Our corrupt tax collection system and its consequences.
By: Tarique Khan Javed
President, Overseas Pakistani Investors Forum.

Net tax collection during British Rule:
It is estimated that Britishers earned net USD 8,000 billion, during their rule from 1757 to 1947. British East India Co formed in1600 with a capital of Pound 70,000 earned Pound 3.7 million in its first eight years rule of Bengal from 1757 to 1765. One can image how profitable the venture was. One can also calculate the dividend that each holder earned and the market value of each share of the Co, based on expected income. For such a profitable Co; raising any amount of capital should not have a problem. Indeed the Co had found the famed “Golden Bird”.

To prove my point I must quote here an interesting British House of Common, 3rd report in 1773, which stated thus:

“When Mir Jaffer was made first Nawab in 1757, the British Officers and troops received a bonus of £1,238,575 out of which Clive him self had taken £32,500 besides a rich Jagir or estate in Bengal. When Mir Qasim was made Nawab in 1760, the present was £200,269 out of which Vansittart had taken £58,333. When Mir Jaffer was made Nawab again in 1763 the present amounted to £500,163 and when Najim-ul-Doula was set up in 1765 present was £230,356. Besides these sums in presents amounting within 8 years to £2,169,665, furthers sums were claimed and obtain as restitution within the period amounting to £3,770,833”.       

Prior to commencement of British rule the tax rate although high at 80-90% of economic income, the actual tax collection was limited. The reason was that bulk of the actual income was kept by the tax collectors and small amount was actually paid to Treasury. In present time the same is happening as is well known to any businessman. For example if the tax calculated on agreed basis was say Rs 100, a deal with the tax collection team could be reached whereby the Government would be paid Rs 20 and Tax collection Team Rs 30 and Tax payer would save Rs 50. All benefited except the poor Government.

The relatively honest Co officials and the system of modern check and balance was responsible for a quantum jump in revenue as illustrated below:
Land revenue of Bengal on different dates:
Todar Mall’s settlement       1582       Rs.10.69m
Sultan Suja                            1685       Rs.13.11m
Jaffer Khan                           1722        Rs.14.29m
Suja Khan                             1728        Rs.14.24m (£1.42m)

Total Gross revenue during 1765-1771 was £20,133,579 (or 3.35 annually); net after payment to Nawab and King £13,066,761. Total expanses Military etc £9,027,609; net surplus balances £4,037,152, for transfer to Britain in the

form of Exports. But the actual transfer was greater if we consider the salary and businessman income out flow.

Perhaps the Import and Export figures given by Governor Vansittart for 1766-68 shows the real out flow: Import £ 624,375 and Export £ 6,711,250; net transfer 6,086,875.

By 1901 the income increased to Ps 44m out of which 16m was remitted to Great Britain as “Home charges”. The pay of European officers in India, virtually monopolizing all the higher service was  Ps 10 millions. As official were provided free housing and servant almost all this amount was also remitted. Implying transfer of 26m out of 44m or 59%.

In the first 46 years of rule 14 years were years of deficit which amounted to 17 million £ and 32 years of surplus amounting to 49 million. Thus a surplus of 32million £ was derived. All this funds was sent to England to pay dividend to Co.

After the Crown take over in 1857, the expansion continued into Punjab and Baluchistan, as it was profitable business proposition. British Co’s earned huge sums in lying millions of miles of Railway, and Irrigation systems and manufactured goods like cloth.

Thus overall British Rule of India was very beneficial for UK and it helped them transform into a major Economic power.

Low Net Tax Collection after Independence:
With the departure of the Britishers Tax Collection drastically dropped, as the old system of keeping bulk of the tax for Tax Collectors and giving up the actual tax started.

The whole sub continent started to face budget deficits which led to printing of notes resulting in inflation and misery of the common people.

While the Governments were compelled to borrow from the World Bank and IMF the Bureaucrats, Businessman and Landlords of the Sub Continents became personally so rich that they become biggest depositors   in Swiss and other Offshore Banks. It is estimated that Indians have some USD 1,500 billion while Pakistanis have some USD 200 billion deposits in such centers. This is on top of huge funds transferred to US, Europe and Gulf for buying Houses and other assets. Most of these people have enough for their families to survive without any income for a longtime.

In recent history the Tax for Land has become insignificant while other Taxes like Sales Tax, Custom and Surcharges have become more prominent. Total tax collected has increased significantly during recent years from Rs 300 billion 6 years ago to current Rs 1,000 billion (2007-2008), yet they are no where near the needs of the Country.

The last budget 2007-8 Expenditure was projected at Rs 1,500 billion which resulted in borrowing of Rs 600 billion from SBP leading to inflation of 25%. This has push huge amount of people to starvation stage. The situation is so grim that the current Government has promised not to borrow any more from SBP starting 1st November 2008.  IMF will insist on it anyway along with other austerity measures like reduction in Armed forces budget by 25% along with matching reduction in Civil Administration cost.

Governments borrowing from State Bank is mostly out of newly printed notes; which is an indirect way of taxing the common people. Inflation is a very cruel method of taxing people indiscriminately with tragic impact on the poorest.  Out of the meager tax collection the bulk 70% is coming from Indirect taxes which impacts all irrespective of their income level. Thus a huge burden is placed on the poor sections of the Society resulting in widening gap between rich and poor. The situation is becoming such that a violent revolution can not be ruled out, as was fore warned on 27th Dec 2007.

Tendering out Tax Collection system:
There is an urgent need to overhaul the entire tax collection system. Lessons from British Rule indicate that we need to bring Honest Tax Collectors. However given the low moral base of our society in which due emphasis has not been placed on loyalty to the employer and common good of the society, this is an uphill task. It is not that the British or European Officers were all honest all the time. However even today in multi national Cos and places like Gulf where  staff come from allover the world; the ratio of dishonest  European/ Western Officers is very low, same where like 3-5% while that of Eastern/Indian/Pakistani Officers is very high, some where like 40-50%. This is one reason why the later are paid far less than the former. Honesty is a highly rewarded in business.

If there is no hope of find honest officers locally and foreigners would not like to come under the given circumstances. The only option left to increase the tax collection substantially is by tendering out the Tax Collection system to private Cos. That is giving out Tax collection to a private Group on a fixed amount of say Rs 3 to 5 trillion compared to current collection of Rs 1 trillion.

Meanwhile a revolutionary cut in Government expenses is imperative. Sighting the low collection and incoming  restriction on further borrowing from SBP, Government must either reduce the number of Ministers and Government employees including that of Armed forces, by say half or reduce their salaries by half. This should also apply to MNA and MPAs. If they do not like their new salaries; they may resign. The Country can not pay them well by starving the common people.