2012-13. http://www.finance.gov.pk/budget/Budget_in_Brief_2012_13.pdf7 As published by SBP on http://www.sbp.org.pk/ecodata/Profile.pdf8 As published by SBP on http://www.sbp.org.pk/ecodata/Profile.pdf9 Chapter 2, Para 2.1(a) of Budget 2013-14 published by Min of Finance on http://finance.gov.pk/budget/Budget_in_Brief_2013_14.pdf

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GLOSSARY

Self Sufficient Survival on domestic resources without inflow of debts.

IMF International monitory fund; formed to fund the needy countries specially to maintain favorable balance of payment.

Balance of payment Balance between costs of imports and proceeds of exports.

Debts Loans obtained internationally or locally.

Terms of Debts Conditions on which a loan is granted.

GDP Gross Domestic Product; a basic economic growth indicator. It is sum total of value of all goods and services produced by a country in a year. It is calculated by adding incomes or expenses of country for a particular year.

GDP = Consumption + Investments+ Govt Spending + (Exports-Imports)

Inflation Rate of increase in price level and decrease in purchasing power.

Fiscal Year A period of one year counted for calculation of economic indicators. Usually it is counter from July to June next year.

National Income Value of goods and services produced in a year within country and outside of the country.

Per capita Income. National Income divided over population of the country.

FBR Federal Board of Revenue; a department established for collection of federally administered taxes.

Direct taxes Taxes levied on income or on the base of income e.g. Income tax, Workers welfare fund, workers profit participation fund, capital value tax etc.

Indirect taxes Taxes which are added to cost of goods or services. e.g. Sales tax, Excise duty and custom duties etc.

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Total Tax rate Amount of taxes and contributions payable by businesses after accounting for allowable deductionsand exemptions. It excludes withholding taxes, Value added taxes and Services taxes.

Withholding Agent A person or company who receives tax on behalf of Government and deposits into national treasury.

POS Machine Point of Sale machine is a modern cash register used by shops and outlets for keeping their sale and tax record. ePOS is Point of Sale machine connected with tax collecting authorities database.

Electronic Funds Transfer at Point of Sale (EFT/POS)

EFT/POS is an online system that involves the use of plastic cards in terminal on merchants premises and enables customers to transfer funds instantaneously from their bank accounts to merchant accounts when making purchases. Commonly used in Australia and New Zealand.

MNOs Mobile Network Operators.

ICT4D Information and Communication Technologies for Development.

e-Money E-money means electronically, including magnetically, stored monetary value in any device or instrument or server as represented by a claim on the issuer, which is issued on receipt of funds for the purpose of making payment transactions and which is accepted as a means of payment by persons other than the issuer. This includes e-money stored in a device such as a SIM card or a server and accessible via mobile, telephone, internet or other access devices, cards, and other similar products but excludes any electronic means to only permit transfers to/from a deposit or current account10.

Bank Account Based e-Payment Service

It is a pre-funded electronic retail payment service that may be offered by authorized entities to allow customers to effect payment from pre-funded accounts. A requirement of each Bank Account Based Payment Service is that the aggregate balances of all customer

10 Guideline for Electronic Retail Payment services, issued by Bank of Jamaica. http://www.boj.org.jm/uploads/news/guidelines_for_electronic_retail_payments_services_-_1_february_2013.pdf

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funds be held in Bank accounts with one or more licensed Financial Institutions.

Telephone Banking Telebanking is a form of virtual banking that deliver financial services through telecommunication devices. Under this mechanism, the customer transacts business by dialing a touch-tone telephone connected to an automated system of the bank. This is normally done through Automated Voice Response (AVR) technology.

PC Banking A service used by bank account holder to access his bank account from his PC and to make fund transfers over a secured network.

E-Wallet It is a piece of software which resides either on web server cell phone or smart card. Amount is loaded into e-wallet by making real payment and used for online shopping. On completion of a transaction, the amount travels from payer wallet to payees wallet.

Smart Card A plastic card embedded with a chip on it to store personal information of card holder. It can store 10 times more data than a magnetic tape embedded card. An e-wallet can also reside in chip of smart card.

Intranet Works like internet but limited to a selected community. Web pages on Intranet are not accessible through Internet and vice versa.

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CONTENTS

Page NoINTRODUCTIONBackground / Introduction 12Statement of Problem 13

Under utilization of natural resources 13Low per capita Income 13Heavy Foreign Debts 13Low Tax Revenues 13

Significance and Scope of research 15Literature Review 16Taxation in Pakistan 19

Income Tax 19Workers Welfare Fund 19Workers Profit participation Fund 20Capital Value Tax (CVT) 20General Sales Tax (GST) 20Federal Excise Duty 20Customs Duties 20Per Capital Revenue and Expenditure 20

Self Sufficiency Recipe 22Integration of Mobile networks and banks 23Integration of Banks with State Bank of Pakistan 25Connectivity of State Bank Of Pakistan 27Connectivity of NADRA Database 28

e-Taxation System 30e-Tax Regime in Pakistan 32

Step 1: Legislation for e-Tax and Electronic Retail Payment Services

32

Step 2: National Intranet 32Step 3: Uniform Banking Systems 33Step 4: Linking of NADRA Database with SBP 33Step 5: Opening of Bank Accounts 33Step 6: Linking of MNOs with SBP Database 33Step 7: Remote operation of Bank Accounts 34Step 8: Replacement of CNICs with Smart Cards 34Step 9: Inflow of Black and laundered money in the system

34

Step 10: Launching of web portals / pages on Intranet 35Step 11: Induction of Cash Coupons 35Step 12: Alteration of ATMs (Hardware and Software) 36Step 13: Provision of coupon readers and Smart Card Readers

36

Step 14: Discontinuation of paper money and coins 37e-Tax Regime in action 37

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e-Tax System : Revenue Expectations 38Per Capital Income approach 38Money in Circulation Approach 39

Comparison of expected revenues and liabilities 39Benefits of e-Tax system 40

Heavy Tax Revenues 40Ease of Compliance 40Correct calculation of National Income 40Decline in general price level 40Boom in business and employment 40Equality 41Revival of banking sector 41Recovery of utility bills 41

Recommendations 42Conclusion 44

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INTRODUCTION

1. Pakistan has never been self sufficient since its inception. This was not due to the reason that Pakistan was not having sufficient recourses. Pakistan was and is having enough resources required to exist like an honorable self sufficient country. Unfortunately the country was trapped in to vicious circle of debts mainly by the western countries and IMF due to their malicious intentions of imposing their agenda in the name of so called terms of debts. This external phenomenon was strengthened by internal incapability, corruption and disloyalty of ruling elite of Pakistan. Resultantly the country kept on depending on external and internal debts over period of few decades. The stage has come where the country is not able to pay off even interest on debts of existing loans yet fresh loans are in pipeline. As per Eatzaz Ahmed11 The current state of Pakistans economy is characterized by low gross domestic product (GDP) growth, high inflation, lack of investment, economic mismanagement, especially in the energy sector and continuing corruption. Although the views of Mr Eatzaz Ahmed were published in 2011 yet they are valid as of today because, the country is persistently facing economic decay. As per economic survey of Pakistan for fiscal year 2012-13 published on 11 June 2013, Pakistan will be under debt of Rs 14 trillion by the end of this fiscal year. Dividing over population of 180 million, it comes to Rs 77,777/- per head. Per head debt share was Rs 57,000/- in 201112. It is worth-mentioning that as per public debt limitation act (an act passed by the parliament), Pakistan cannot keep debts more that 60% of its GDP. By the end of March 2013 this percentage was 59.5% and it will be 62% by the end of current fiscal year13.

2. Besides, Pakistan is facing many problems. Commonly discussed and highlighted problems include Poverty, Illiteracy, Corruption, Unemployment, insufficient health facilities, Power crises, War on terrorism, Declining exports, Inflation, Tumbling stock-market, Lack of tourism and Losses in business sector. Every economist, politician or analyst closes his article, speech and column / talk show with more or less the same bottom line that we should alleviate the poverty; we should improve the literacy rate; we should stop the corruption; we should create more jobs; we should build more hospitals; we should produce power; we should deal with terrorism; we should boost the business sector etc. If we analyze, none of these golden wishes can be fulfilled without necessarily required funds. The main source of funds generation is taxes. All types of direct and indirect taxes rates have been increased but no considerable positive change is observed in the economy. When conventional methods fail, something unconventional is direly needed to be done to obtain ground breaking results. The research deals apparently with only one problem; generation of surplus funds but actually it will deal with all the problems mentioned in this paragraph.

