Pakistan's new rulers grapple with an old problem: How to get people to pay taxes?

PM Imran has vowed to double tax collection by reforming the FBR

ISLAMABAD:  

Muhammad Hammad Azhar, one of the youngest ministers in Pakistan’s new government, is the latest in a long line of officials to face a problem that undermines his country’s development: getting people to start paying income taxes.

Ending a culture of rampant tax evasion is expected to be high on the agenda in negotiations this month with the International Monetary Fund (IMF) as Pakistan seeks a second bailout since 2013.

State Minister for Revenue Azhar, 37, says he is planning for long-term reforms. But first, he is banking on improved technology to allow the government to tap existing financial databases to help identify tax dodgers in a nation where less than 1% of the population files income tax returns.

“There is a lot of catching up to do,” Azhar told Reuters in an interview.

One of the world’s lowest tax collection rates partly help explain the shoddy state of Pakistan’s hospitals and schools and why the illiteracy rate hovers above 40%. Prime Minister Imran Khan, who took power in August, has vowed to double tax collection by reforming the Federal Board of Revenue (FBR), an institution he has called “totally corrupt”.



One of Khan's first acts as premier was to replace the FBR chief. In recent months, the FBR has launched a crackdown on 350 wealthy people targeting landlords and owners of luxury cars as well as individuals who have a “trail of large business transactions and business deals” but don’t file tax returns.

“Reforming the tax system in a country like ours is a gigantic task,” said Yousuf Nazar, a former head of emerging market equity investments at Citigroup in London and author of a book on Pakistan’s political economy. “Powerful interests in the establishment, big business and large land owners are not serious about tax reform.”

To widen the tax base, Revenue Minister Azhar said the government plans to use a carrot and stick approach - intensifying the targeting of evaders while at the same time making it easier for taxpayers by allowing them to file taxes under a single window, where all the relevant information would be stored.

Azhar says his team is using existing government data on car purchases, bank transactions and air travel histories to build a database that will identify and profile wealthy tax dodgers. But it would take a few months for most of the disparate data on the government’s books to be brought under one platform.



Sales taxes

Such efforts are likely to go down well with the IMF, which in return for bailing out Pakistan is expected to demand structural reforms, including the widening of income tax base.

The previous government increased the tax-to-GDP ratio to around 13% from 10.1%, but that is still far below the 34% average among members of the Organisation for Economic Cooperation and Development.

Much of the increase was due to import duties, sales taxes and other indirect taxation, which accounts for nearly 63% of government’s revenue.

Critics say this kind of taxation is regressive and disproportionately hurts the poor. As of last year, only 1.6 million people in the country filed tax returns.

Out of them, 400,000 showed income below the levels that allow tax cut, another 200,000 had minimal tax and only 950,000 paid tax of any significance.

There is political will in the new government to push through changes and go after non-filers but it is not unanimous across Khan’s party and may not last forever, according to Zeeshan Merchant, a tax expert. “We don’t need rhetoric. We need action,” he said.

Key tax reforms kicked off last week when Khan’s cabinet separated tax policy from revenue collection. This effectively took away policy-making powers from the FBR, which has a history of imposing indirect taxes to help hit year-end targets.

One of the biggest potential prizes for Azhar is capturing Pakistan’s black economy, in which property, goods and services are sold for cash to avoid taxation, and which many people believe is bigger than the formal $310 billion economy.

“We really have to discourage the cash economy,” Azhar said. “All this money is handed in cash under the table and that’s something we want to make difficult.”