Pakistan’s taxation crisis
Whether they indulged in legal tax avoidance or evaded taxes under the counter, leaked documents of a Panamanian firm revealed quite a lot in April about a number of Pakistani politicians and businessmen. Tax evasion has of late become synonymous with Pakistan because of its failure to overcome its taxation crisis. Despite oft-reiterated resolutions by the subsequent administrations to improve its taxation net, taxpayers have not yet shown any remarkable increase. With a dismal 0.3 percent of its population that exceeds 190 million filing taxes, Pakistan is slated amongst countries with the lowest tax to GDP ratio (9.4 percent).
This narrow tax base is greatly facilitated by the dismissal attitudes of well-off Pakistanis who look out for loopholes in the system in lieu of paying voluntarily. This dilemma of tax evasion was once again brought to light by a tax directory released by Finance Minister Ishaq Dar that focused on the tax paid by parliamentarians. According to the report, Senator Taj Muhammad Afridi was found to have filed the highest income tax (Rs 41.712 million) this year, while the lowest tax was paid by MPA Muhammad Javed Awan (Rs 920). Save a few exceptions, the laughably low-income taxes paid by most of the legislators paint a stark contrast with their princely lifestyles.
Nevertheless, legislators alone cannot be blamed for giving rise to a non-functional revenue system. In a country where most people are willing to spend in the name of charity but not as taxes, the fact that the rich find it easier to achieve tax avoidance should come as no surprise. The official exemptions made through the Statutory Regulatory Order’ are one of the many ways that these taxpayers avail to avoid taxation. Non-existent agricultural taxes, failure to register the informal workforce and corruption in the tax administration further facilitate revenue losses. Had the administration been serious enough to effectively deal with this monstrosity, the revenue earned from tax evaders could have easily taken the place of external loans.
What the country now needs is a coherent and functional system that acts against all tax dodgers. As long as an improved governmental process is not worked upon, this trust deficit would continue to encumber development. Accountable tax systems would not only help Pakistan get rid of foreign dependency but also assist in the realisation of many developmental projects. The shambolic health and education sectors that at present receive only 0.7 percent and two percent of GDP respectively can be fundamentally developed if assigned greater funds. Adequate welfare expenditure can also expedite the poverty alleviation of more than 30 percent of its population currently living under the poverty line. However, such reforms require funds, which can only be gathered if all seven million Pakistanis eligible to pay income taxes are willing to do so.
Pakistan needs to let go of its perpetual reliance on indirect taxation in favour of more successful and embracing tax reforms. The Federal Board of Revenue should act in conjunction with governmental agencies to document the economy in an efficient yet thorough manner so that all potential taxpayers could be targeted. Failures in the tax system could also be overcome if the corrupt and cumbersome elements in the collection agencies are removed. One-window operations and audits of tax returns should be initiated to ensure smooth collection sans any evasion. The day Pakistan manages to achieve its long-deprived revenue from its taxpayers it would also establish an absolute trust in its institution to run in accordance with its law.*