11 Professor of Economics and Dean of the Faculty of Social Sciences, Quid-i-Azam University, Islamabad (The Lahore journal of Economics, September 2011).12 Tribune 2 Feb, 2011.13 Tribune 12 Jun 2013.

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STATEMENT OF PROBLEM

3. The statement of problems is 27th biggest economy of the world and only nuclear power in Muslim world is on the verge of default; how Pakistan can be made self sufficient? The research comprises provision of solution to all economic problems of Pakistan. Major challenges being faced by Pakistans economy are the main target of the research. It is a long list; however some important economic problems of Pakistan are listed below:

(a) Under utilization of Natural Resources:- Natural resources include water, coal, gas, oil, precious stones and precious mettles etc which are in ample quantity in Pakistan but could not be exploited due to lack of funds. 23% of total land is uncultivated. Water is being wasted due to lack of dams. No dam is constructed after tarbela in1974. The 6th largest mine of Platinum and gold in Rekodic Baluchistan is still waiting for enough funding in its exploration. Easy way of Iran Gas pipeline is adopted leaving behind the recent discoveries of huge gas reserves in Sindh and oil reserves in KPK.

(b) Low per capita income:- Per capita income is calculated by dividing national income over population. Low per capita income means low capacity to save. Low capacity to save means low power of investment. Investments havedeclined from 22.5 percent of GDP in 2006-07 to 13.4 per cent of GDP in 2010-11 which is a vital indicator of declining per capita income. Less investment amounts to less development. This is how the per capita income directly relates to development and economic growth.

(c) Heavy foreign debts:- Due to insufficient domestic resources to meet the fiscal requirements, Pakistan has to rely on foreign debts. Persistent inflow of foreign debts has accumulated such a big amount of foreign debts that most of the domestic resources are being used just for debt servicing. As per State Bank of Pakistan14, Pakistans foreign debts obtained from IMF alone are 441.3 Billion rupees (4.11 billion dollars). Total external debs are 6159.70 Billion rupees (57.30 billion dollars)15. Pakistans debt servicing obligations on external debt rose to $3.553 billion in the current fiscal year, up by 54 percent over $2.3 billion the previous year16. After debt servicing, a meager amount generated from local resources rests for development and well being of the country.

(d) Low Tax revenues:- FBR set the target of tax collection for fiscal year 2012-13 to the tune of Rs 2381 billion but in first four month they were able

14 Figure at I(C)(c) in SBP report published at http://www.sbp.org.pk/ecodata/Profile.pdf15 Figure at I(C) in SBP report published at http://www.sbp.org.pk/ecodata/Profile.pdf.16 Economic Affairs Divisions presentation (covered by business recorder)http://www.brecorder.com/market-data/stocks-a-bonds/0/1147985/

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collect only Rs 549 billion against target of Rs 613 billion17. Considering fourmonth short fall of Rs 64 billion as a yardstick it is expected that by the end of current financial year FBR will be collecting Rs 192 billion less than the target.Even if the target is met, the target tax revenue for FY 2013-14 of Rs 2124 billion18 will be insufficient to meet projected expenditure of Rs 347819 billion for the same financial year. Tax evasion is an other problem directly related to low tax revenues. Businessmen are maintaining dual books of accounts as a general practice. In addition they are being paid false tax credit claims though bribing the tax officials. Politicians are not paying their due taxes. 43% of the members of national assembly have not paid tax during FY 2011-12.

4. As earlier mentioned in this document, there are number of economic challenges being faced by Pakistan, only few of them are discussed above. Unemployment, adverse balance of payment, trade deficits, Inflation, power crises, poverty and so many other problems are not discussed here because solution presented in the research will deal with all types of economic problem alike.

17 Qarterly report of Fedral Board of Revenue (http://www.nation.com.pk/business/12-Sep-2012/rs-2-38tr-target-challenging-fbr)18 Page 3, Tax in Brief 2013-14, http://www.finance.gov.pk/budget/Budget_in_Brief_2013_14.pdf19 Page 2, Tax in Brief 2013-14, http://www.finance.gov.pk/budget/Budget_in_Brief_2013_14.pdf

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SIGNIFICANCE AND SCOPE OF RESEARCH

5. The problem statement highlighted severity of the matter. It is rightly said that every problem has a solution. But, what is the significance of finding solution to the posed problem statement? Undoubtedly, it is a matter of survival of Pakistan. It is a matter of honorable living and well being of 180 million people of Pakistan. Every article in newspapers, every TV talk show, every seminar and symposium is focused on one and the same point that how Pakistan can live like an independent, honorable and self sufficient country. People of great intellect have written a lot in this respect. An article titled as The only way out by Huzaima Bukhari and Dr Ikramul Haq20 suggests that the only way out to strengthen the economy is bringing non-tax payers in tax net. It is said by State Bank of Pakistan in Monetary policy statement published in September 2013 that Weak tax generation capacity is the fundamental economic problem faced by Pakistan. There is an urgent need to initiate and implement comprehensive tax reforms21. Member inland revenue, FBR Mr Muhammad Ashraf Khan said in a press statement that "the real challenge confronted by the country is to revamp the tax system to survive as a successful nation". Spokesman of Department for international Development (DfiD) UK said in connection with provision of aid to Pakistan We have made it clear to government and opposition politicians in Pakistan that it is not sustainable for British taxpayers to fund development spend if Pakistan is not building up its own stable tax take22. These are just few examples, quoted here to establish significance of the matter. There are thousands of wishful sentences in suggestive tone but a concrete and doable solution is yet awaited. It is surprising that bureaucracy and ruling elite of the country are good and bad financial managers at the same time; good for themselves and bad for the country. After every term of 5 years their personal assets are found manifolds inflated and national treasury found empty. They make sure that their personal interest are not compromised at any cost and at the same time they just give wishful statements about the country that we should do this and we should do that.

6. Significance of economic independence, self sufficiency, being debt free and being a welfare state is something which is easily understood by every man of common prudence. Considering other side of the picture, the consequence of a sovereign default should be understood. Willful or uncontrolled inability of any country to pay of its international liabilities or to abide by the terms thereon is termed as sovereign default. It means permanent disqualification for further international debts, cutting down of budget including defence budget, collapse of banking sector due to mistrust of general public and withdrawal of their savings at once, full stop on development expenditure etc. It is horrific to think for a nation which has learnt to live lavishly on others money to live in a defaulted country. Therefore, it is a matter of great significance to make Pakistan a self sufficient and debt free country. 20 Both are professors at LUMS Lahore and running a Tax Law Consultancy http://www.huzaimaikram.com.21 Para 60 of monetary policy statement, November 2013 published at http://www.sbp.org.pk/m_policy/2013/MPS-Sep-2013-Eng.pdf22 A news by BBC news on 4 April 2013

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LITRATURE REVIEW

7. Main target of the research is about finding ways and means to bring whole population of Pakistan in tax net at very nominal tax rate. It is about increasing the tax base from 0.81million23 tax payers to 180 million tax payers. Without use of latest network and information technology, this goal cannot be achieved. Literature review on any topic demands exploration of previously done work on same or similar lines. So far no country in the world has ensured collection of tax from 100% of its population yet lot of work has been done on automation of tax returns and easing up the taxation procedures. Measures taken by modern economies and their outcomes in this regard can source of guideline for this research.

