Pakistan’s taxing problem

Soon after partition, a ticket collector was making the rounds of a train and asked one of the passengers to show him his ticket. The passenger got upset and exclaimed, “Are you out of your mind? Haven’t you heard that we are ‘Free’ now? Why should we buy tickets anymore?” This story might be apocryphal but it succinctly reflects the attitude of Pakistan’s general public towards taxes. Tax avoidance is an endemic disease in our part of the world. People would go to all lengths just to save a few bucks in taxes. On one hand, talk to the person on the street and they will decry the pathetic situation of public services like government hospitals, educational institutes and law enforcement agencies. Ask the same person about tax returns and you will receive lengthy rants about inefficient governance but not a peep about paying taxes. The fact that only 0.3% (500,000 people) of the population of Pakistan files their income tax returns does not raise many eyebrows because of our national attitude towards this issue.

Pakistan has a Tax-to-GDP ratio of 9.4%, among the lowest in the world. We do however boast of having the 6th largest population in the world, the seventh largest army and third largest nuclear arsenal. A recent report by RAFTAAR (Research and Advocacy for the Advancement of Allied Reforms) on taxation and public expenditure in Pakistan sheds some light on this issue. Governments require revenue streams to pay for services they offer to citizens. Taxes form a major chunk of the revenue that is collected from citizens in all developed and developing countries in the world. In social democratic setups of Western Europe, high earners have to pay more taxes than the average household. The average Tax-to-GDP ratio—the amount of GDP contributed through taxes—in Western European countries was 34% in 2013-14. Pakistan’s government requires revenue to pay for public services and in absence of significant tax returns, indirect taxes are implemented. As a result, 68% of tax revenue comes from indirect taxation. We pay more for fuel and electricity than other regional countries because of the surcharges added. The downside of this approach is that people with lower socioeconomic status have to pay as much tax as the highest earners.

Even with indirect taxes, the government doesn’t earn enough to cover its expenditures. This situation leads to loans from internal and external sources. Pakistan has a Rs. 17 trillion public debt which amounts to 63% of our Gross Domestic Product (GDP). Contrary to popular perception, only one third of our debt is foreign while two thirds is raised through domestic sources. To compound the misery, Domestic debt has an interest rate of 10.7% while International debt has an interest rate of 1.9%. These facts pose problems for people who are tasked with formulating the Annual Budget. Majority of budgetary allocations have to be devoted to paying back the public debt and there is little room for spending on development projects. More than 53 percent of federal government’s expenditure is on interest payments on debt, defence spending and salaries and remuneration. Another 29 percent is allocated towards subsidies and grants. The remaining expenditure that is fully adjustable is only 18 percent.

The debt servicing cannot be ‘deferred’ indefinitely and withdrawal of subsidies is not politically feasible. Increasing the tax net or indirect taxes can help increase the revenues. The recent proposal of implementing a Withholding Tax has sparked protests in major urban centres, mostly by middle-income traders and retailers. ‘Services’ sector is resisting a change in the status quo and doesn’t want imposition of even 0.6% tax on their transactions. Due to apparent religiosity and patriotism displayed by the same segment of society, cultural critic Nadeem Paracha branded their sentiments “nationalism minus responsibility”. Similarly, property tax collected in Punjab is about Rs. 5 Billion annually. In comparison, Mumbai collects more than Rs. 60 Billion annually while Delhi and Bengalore also collect more.

Pakistan’s economy is fragile and the government needs to spend more on health, education and other essential services. This, however, is not possible without improvement of Tax Collection. We can’t afford more public debt in these circumstances. What needs to be done in this regard is an increase in the number of tax payers and more importantly, reduce tax exemptions. Pakistan does not have a solid industrial base and our economy is not stable enough to finance the requirements of burgeoning population. Limiting the budget spending on military and reducing corruption in the public sector are hard steps that have to taken.

Federal Bureau of Revenue has tried to incentivise tax payers and introduced an e-filling system but these are only baby steps in the right direction. To promote a tax paying culture, children in primary schools need to be informed about their civic responsibility of paying taxes. Media should be used to sensitise the common man about the gravity of this issue. Unless we start paying our taxes, the country will remain in doldrums and public services will remain dilapidated.

The writer is a freelance columnist. Follow him on Twitter

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