It is not new for any lender, think tank, economist or even the common man to say that enforcement of the tax regime has remained weak in Pakistan. Tax authorities continue to play the blame game but the fact remains that there is hardly any incentive for people and businesses to pay taxes or fear punishment if they fail to do so. Hearing stories of government officials themselves not paying taxes is hardly encouraging, which is obvious after only 510,000 taxpayers in the country filed returns this year before the deadline was extended. In the budget for the ongoing fiscal year, the government introduced various measures to enhance revenue collection but, contrary to claims, the tax base failed to widen. Increasing the share of withholding taxes was the government’s approach towards resolving our tax conundrum. Its strategy was to increase the percentage of those taxes that are more regularly paid, including the capital gains tax, tax on transfer of ownership in case of vehicles, and property taxes. Why the government thinks that increasing withholding taxes is the way to go is beyond comprehension. This is a short-term measure to solve the problem of the public failing to file tax returns. If there was an effective reward and punishment mechanism in place, one would file tax returns. But, as is clear, the government does not seem serious about working along these lines.
Published in The Express Tribune, December 10th, 2014.
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"Why the government thinks that increasing withholding taxes is the way to go is beyond comprehension. This is a short-term measure to solve the problem of the public failing to file tax returns. If there was an effective reward and punishment mechanism in place, one would file tax returns. But, as is clear, the government does not seem serious about working along these lines."
The difference in applicable rates of withholding taxes for income tax filers and non-filers was one attempt made by the government to encourage more people to file their returns. The key is to have an honest, flexible and nimble tax administration that not only succeeds in getting the wealthy to pay their taxes, but also manages to get a larger share of the economy documented, which would automatically lead to higher tax collection and thus lower the need for withholding taxes.
Pakistan will always be a country where only the "little people" pay taxes!