8. Paying Taxes is an annual study carried out by Word Bank and International Finance Corporation UK. The study comprises of comparison of taxation systems effectiveness of 189 economies of the world on the basis of three parameters. These are; Total Tax Rate (TTR), Time to comply (ease of tax payment) and No of tax payments per year. Latest annual report of 201424 reveals that Guatemala made the biggest improvement in the ease of paying taxes in the past year. The most common feature of tax reforms in the past five years was to reduce profit tax rates (Income Tax) to improve the tax compliance. In the past three years more economies focused on introducing or improving electronic systems. Since 2009, 189 tax reforms in 114 economies were recorded. Of these, 57 introduced or enhanced online filing systems. By 2012, 76 economies had fully implemented electronic filing and payment of taxes25. In 2012-13, electronic systems became more popular among taxpayers in Kenya, Madagascar, Rwanda and Uganda. In Latin America and the Caribbean, economies including Colombia, Guatemala, Mexico, Paraguay and Uruguay have implemented electronic systems for filing and paying taxes over the past five years. In East Asia and the Pacific 7 of 25 economies have established electronic systems for filing and paying taxes: Taiwan, China; and Thailand. In Middle East 5 out of 20 economies have implemented electronic systems for submitting tax declarations and paying taxes. These include Morocco, Saudi Arabia and the United Arab Emirates. Report further says that in South Asia, India is the only economy out of eight others which is having a complete online system for filing and paying taxes. Pakistan also has established electronic system but uptake has been limited.

9. Above paragraph presents the position of Pakistan among economies of the world with respect to tax automation. Ranking of Pakistan in this regard is 166 out of 189 economies of the world26 with 577 hours per year to comply tax obligations27 and

23 Daily DAWN 20 Dec 2012, State finance minister said that 3.39 million people are issued with NTN but only 0.81 million people filed their tax returns in 2011-12.24 http://www.pwc.com/gx/en/paying-taxes/assets/pwc-paying-taxes-2014.pdf. The report compiled by Rita Ramalho, Joanna Nasr, Nina Paustian, Michelle Hanf, Valter Deperon and Nadia Novik or World Bank and Neville Howlett, Tom Dane, Hong Wang, Karla Cortez and Jialu Pan of PwC.25 Page 16 of the report.26 Page 166 of the report.27 Page 177 of the report Paying Taxes 2014.

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34.7% total tax rate28. As per the report, economies of UAE, Qatar, Saudi Arabia, Hong Kong & China and Singapore are declared having five top level systems respectively in terms of ease, efficiency, compliance time and total tax rate. Researchers of World Bank believe that a best taxation system is characterized with low tax rate, expanded tax base and minimal time to comply. Taxation of world 189 economies is averaged atmaintaining Total tax rate of 43.1%, 268 hours in a year to comply with the tax laws (tax payment man hours) and 26.7 tax payments per year29. If this is the outcome of the latest taxation systems of most modern economies of the world, we need to think again. Thinking of zero man hours required for complying tax payments, Tax rate of 2% instead of 43.1% and filing of zero tax returns in a year can be a more than ideal situation and undoubtedly best of the best technologies of the world, when compared on the basis of three dimensions set by researchers of the World Bank.

10. UAE is declared having best taxation system in the world. On average a medium company in the Middle East makes 17.6 payments (frequency with which the company has to file and pay different types of taxes and contributions), and spending 158 hours (time to prepare, file and pay three major types of taxes including labour taxes, mandatory contributions and consumption taxes), a figure which is well below the world average and the lowest for any region. Let us analyze, what made UAE to hold top position in the world for its taxation system. In UAE there are no Personal income, Capital gains, Value-added, Withholding and Corporate taxes. Only oil, gas and petrochemical companies and branch office of foreign banks are required to pay taxes. On account of personal taxes, people of UAE are liable to pay 5 to 10% service charges on their hotels and restaurants bills. If some how Pakistan manages to levy only 2% tax and discontinue all other direct/indirect taxes, for sure the country will stand at 1st

position in the world. The research paper will deal with this hypothesis that how Pakistan can manage to generate sufficient revenues to retire its debts by imposing only a single tax @ 2%. This hard target can be achieved if whole population of the country is brought in tax net and 2% tax is charged on each and every transaction taking place in any corner of the country. It is about broadening the tax base to its optimum capacity.

11. In order to impose 2% tax on each transaction, all transactions are necessarily required to be documented. In the prevailing system, nearly all transactions remain anonymous. Only purchase of mobile cards is linked with servers of cellular phone operators therefore, these transactions are not anonymous. Resultantly taxes on mobile cards are being charged with 100% accuracy. From 2010 to 2013 an amount or Rs 91 billion is collected from mobile card users30. Beauty of the system is notable that no matter a user of cell phone is a minister, a bureaucrat, a General, a gangster or a beggar, if he has to use a mobile card, he must have to pay tax and no one is above this mandatory binding. There are no media appeals, no complex tax returns, no confusing and difficult tax laws, no book-keeping, no audits and no rebates with respect

28 Page 175 of the report Paying Taxes 2014.29 Page 2 of the report; Paying Taxes 2014.30 Business Recorder, 8 Jan 2014.

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to tax on mobile cards. You just charge a card to your cell phone and tax will be deposited into Government treasury automatically. If this standard of transparency, impartiality and ease in collection and payment of tax is applied on all business/non-business transactions taking place on every second in country, the country will be for sure in a position to collect enough revenues to pay off its all debts in a short span of time.

12. In Pakistan one of the most common Value added taxes (VAT) is General Sales Tax which is included in the sale price of consumer goods and is being collected through withholding agents. In most of the cases this tax is embezzled by the withholding agents and does not reach the Government treasury. Fidelity Bank hasinstalled 50 POS machines in state of Abia in Nigeria for collection of Tax direct from point of sale to bank31. Recently Turkey has started installation of new machines at outlets combining POS and cash register. The machine accepts cash as well as credit/debit cards. 2% of sales proceeds directly go into bank account of Government32. Nagpur Municipal committee of India has devised a system recently for online collection of property tax. In every zone of the municipal committee, machines are installed to accept cash, debt and credit cards for collection of property tax. Payee is acknowledged with SMS about receipt of tax. In this literature review it is established that ease in tax deposit, reduction of tax rates and broadening of tax base are the best strategies for maximization of tax revenues. Further, it is also established that world is now adopting new ways of tax collection like tax collection through ePOS machines, mobile phones and online payments. The research will be focused on possibilities of broadening of tax base at a minimal rate of tax and online collection of taxes in Pakistan.

31 http://www.thisdaylive.com/articles/fidelity-bank-boosts-abia-s-igr-drive-with-50-pos-machines/162358/32 http://www.hurriyetdailynews.com/new-payment-system-to-earn-extra-tax-revenue.aspx?pageID=238&nID=49601&NewsCatID=344

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TAXATION IN PAKISTAN

13. Broadly, there are two types of federal taxes; Direct taxes and Indirect Taxes.

(a) Direct Taxes. These are those taxes whose incidence is borne by the person from whom the taxes are collected. Following direct taxes are in place in Pakistan.

(i) Income Tax. It is payable by every person with regard to his taxable income for a particular tax year under Net Income Bases (NIB) or Final Tax Regime (FTR). Under NIB, tax is payable after realization of profit at the end of year. Losses are not taxed and can be carried forward for future adjustments. Every tax payer under this system has to file a detailed tax return yearly. Companies are to attach audited accounts as well. Under Final or Flat Tax Regime tax is charged on gross receipts/turnover for the year, irrespective of profit or loss. It was introduced in 1991. Rates are presented below.

INCOME TAX RATES UNDER NET IMCOME BASIS (NIB)

INCOME TAX RATES UNDER FINAL TAX REGIME (FTR)

(ii) Workers Welfare Fund. This tax is collected by FBR under workers welfare fund ordinance 1971 from companies and businesseshaving yearly income more than 500000 @ 2% of income. The fund is used for housing, medical and general facilitation of industrial workers.

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PER CAPITAL REVENUE AND EXPENDITURE

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(iii) Workers Profit Participation Fund. Under companys profit (Workers participation) Act 1968, 5% of income is to be contributed by companies having 50 or more employees with certain limits of paid up capital and assets.

(iv) Capital Value Tax (CVT). As per Finance Act, 2006, CVT is levied @2% of recorded value of one kanal or above residential property and any size of commercial property.

(b) Indirect Taxes. These Taxes are added to the cost of goods or services and ultimately borne by the consumers. Following indirect taxes are levied in Pakistan:

(i) General Sales Tax (GST). GST is charged at the rate of 16% to 19% to Manufacturers, Retailers, Importers and Wholesalers. It simply increases the price of consumer goods which is borne by consumers.

(ii) Federal Excise Duty. It is levied on domestically produces goods, imports and services rendered in the country. Purpose of FED is to encourage/discourage use of certain commodities and services.

