Burgeoning tax base in Pakistan: a cry in wilderness

Newly elected Prime Minister Shahid Khaqan Abbasi pivoted his maiden speech around his economic vision and prosperity in tandem with CPEC. At the center of his futuristic plans was his commitment to bring every affluent person into the tax net – including those in the parliament. He looked grieved over the dismal picture portrayed by recent tax directory of parliamentarians not paying taxes. His emphasis on burgeoning tax base in his maiden speech shows how reducing deficit has become a wild cry for his party due to inefficient tax policies. With 4.2% tax deficit looming large for the recently concluded fiscal year – significantly greater than estimation 3.8% set by Ishaq Dar – the PM and Finance Minister have asked tax authorities to find more taxpayers.

Four years after the ascendance of Nawaz Sharif as Prime Minister of Pakistan for the third time and promises of bold reforms to Pakistan’s largely dysfunctional tax collection system, it still remains as dilapidated as before. The very fact that less than 1% of people in Pakistan pay tax is enough portrayal of abysmal tax collection system in Pakistan. With current key economic indicators like current account deficit and trade deficit ballooning alarmingly, a return to another IMF program seems inevitable, unless bankrolled by mana from heaven like a generous donation from Saudis is received.

The figures of 12% tax to GDP – the lowest in the world – and total revenue to GDP 9.4% for the first three quarters of 2017 as compared to 9.9% for the same period last year have been doing rounds in media for some time now and are bringing a bad name to Pakistan globally. With this percentage, Pakistan ranks among the lowest taxpaying countries in the World. This figure has allowed many donor countries to question the rationale of financing the budget deficit with assistance and loans while Pakistani governments keep giving free rides to their citizens. These figures are despite the fact that the Finance Minister has taxed almost everything in Pakistan, but failed to enhance the tax base. This is conflicting to the three-year IMF Program, where it was committed that tax base will be enhanced and tax rates will be reduced.

From real estate tax to CGT and import duties to indirect tax on goods sold, the government has almost doubled tax rates, but it has failed pathetically in bridging the fiscal deficit. This is due to a lack of formulation and implementation of a thorough and rigorous tax collection laws which are in conformity with the changing class demography of Pakistan. Middle and working class people have been brought under tax net through indirect taxation and tax at source, but wealthy and affluent people have always been dodging the tax net. Fixing tax collection system will be a cry in the wilderness unless a wide ranging and all-encompassing tax law is formulated to charge equitable taxes on people from different classes.

Lossmaking public institutions like PIA and Railways are also contributing significantly in negative balances of the current Account. The way forward is not increasing tax rates but making sure that every penny due for tax liability is collected from public. There’s no denying the fact that accurate data about number of taxpayers has never been compiled or released by tax authorities in the country. The number of people who file their returns is far smaller than the number that actually pays income tax. Many citizens get their tax deducted at source, including government employees and armed forces personnel. After this, many of them feel that since they have already paid, filing returns is a mere formality that need not concern them too much. FBR should come up with a list of people who actually pay tax through their employer to help draw complete picture of taxpayers in the country.

 

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