(iii) Customs Duties. These are levied on imports only to regulate the inflow of certain goods. Customs duties include Import duties, Warehouse surcharge, Export Development Surcharge and Miscellaneous.

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14. A quick rundown of different direct and indirect taxes in force is presented above to make a point that so many different kinds of taxes are in place yet the total revenue collected from all these taxes is quite discouraging. Over a period of time the per capita excess of expenses over revenue gap has been persistently widening.33 In the above graph, data from 1981 to 2010 is plotted just to show a trend of efficiency of tax system of Pakistan which is glaringly going into decay. Therefore it is established that no matter how many new taxes are introduced, how many new tax laws are made and how many procedures are adopted to get the tax law abided by the tax payers, the existing tax system is a proven time tested failure and cannot rescue Pakistan toward self sufficiency. It is now high time for Pakistan that international donors have also started expressing their concerns regarding inefficiency of tax system of Pakistan and increasing culture of tax evasion in the country. UKs Department of International Development (DfiD) expressed that Pakistan needs to recoup more in taxes before any aid boost. Further, it was said we cannot expect people in the UK to pay taxes to improve education and health in Pakistan if the Pakistani elite does not pay meaningful amounts of income tax."34

33 Adapted from a research paper of Mr Tahir Sadiq (Lecturer in Department of Economics at Beaconhouse National University, Lahore) http://www.pide.org.pk/psde/25/pdf/agm26/day2/Tahir%20Sadiq.pdf34 Story covered by The Guardian http://www.theguardian.com/global-development/2013/apr/04/pakistan-recoup-taxes-aid-mps

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SELF SUFFICIENCY RECIPE

15. Self sufficiency or self reliance is termed as survival and progress of country without any external aid, assistance or loans. This can be achieved through collection and generation of enough funds locally to payoff external/internal debts and to meet the projected national expenditure. At present the country is under burden of Rs 6405.80 billion external and Rs 10949.80 billion internal debts (total Debts are Rs 17355.60 billion). Annual budget as per budget figure of FY2013-14 is of Rs 3985 billion. It means, we need to have Rs 21340.60 billion to reach the level of self sufficiency. Total internal resources of the country (including all tax revenues, revenue receipts, capital receipts and provincial surplus) are amounting to Rs 2434 billion35 which is only 11.41% of total requirement and 61.08% of budgetary requirement of FY2013-14. If we forget about debts, still we need to have Rs 1551 billion more to fill the budgetary gap. The deficient amount is being arranged through internal and external debts every year, therefore, debts are persistently increasing over period of time. Thinking optimistically, if we manage to strengthen existing tax system to such a level that it should be capable of meeting 100% budgetary requirements, yet we wont be able to retire out internal and external obligations which are piling up since inception of the country. It is therefore established that what ever we may do with the existing system of taxation for its improvement and enforcement, we cannot be self sufficient. There is no way out except to introduce a new taxation system because when there is no space for further patch work on a sheet, it is always replaced with a new one.

16. Presently, registered taxpayers are 1.88% of total population of the country, of which only 0.45% has deposited their tax returns last year (Footnote 22 referred). This is the weak area as well as the key to solution of the problem. We need to bring 100% of population in tax net which could not be done in past mainly due to anonymity of the transactions. When a transaction takes place in any corner of the country it is not in knowledge of Government. Every second, millions of financial transactions are taking place in the country. Even if each and every transaction is reported, the Government is not in position to collect tax on each transaction in the absence of an automated system. This gigantic task cannot be done without a sophisticated automated computerized system. Earlier in this paper, example of tax on mobile cards is quoted. Those transactions are not anonymous, they are linked with mobile operators and banking servers, therefore, the tax is being collected without any problem. Modern word is finding ways to overcome anonymity of the transactions. Fidelity Bank has installed 50 POS machines in state of Abia in Nigeria for collection of Tax direct from point of sale to bank36. Similar systems are being installed by most of modern economies.

17. Pakistan is considered lucky for tax automation because infrastructure required for the purpose is already available in the country. It only needs will of Government to do it, otherwise only few administrative arrangements will be required to achieve the

35 Page 8 of Budget 2013-14, http://finance.gov.pk/budget/Budget_in_Brief_2013_14.pdf36 http://www.thisdaylive.com/articles/fidelity-bank-boosts-abia-s-igr-drive-with-50-pos-machines/162358/

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desired goal. Analysis of components necessarily required for tax automation in Pakistan is presented in succeeding paragraphs.

Integration of Mobile networks and Banks

18 There are four Mobile Network Operators (MNOs) in Pakistan; Mobilink, Telenor, Ufone, Warid and Zong. Servers of all four mobile networks will be required to link with database of State Bank of Pakistan. The MNOs are already in process of linking themselves with different commercial banks. They are offering financial services in collaboration with different banks. Telenor Easypaisa, UBL Omni, Ufone Upayments and MCB Mobile are fast growing mobile financial services in the country.

(a) Mobilink offers MobiCash money transfer service, SMS (text) banking to Citibank, MCB, Standard Chartered Bank, UBL and Emirates Global Islamic Bank (EGIB) account holders.

(b) Telenor provides EasyPaisa service, primarily aimed at assisting the un-banked population by allowing them to use their mobile phone numbers as account identifiers. An other service Easypaisa Khushaal; is introduced by Telenor to provide a savings product, offering rewards with free Life and Accidental Death Insurance. Fauri Ticket service is also one of its kind, introduced by Telenor in collaboration with PIA to buy a ticket by calling UAN 111-786-786 and making payment at any easyPaisa centre.

(c) Ufone Upayments is offered by Ufone in collaboration with HBL and Summit Bank. Customers can inquire about and pay utility bills, buy and pay for prepaid and postpaid airtime purchases, check HBL or Summit Bank account statements, and transfer money to any bank account in the Habib Bank and Summit Bank networks.

(d) Zong provides TimePay service for transfer to money to any CNIC holder irrespective of the fact the recipient in a zong customer or he is not having any bank account.

(e) UBL Omni customers can withdraw and deposit cash, make utility bill payments, transfer money domestically and internationally, pay mobile phone and other bills, and purchase airtime. Recently, UBL also introduced an ATM card for its Omni customers to receive money through ATMs.

(f) MCB customers can check their bank-account balances, receive mini-statements, transfer funds, purchase mobile top-ups, pay mobile phone and utility bills, make MCB Visa credit-card payments or charitable donations, or buy insurance.

(g) On 29 April 2013, HBL Express branchless banking service was launched in Karachi. It was expressed in the ceremony that HBL Express will be launched

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with Domestic Remittances and Utility Bill Payments. The product portfolio will be expanded to include International Remittances, Mobile Wallets, G2P Payments and Corporate Solutions in the near future. To allow its agents to conduct transactions, HBL Express has pioneered in providing its agents with Smart phones equipped with a custom developed mobile application37.

19. A USA based organization Inter Media Knowledge Centre38 has revealed interesting facts about mobile usage and mobile financial services in Pakistan.

(a) 50% of population of Pakistan is illiterate yet 90% of it is having access to mobile phone and Sim Card.

(b) 10% of population is having bank accounts.

(c) 5% house holds use m-money.

37 Page 8 of Branchless Banking newsletter of State Bank of Pakistan. http://www.sbp.org.pk/publications/acd/BranchlessBanking-Jan-Mar-2013.pdf38

InterMedia is currently working with the Bill & Melinda Gates Foundations Financial Serviceshttp://www.audiencescapes.org/fits

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Integration of Banks with State Bank of Pakistan.

20. The State Bank of Pakistan is the Central Bank of Pakistan, operating since 1st

July 1948. State Bank is not only responsible for issuing domestic currency and regulating foreign currency but also for analyzing domestic economy. The bank has been operating with a mission of promoting both monetary and financial stability and to promote the financial system for achieving sustainable growth by reducing inequality. The relevant provisions of law which vest powers in State Bank of Pakistan to carry out inspection of banks are contained in the Banking Companies Ordinance, 1962. Besides, State Bank of Pakistan Act, 1956 and the Banks Nationalization Act, 1974, the Financial Institutions (Recovery of finance) Ordinance, 2001, companies Ordinance, 1984 and Statutory Regulatory Orders (SROs) are the relevant legislations, which cover the activities concerning the banking sector.

21. As per SBP39, commercial banks of Pakistan include De-Nationalized Banks (DNBs), Development Financial Institutions (DFIs), Foreign Banks (FBs), Investment Banks (IBs), Micro Finance Banks (MFBs), Nationalized Commercial banks (NCBs), Private Scheduled Banks (PScBs), Provincial Banks (PBs) and Specialized Schedule Banks(SSBs). Under the powers conferred by above mentioned laws, State Bank is officially authorized to access data and monitor DFIs, and MFBs. There are 8 DFIs and 2 MFBs in Pakistan working under supervision of State Bank of Pakistan. The other banks include 4 Nationalized Banks, 2 De-nationalized Banks, 04 Specialized Scheduled Banks, 13 Private Banks, 2 provincial banks, 2 Micro Finance Banks, 14 Investment Banks, 2 Venture Capital, 4 Discount Houses and 4 Housing & Finance Companies. Names of banks in different categories are presented below.

(a) Nationalized Banks.

(i) First Women Bank(ii) Habib Bank Limited(iii) National Bank of Pakistan(iv) United Bank Limited

(b) De-Nationalized Banks.

(i) Allied Bank of Pakistan(ii) Muslim Commercial Bank Ltd

(c) Specialized Scheduled Banks.

(i) Agricultural Development Bank(ii) Federal Bank for Co-operatives(iii) Industrial Development Bank(iv) Punjab Provincial co-operative Bank

39 State Bank of Pakistan official Web http://sbp.org.pk/f_links/index.asp

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(d) Private Scheduled Banks.

(i) Askari Commercial Bank Ltd(ii) Bank Al Falah Ltd(iii) Bank Al Habib Ltd(iv) Summit Bank Ltd(v) Faysal Bank Ltd(vi) Meezan Bank Ltd(vii) Habib Metropolitan Bank Ltd(viii) NIB Bank Ltd(ix) KASB Bank Ltd(x) Soneri Bank Ltd(xi) Standard Chartered Bank Ltd(xii) SAMBA Bank Ltd(xiii) Silk Bank Ltd

(e) Provincial Banks.

(i) The Bank of Khyber(ii) The Bank of Punjab

(f) Micro Finance Banks.(i) The First Micro Finance Bank Ltd(ii) Khushhali Bank Ltd

(g) Development Financial Institutions.

(i) Investment Corporation of Pakistan(ii) National Investment Trust Ltd(iii) Pak Kuwait Investment Company (Pvt) Ltd(iv) Pak Libya Holding Company (Pvt) Ltd(v) Pak Oman Investment Company (Pvt) Ltd(vi) Pakistan Industrial Credit & Investment Ltd(vii) Saudi Pak Industrial & Agricultural Investment Company (Pvt) Ltd(viii) SME Bank Ltd

(h) Investment Banks.

(i) First Standard Investment Bank Ltd(ii) ABL Asset Investment Bank Ltd(iii) Atlas Investment Bank Ltd(iv) Crescent Investment Bank Ltd(v) Escorts Investment Bank Ltd(vi) Fidelity Investment Bank Ltd

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(vii) First International Investment Bank Ltd(viii) Franklin Investment Bank Ltd(ix) Islamic Investment Bank Ltd(x) Jehangir Siddiqui Investment Bank Ltd(xi) Orix Investment Bank (Pak) Ltd(xii) Prudential Investment Bank Ltd(xiii) Security Investment Bank Ltd(xiv) Trust Investment Bank Ltd

(j) Venture Capitals.

(i) Pakistan Venture Capital Ltd(ii) Pak Emerging Venture Ltd

(k) Discount Houses.

(i) First Credit & Discount Corporation (Pvt) Ltd(ii) National Discounting Services Ltd(iii) Prudential Discount & Guarantee House Ltd(iv) Speedway Fond metal (Pak) Ltd

(l) Housing Finance Companies.

(i) Asian Housing Finance Ltd(ii) Citibank Housing Finance Co Ltd(iii) House Building Finance Corporation(iv) International Housing Finance Ltd

22. There are roughly 61 banks and financial institutions which will be required to link with database of Sate Bank of Pakistan. SBP will communicate only with head office of each bank. Individual branches of all banks are already connected with concerned head offices.

Connectivity of State Bank Of Pakistan

23. Nearly half of the work is already done at SBP for establishing an online link with financial institutions. In year 2000, State Bank of Pakistan started a project with the help of World Bank under Technical Assistance for Banking Sector (TABS) programfor linking and automation of SBP head office and its distantly located 15 branch offices. state of the art Oracle financial based ERP software named as Globus was installedalongwith a data warehousing facility. In order to implement the system, 1000 PCs, three N-Class application servers and two N-Class backup servers were installed. A high speed Gigabit backbone connection was installed to keep distant backup of

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precious data.40 In the availability of mentioned infrastructure at SBP, it will be not a big task to hook up head offices of commercial banks with backbone of SBP because head officers of most of the banks are located in same city of Karachi.

Connectivity of NADRA Database

24. National Database & Registration Authority (NADRA) started its operation in March 2000. Through continuous efforts and struggle now NADRA can pride itself for having one of the largest centralized databases in the world. It is maintaining multi record data of 96 million people of Pakistan. Using its magnificent database, NADRA is providing following services besides issuance of computerized National Identity Cards and e-passports.

(a) SMS service in collaboration with Pakistan Telecommunication Authority and all mobile networks for issuance of Pakistan Cards. Any CNIC can be verified within no time by sending an SMS on 9777.

(b) About 90 Data centralization projects are on way to link information about a person available at any departments across the country.

(c) NADRA Smart Cards project is started to issue chip-CNICs containing multiple security features, biometric identification record, all CNIC based information and will be extended to addition of data of all Credit/Debit cards in the same chip. It is expected that Smart Cards will be usable at ATM machines as well in near future.

(d) Through its more than 5000 e-sahulat centers, NADRA is providingservices for collection of all kinds of utility bills and some other allied services.

(e) e-Driving license which can also record the detail of violations in chip and NADRA database.

(f) During recent vote verification issue, NADRA under command of Mr Tariq Malik invented Electronic Voting Machine41 to cast votes electronically after biometric verification of each voter. The EVM was enabled to compile results and to upload voting data on NADRA database. It was a heinous crime for which his services were terminated on the day when he was going to present his invention before election commission of Pakistan.

40 As per Technology up gradation report by State Bank of Pakistan http://www.sbp.org.pk/publications/apr/Technology_Upgradation.pdf41 http://www.nadra.gov.pk/index.php/component/content/article/14-latest-news/495-nadra-develops-electronic-voting-machine-

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25. Banks, Mobile Network Operators and NADRA are three main players who can jointly be a part of a computerized economic/taxation system which can make Pakistan self sufficient. Existing infrastructure, capabilities and services of main players are evaluated before proposing the system.

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e-TAXATION SYSTEM

26. ICT4D is a newly emerged concept which deals with use of Information and Communication Technologies for Development. It covers nearly all areas of life and Taxation is no exception to it. The concept of e-governance is already embraced by Pakistan and various online services are being provided through official portal of Government of Pakistan42. Limited e-services are provided being provided by Federal Board of Revenue thorough its web portal43 but efforts for maximization of tax revenue through implementation of ICT are yet to be seen. FBR is providing Online Taxpayer Registration, Get User ID / Password / PIN, Online NTN Inquiry, Active Taxpayer List, Black Listed Taxpayers and Document Verifications services online. In its broad prospective, Government of Pakistan is just reproducing the offline information online but the major problem is not being addressed which are low tax revenues, tax evasion, corruption etc. Modern world has adopted some new technologies to address similar issues in their countries. Jamaica has introduced an online tax payment system44. The system was introduced in year 2007 and got popularity in days due to ease in compliance and economy of efforts. A report was presented by Fiscal Services Limited45 in this regard which claimed that tax revenues rocketed upward soon after implementation of online tax payment system in Jamaica. The Fiscal Services Limited Jamaica is contractor of Jamaican Government for provision and maintenance of e-Governance services. Pakistan is again having an edge in this regard because similar services are already available with NADRA Pakistan. Government may need not to outsource in this regards, neither is it

42 Official Portal of Government of Pakistan. http://www.pakistan.gov.pk43 Official Web Portal of FBR http://www.fbr.gov.pk44 Jamaicas online Tax Payment services https://www.jamaicatax-online.gov45 http://www.fsl.org.jm

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recommended due to sensitivity of financial data. After implementation of online tax payment system in Jamaica visible increase in revenue was noted, as shown in this graph.

27. Similar approach is being followed by most of the modern economies. Pakistan, having culture of corruption and tax evasion need not only to collect tax online but also need to ensure visibility and transparency of financial transactions taking place in the country. At 3rd international conference of e-Governance held in 2005, during his presentation, Mr Asif Kabani46 proposed Government to implement online transactions system. In the next segment of this paper, it will be explored that how anonymous financial transaction can be made visible and how tax can be collected with maximum ease and accuracy without filing unmanageable/troublesome tax returns. After going through the technological tax measures being taken in the worlds modern economies, it is envisaged that Pakistan can achieve the level of self sufficiency only and only by implementing a mega project. As there is no further room for patch work to correct the existing tax adversities, therefore the existing tax system need to be replaced with a new e-Tax system by taking few big and bold economic/administrative steps.

46 Deputy Director, Decentralization Support Program, NPSO Asian Development Bank & Ministry of Finance. http://www.slideshare.net/kabani/managing-e-governance-in-pakistan

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NADRA Server SBP Server

e-TAX REGIME IN PAKISTAN

Step 1: Legislation for e-Tax and Electronic Retail Payment Services

28. Electronic Retail Payment system is a system which provides facility of various electronic ways to consumers for making payments. It is not limited to but includes e-payments through web, Credit card, Debit Card, Smart card or electronic wallet. Incase of payments through electronic wallet or hard cash the transaction remain anonymous and untraceable by tax authorities. Due to presence of anonymity element in financial transactions, taxes cannot be collected accurately. To start with, in order to overcome anonymity of financial transactions, a set of rules will necessarily be required for operation of ERPS and for collection of e-Taxes. One year back, similar rules were made by Jamaican Government47 which are available on address given in footnote. Under the mentioned rules, ERPS is in practice in Jamaica. Riksbank (State bank of Sweden) has also implemented electronic large value payment and electronic retail payment systems. 70% of the population of Sweden is regular user of these systems48. USA has also a state of the art electronic payment system49. These are few examples of electronic payment system in practice. Sooner or later every developing economy has to follow the footsteps of worlds modern economies. Bank Indonesia, the countrys central bank, recently issued guiding principles for upcoming tests of a banking and payment system through existing Financial Services Intermediary Units (FSIU), registered third-party services which facilitate the provision of non-conventional banking services. These principles are intended to provide banks as well as telecommunications companies and FSIUs with a more comprehensive understanding of branchless banking in an effort to effect adequate preparation to support project implementation of the trials50. Pakistan needs also to do necessary legislation on the footsteps of Indonesia.

Step 2: National Intranet

29. Intranet is just like internet with an exception that it is accessible by a selected group of users, community or country. Big organizations maintain Intranets to provide access of their centrally located ERP systems and web pages to users at their distantly located offices. Pakistan will need to establish a country wide Intranet to provide a connectivity back bone for access of

47 ERPS guidelines http://www.boj.org.jm/uploads/news/guidelines_for_electronic_retail_payments_services_-_1_february_2013.pdf48 http://www.riksbank.se/en/Financial-stability/Financial-infrastructure/Systems-in-the-Swedish-infrastructure/49 USA Electronic payment system http://www.usapaymentsystems.com50 Page 11 of Branchless Banking newsletter by State Bank of Pakistan Jan-Mar 2013.

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multiple financial, economic, e-governance and e-taxation modules to people of Pakistan. It will be a fire walled system so that national data is not shared or accessed by international Internet users. A switching technology will be used so that a Pakistan based user should be able to access either Internet or the Intranet at one time, but not the both.

Step 3: Uniform Banking Systems

30. At present different commercial banks are financial institutions are using different software to keep the accounts of their respective clients. These programs are tailored as per specific requirements of the banks in conciliation with their role and task. State Bank and all commercial banks will need to develop intermediary modules to ensure real time financial data communication among all commercial banks and State Bank of Pakistan over intranet.

Step 4: Linking of NADRA Database with SBP

31. NADRA Database keeps record of people; it includes biometric and family tree record also. In order to device an e-Tax system NADRA database will require to be linked with State Bank Database. The linking will be done trough Intranet backbone using an intermediary module. This purposeful linking will facilitate both the databases to access desired data from each other. State Bank will require biometric record and addresses of bank account holders and NADRA will require financial information of people for its embedding in chip of smart cards. Change in data at either side will update both the linked databases.

Step 5: Opening of Bank Accounts

32. Under new e-Tax system, keeping a bank account will be made mandatory for every CNIC holder. State Bank will collect data of existing account holders from all commercial banks and will compare the same with NADRA database. Query will extract all those CNIC holders who will not be having bank accounts at any bank. Through an automated procedure, bank accounts will be opened at once of such people at nearest branches (as per address available in NADRA database) of different bank. Relocation of people from their permanent addresses will not matter because under new system people will not need to visit their banks for operation of their accounts.

Step 6: Linking of MNOs with SBP Database

32. Servers of 04 Mobile Network operators (MNOs) will be linked with State Bank database through intranet. Considering activity logs at MNOs servers, currently active SIMs will be identified. CNIC number available in MNOs servers against active SIMS will be verified through NADRA database and verified SIMs on the basis of CNICs cross verification will be marked at Registered SIMs. Mobile numbers of so registered SIMs will be made accessible to NADRA for their entry in chips of smart cards and to commercial banks for remote operation of bank accounts. People having CNICs but not

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bank accounts or registered SIM cards will be notified though media that their bank accounts are opened and they should submit their registered mobile numbers to concerned banks through personal visits, through intranet web of SBP or by sending SMS to a particular SMS server.

Step 7: Remote operation of Bank Accounts

33. After necessary automated verification of users through SMS server based questioner, they will be communicated their financial numbers and pin codes through SMS or through their personal visits at nearest bank branches. The provided financial numbers and PIN codes will be used by them for operation of their bank accounts distantly in many ways.

Step 8: Replacement of CNICs with Smart Cards

34. At this stage NADRA will issue Smart Cards to existing CNIC holders. Forthwith, the conventional CNICs will be discontinued for ever and only Smart Cards will be used by all Pakistanis. Smart Cards will contain all financial and biometric record of personnel in the chip embedded on them. NADRA will keep updating data on issued smart cards of people regarding their debit / credit cards, health, insurance, property, passport, ammunition license, driving license, terrific violations, criminal history, loans record etc in phases. Ultimately only smart card will be used to represent all legal and financial documents. The Smart Cards technology is already available with NADRA. The cards are being issued since last few years. For the purpose of implementation of e-Tax system, NADRA will just need to expedite the existing process of replacing CNICs with Smart Cards.

Step 9: Inflow of Black and laundered money in the system

35. The exact volume of black economy of Pakistan is unknown, however it is believed that parallel black economy of considerable size exists. Moreover laundered money only is Swiss banks amounts to $200 Billion (Rs 21500 Million)51. This amount is seven times the value of budget of Pakistan for FY 2012-13 (Rs 3985 Billion)52 and remains free of all tax obligations under existing taxation system. At this stage of preparation for e-Tax system implementation, Government of Pakistan will notify through media that black and laundered money should be deposited by concerned persons in their respective bank accounts in Pakistan by a due date, failing which the black money will turn into worthless pieces of papers and laundered money will be retrieved back in national treasury by filing cases in international courts.

51 Financial Daily news report. http://thefinancialdaily.com/NewsDetail/140818.aspx52 Chapter 2 Para 2.1(a) and (g) of Budget in Brief. http://finance.gov.pk

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Step 10: Launching of web portals / pages on Intranet

36. In addition to existing web portals of different Government departments available on internet, all departments will launch their web portals on intranet also for interaction, awareness and utilization of general public. Moreover launching of web sites will be made mandatory for all business organizations of the country.

Step 11: Induction of Cash Coupons

37. In order to overcome anonymity of financial transactions it will be proposed after a couple of further steps that currency notes and coins should be discontinued and bank accounts based e-payment system should take over. As mentioned earlier at Para 19, as per report of Intermedia knowledge centre USA, 98% of the population of Pakistan ishaving access to mobile phones and SIM Cards, yet a considerable part of population is illiterate, non user of cell phones or unsuitable to fit in money less culture. There are minors as well who neither have bank accounts nor NICs but need money to survive. The less educated, illiterate and minors cannot be ignored. A parallel system of cash coupons will facilitate these quarters to be active part of the economy. They will be equally good e-money users and tax payers but without use of mobile phone or internet/intranet. Cash coupons of different denominations (somewhat similar to shown in this picture) will be printed at security printing press. Operation and characteristics of cash coupons are described as under.

(a) Cash coupons will be printed in all denominations from Rs 5 to Rs1000 as in case of currency notes.

(b) All cash coupons will be embedded with magnetic tape and bar code. Value and expiry date will be saved in the system database as well as in the magnetic tape of the coupons.

(c) Cash coupons will be timed instruments. Value of each coupon will required to be credited to some bank account before its expiry, failing which the value of the expired coupon will automatically be credited to treasury account.

(d) Users of coupons will be able to charge value of their coupons to any bank accounts through any of the following methods.

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(i) Like a mobile scratch card, the hidden serial number of card can be sent in a text message to SMS server of the system. The system in response will prompt the financial number and the value will be credited to respective bank account.

(ii) By sliding in any of the POS machines or by scanning through system connected bar code readers installed at shops and stores.

(iii) By slipping the coupon into ATM machine.

(iv) By depositing the coupon at bank counter (incase of depositing large number of cards at the same time).

(e) Coupons will be purchasable from ATMs, Bank counters, shops, stores etc.

(f) 2% of the value of purchased coupon will be credited to treasury account at the time of purchase. Tax free movement of coupon will be allowed for a very short period of time after which the card will expire.

(g) Cash coupons will be used by minors, less educated people, street vendors and beggars etc. Moreover limited number of cards can also be used by modern users for making payments to mentioned classes of people.

(h) In order to make sure that no coupon is used for manual transaction after its value is credited; security features of the coupons will be kept hidden under scratch able strips. Coupons with reveled security features will not be accepted for manual transactions. However bank counters and ATMs will use automaticshredders to destroy the coupons after crediting their value to bank accounts.

Step 12: Alteration of ATMs (Hardware and Software)

38. Existing ATM machines are mainly used for withdrawal of cash. There are some secondary uses also including transfer of funds, balance inquiry, utility bills payment, bank statement etc. An other type of ATM also exists in modern economies of the world which accepts cash deposits also in addition to mentioned routine features. For the purpose of implementation of new e-Tax system hardware and software of ATM machines will be altered so that they should be able to receive and issue cash coupons instead of cash. In addition ATM machines will be enabled for intranet web browsing and smart card reading.

Step 13: Provision of coupon readers and Smart Card Readers

39. All shops, business counters and outlets will be supplied with coupon reading and smart card reading machines. Smart card readers are already in use in Europe

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and coupon reader is nothing but a debit/card reading machine. Most of the big stores are already using Debit/Card reading machines in Pakistan

Step 14: Discontinuation of paper money and coins

40. After going through all above mentioned steps (1 to 12), Government of Pakistan will be able to discontinue the existing paper money and coins. Public will be notified through media to deposit their cash in hand in respective bank accounts by presenting at any branch of any bank irrespective of the fact that their accounts exists in the same branch/bank or any other. Paper money and coins will stand invalid after the notified deadline. This step is expected to bring a pleasant surprise for Government because all black money in the country will no more remain underground and untaxed. On every transaction, treasury will receive 2% of the value of transaction. The amount available in bank accounts will be used by respective account holders for financial transactions using any or all of the following methods.

(a) Cash Coupons

(b) Mobile Phones; by text messages with systems SMS server.

(c) Smart Cards

(d) ATM machines

(e) Intranet; accessible through cell phones, ATMs, PDAs, Personal Computers and Laptops.

e-Tax Regime in action

41. Once the system will be in operation, all financial transactions will start taking place through Bank Account Based e-Payment System (BABEPS). All smart card holders (previously CNIC holders) will be operating their respective bank accountsremotely using their mobile phones, coupons, smart cards, Intranet and ATMs. Every single transaction will be known by the Government and system will manage to credit 2% of the value of each transaction into bank account of national treasury. All existing taxes will be discontinued and economy will experience a steep depression in general price level. General public will be happy with decrease in prices of goods and discontinuation of numerous direct/indirect taxes. Government will be happy to collect more tax revenues due to maximum of breadth of tax base. Banks will be happy to have more accounts/deposits, managed with less manpower due to least interaction with account holders. Business community will be happy due with reduction in cost of production and increased purchasing power of general public. Thinking hypothetically, It sounds good, but it will be of no use if it is not established with support of factual calculations that Government will be able to collect more tax revenue with this system of 2% tax after abolishing all existing taxes.

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E-TAX SYSTEM: REVENUE EXPECTATIONS

42. Before going into detail of e-tax systems revenue earning capabilities, the outcome of existing tax system need to be reviewed. At Para 13 of this paper, types and rates of existing taxes are presented. Rates of direct taxes are so high that business men find themselves justified in tax evasion. Indirect taxes are being charged at so high rates that items are daily use has become out of reach of general public. Excessive duties and taxes on fuel have added additional cost to nearly all items. After levy of so many taxes at extremely high rates the outcome in terms of total revenue from taxes is not contributing significant share in total budget of the country. Tax revenue contribution for FY 2013-14, as shown in this graph53 contribution of all taxes collectively in total budget of 2013-14 is not more than 50%. 37% of the budget consists of foreign aid and borrowings. On top of it, World Bank is pressing hard to further increase taxes and general price level as a condition of grant of additional loans, which are necessarily required to fill the budgetary gap.

43. The e-Tax system will comprise of only one Tax, @2% of the transaction value. Aggregate value of total transaction made in a day, moth or year cannot be calculated exactly before implementation of the e-tax system. However, a literarily rational can be developed for assessing this value. While discussing about revenue generation potential of a tax system where every Pakistani will be a tax payer, we need to consider the black or parallel economy as well which is roughly double the size of documented economy. Under following different prospective expected revenue of e-Tax system can be assessed.

(a) Per Capital Income approach. Per Capita income is calculated by dividing national income by population of the country. It was Rs 131,543 for FY 2012-1354. Multiplying per capita income with population of 180 Million, the

53 Source: http://www.riazhaq.com/2013/06/pakistan-to-borrow-billions-more-to.html54 As per Min of Finance http://finance.gov.pk/survey/chapters_13/HGHLIGHTS%202013.pdf

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sum of total transactions comes to Rs 23.68 Trillion per year. Velocity of money is number of times a rupee changes hands in a given period of time. It is expected that a rupee will change at least 3 hands in a month in an economy where 100% population is transacting online. Therefore transaction velocity of rupee will be 36 (12x3) for a year. The sum total of transactions will be Rs 852.4 Trillion (23.68x36) for a year. If tax is collected @ 2% on each transaction, total revenue for a year is expected to be Rs 17.05 Trillion (852.4x0.02).

(b) Money in Circulation Approach. As per State Bank of Pakistan money in circulation is Rs 11.43 trillion55. Taking above assumption of yearly transaction velocity of money of 3 per month as a yard stick, the yearly volume of transactions will be Rs 255.84 Trillion and 2% Tax revenue will be Rs 8.23 Trillion. Further if we take Rs 63.96 Trillion56 non currency based transactions into account, a further revenue of or Rs 5.12 trillion (@ 2%) will be added making total revenue of Rs 13.35 Trillion per year.

Comparison of expected revenues and liabilities

44. The expected revenue from the proposed e-Tax system is worked out with two different approaches. Let us analyze that with this much yearly revenues will the country be able to fulfill its liabilities.

(a) Per Capital Income approach. Rs in TrillionsREVENUE LIABILITIES DIFFERENCE

1st Year 17.05 Budget 3.99Debts 17.36 21.35 (4.30)

2nd Year 17.05 Budget 3.99Debts 4.30 8.29 8.76 Surplus

(b) Money in Circulation approach1st Year 13.35 Budget 3.99

Debts 17.36 21.35 (8.00)2nd Year 13.35 Budget 3.99

Debts 8.00 11.99 5.06 Surplus45. As worked out above, the country is expected to be self sufficient within a period of one and a half year and by the end of 2nd year after implementation of e-Tax system, surplus amount of more than full year budget of the country will be with Government for development of the country. The implementation of e-Tax system is not just a recipe of self sufficiency but it will carry lot of other benefits also. These benefits are related to good governance, ease of compliance, transparency, economic benefits etc. A brief account of benefits of e-Tax system is presented.

55 State Bank of Pakistan http://www.sbp.org.pk/ecodata/M3.pdf56 As per payment review system report of SBP for 1st Qtr of 2014 (Sum of table 1 to 4), Quarterly figures of Inter Bank (30.58 Tr), Instrument (26.96Tr) and e-transactions (6.42 Tr) multiplied by 4 to get yearly transactions. http://www.sbp.org.pk/psd/reports/2014/First-Quarterly-Review-FY13-14.pdf

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BENEFITS OF E-TAX SYSTEM

46. Heavy Tax Revenues. Since last 66 years efforts are being made to increase the tax base but no visible results are observed. After lot of tax reforms the final outcome is very discouraging. The existing tax system is capable of generating revenues equal to only 50% of the budget or even less. The e-Tax system will generate much more than budget requirements and all internal and external debts will be cleared within 1.5 years time.

47. Ease of Compliance. Compliance means payment of taxes. Economists of all times believe that if tax compliance procedure is simple and easy, more taxes payers will show their interest in payment of taxes. Compliance is considered as a yard stick by Department for International Development (DfiD) UK (Para 5) to grade any tax system as best of others. It also is included in Tax Cannons of Adam Smith57. The e-Tax system will be at height of it. There will be no formal tax returns, tax audits, rebates and confusing tax SROs. Tax will be deducted automatically from each transaction and will be credited to treasury account.

48. Correct Calculation of National Income. National income is a prime indicator of any economy. It is either calculated through income or expenditure method. In the existing system it is never calculated correctly due to many factors, one of which is underground economy comprising anonymous transactions. In the proposed system exact National Income will be calculated and no business activity will remain under the carpet.

49. Decline in General Price Level. All existing taxes will be abolished with the implementation of e-Tax system. As a result sale price of existing commodities will suddenly decrease by 17% to 20%. At a later stage, the decreased cost of production owing to decline in cost of raw materials will also add its share in decreasing the general price level.

50. Boom in Business and employments. Availability of working capital is an all time challenge for ongoing businesses. In the proposed system a buyer will be able tobuy raw materials costing more than his bank balance. The seller will received full payment and a loan will be generated against the buyer, which will be payable in easy installments. These arrangements will keep business wheal spinning. Same will be valid for consumers; therefore their purchasing power will increase. Every increase in demand of consumer goods increases supply (production). Requirement of heavy production will increase the demand of manpower. A level of Full Employment is expected as a result.

57 Wealth of Nations by Adam Smith (1776), The father of modern political economy. Association of chartered certified Accountants (ACCA) submitted a policy paper Tax Principles from Adam smith to Barack Obama and simplicity in taxation was stressed upon. http://www.nctbpu.org.ua/pdf/analytics/Tax_Principles.pdf

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51. Equality. Equality is an other tax cannon of Adam Smith as mentioned in his book Wealth of Nations. It means that tax should be charged indiscriminately. Goods and service are equally good for generation of income at individual and corporate level. Presently, major portion of taxes is being collected from goods and a negligible portion from services. This is due to lack of documentation in services sector. Proposed system will levy tax on goods and services alike. Non documentation at individual and corporate level for rendered services will not affect the new taxation system.

52. Revival of Banking sector. Presently banking sector is under merger and acquisition wave do to low return. Under the proposed e-Tax system banks will be having a vital role in the economy. They will be benefited on following counts.

(a) Heavy deposits (Large number of accounts in each bank).(b) Cost effective due to minimal counter dealing. (c) Economy of manpower due to no cash dealing.(d) Economy in cash transportation, storage and security set up costs.(e) More investment due to high rate of profit and easy processing. (f) Discontinuation of Cheques, Drafts, MTs, TTs, Travelers' Cheques etc will provide economy of manpower.

(g) More profits due to more accounts and offering e-loans.

53. Recovery of Utility Bills. Presently bills of Government owned utilities are not being recovered fully. A large number of politicians, businessmen and general citizens are defaulters of Govt owned utility services. Under proposed system, 100% recovery of utility bills will be ensured. The bill will be intimated through SMS and reply to the SMS will pay off the bill from concerned bank account. If no queries are raised by the consumer for a given period of time the amount of bill will be automatically deducted from his account and will be credited to the account of concerned department. There will be a remote chance of circular debt in any of the service providing Government department.

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RECOMMENDATIONS

54. Keeping in view the findings revealed during course of the research work, it is recommended that:

(a) Heavy taxes; 5% to 25% on individuals and 25% to 35% on companiesmay be abolished to provide relief to long suffering population.

(b) Only one tax @ 2% of transaction value may be levied on all population of Pakistan, indiscriminately.

(c) Tax base may be increased from 0.81million58 tax payers to 180 million tax payers.

(d) Recommendations from (a) to (c) may be achieved through following actions.

(i) Legislation may be done for implementation and operation of e-Tax and Electronic Retail Payment Services (ERPS).

(ii) Nation-wide Intranet may be established to provide a secured and fire walled medium for connectivity of all financial transactions taking place in the country with revenue collecting authorities and for connectivity of NADRA and commercial banks with State Bank of Pakistan.

(iii) Intermediary software modules may be implemented for real time data linking of all commercial banks with database of State Bank of Pakistan.

(iv) Each adult Pakistani may be issued with NADRA Smart Card. Keeping of at least one registered SIM and a bank account may be made mandatory for him.

(v) All mobile network operators may be linked with State Bank of Pakistan directly or through nearby commercial banks.

(vi) All paper money and coins may be got deposited in commercial banks and conventional money may be abolished forthwith. Meanwhile, time bound cash coupons may be spread in the country to replace paper money for use of those who are not in access of any online media.

(vii) Hardware and software of ATM machines may be alerted to accept and issue cash coupons.

58 Daily DAWN 20 Dec 2012, State finance minister said that 3.39 million people are issued with NTN but only 0.81 million people filed their tax returns in 2011-12.

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(viii) Cash coupon readers and smart card readers may be provided on all points of sales and businesses.

(e) Bank accounts may be operated by whole population of Pakistan through internet connected or G3 connected devices. 2% tax on each transaction may be credited to treasury account. The transactions include sale and resale of cash coupons also.

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CONCLUSION

55. Adam Smith is considered father of modern political economics. In his internationally famous book Wealth of Nations (1776) he spelled out Tax cannons;Equity, Certainty, Convenience and Economy. Word Bank and International Finance Corporation UK presented a comparative study of tax systems of the world 189 economies on the basis of Tax Cannons of Adam Smith. Pakistan was ranked 166th out of 189 economies. Association of Chartered Certified Accountants (ACCA) presented a policy paper Tax Principles from Adam Smith to Barack Obama stressing upon the same Tax cannons. Pakistans economy is more needful for tax reforms because Tax system of Pakistan is generating less than half of the annual budget requirements. Spokesman of Department for international Development (DfiD) UK said in connection with provision of aid to Pakistan We have made it clear to government and opposition politicians in Pakistan that it is not sustainable for British taxpayers to fund development spend if Pakistan is not building up its own stable tax take59. It is a sorry state that tax evasion, corruption and fraudulent accounting are now parts of culture of the countryand other nations are teaching us to pay taxes.

56. Over last 66 years, it is leaned that no tax reform in the existing tax system can make the country self sufficient. The final outcome of all previous tax reforms is hopeless. As of today Pakistan is under Debt of Rs 17.36 Trillion. Total tax and revenue earning capacity of the country is not more than Rs 2.6 Trillion. Average yearly budget is about Rs 4 trillion. Here a question arises, how a country, whos tax system is not able to generate revenue covering half of its budget can be free of its budget and debt liabilities? Undoubtedly, no conventional measure can work to fill this huge gap. How to make Pakistan Self sufficient was the research question of this research. In the torch light of Adam Smiths Tax Cannons and realizing the fact that there is no more room for corrective measures in the existing tax syst