Tax, the existential crisis
It has been estimated that the land-owning classes have been evading taxes to the tune of over $1.2 billion a year
Saman Munir is a final-year student of Economics and Finance at the National University of Modern Languages in Islamabad
The report by the Research and Advocacy for the Advancement of Allied Reforms titled ‘Tax the existential crisis of Pakistan’ highlights the country’s dismal tax-to-GDP ratio, which at 9.4% is one of the lowest in the world.
According to the State Bank of Pakistan’s annual report, 57.5 million people are employed and obviously earning some income and thus these people should be paying income tax one way or the other. According to the Economic Survey of Pakistan, 61.4% population is of working age making 122 million people fall into the working population. The 57.5 million taxpayers constitute 48% of these working people.
In Pakistan, poorest of the poor pay taxes while the rich whose total contribution to overall tax revenue does not exceed 5% enjoy special rights or privileges and a concessionary regime under the country’s unethical tax structure. The elite, just like Pakistan’s powerful personalities, should be made to pay taxes which can automatically improve the tax revenues.
It has been estimated that the land-owning classes have been evading taxes to the tune of over $1.2 billion a year. While the number of national lawmakers from feudal families representing in the country’s feudal democracy appears to be shrinking primarily due to increased urbanisation, their financial clout seems undiminished. According to a recent study by the Pakistan Institute of Legislative Development and Transparency, the average worth of a member of parliament is $900,000, with the richest member worth over $37 million.
Similarly, structural problems, including a narrow tax-base, massive tax evasion and administrative weaknesses have become the most serious concerns. Repeated and frequent changes to tax legislation have also contributed towards the distorted tax system. The reason of a low tax base is preferential and discriminatory behaviour towards different sectors of the economy. Tax laws are such that different individuals with the same income, businesses and profits are treated unequally.
Another problem is indirect taxes. Increase in indirect tax means that poor people are forced to pay more taxes as compared to rich people. Surprisingly, the contribution of the poorest 10% of the population in Pakistan is 17% of their total income through indirect taxes which includes General Sales Tax (GST), Central Excise Duty (CED) and Customs Duty. An example of indirect tax collection in Pakistan is through the electricity and telecommunication bills. If your electricity bill is Rs20,000, you are paying Rs13,000 for the cost of electricity used and the remaining Rs7,000 rupees are collected in terms of 14 different indirect taxes. That means a total of 35% tax is collected on electricity bills.
These problems can be resolved by drastic changes in policies that can create a lasting and flourishing impact on the taxation system. Firstly, policies should be made to increase the direct tax base while keeping indirect taxes as low as possible. This would make the richer person pay more taxes and the burden of taxes is reduced on poor people. A successful taxation system reduces the wealth gap between the rich and the poor and ensures equitable distribution of income and wealth.
Moreover, an equitable and fair national tax policy should be made where everyone and every sector with a potential tax liability should be taxed. Those who have little should pay little, but they should pay something, anything that displays a commitment to the nation and its goals.
Furthermore, the politically and economically powerful elite must demonstrate their stake in society by carrying its share of the tax burden. The FBR should be free from political influences. Accountability should be established within the department and corrupt officers should be laid off from the department. Examples should be set by penalising corrupt officers. These steps will restore public confidence in the department and contribute towards better tax collection.
Published in The Express Tribune, January 5th, 2019.
According to the State Bank of Pakistan’s annual report, 57.5 million people are employed and obviously earning some income and thus these people should be paying income tax one way or the other. According to the Economic Survey of Pakistan, 61.4% population is of working age making 122 million people fall into the working population. The 57.5 million taxpayers constitute 48% of these working people.
In Pakistan, poorest of the poor pay taxes while the rich whose total contribution to overall tax revenue does not exceed 5% enjoy special rights or privileges and a concessionary regime under the country’s unethical tax structure. The elite, just like Pakistan’s powerful personalities, should be made to pay taxes which can automatically improve the tax revenues.
It has been estimated that the land-owning classes have been evading taxes to the tune of over $1.2 billion a year. While the number of national lawmakers from feudal families representing in the country’s feudal democracy appears to be shrinking primarily due to increased urbanisation, their financial clout seems undiminished. According to a recent study by the Pakistan Institute of Legislative Development and Transparency, the average worth of a member of parliament is $900,000, with the richest member worth over $37 million.
Similarly, structural problems, including a narrow tax-base, massive tax evasion and administrative weaknesses have become the most serious concerns. Repeated and frequent changes to tax legislation have also contributed towards the distorted tax system. The reason of a low tax base is preferential and discriminatory behaviour towards different sectors of the economy. Tax laws are such that different individuals with the same income, businesses and profits are treated unequally.
Another problem is indirect taxes. Increase in indirect tax means that poor people are forced to pay more taxes as compared to rich people. Surprisingly, the contribution of the poorest 10% of the population in Pakistan is 17% of their total income through indirect taxes which includes General Sales Tax (GST), Central Excise Duty (CED) and Customs Duty. An example of indirect tax collection in Pakistan is through the electricity and telecommunication bills. If your electricity bill is Rs20,000, you are paying Rs13,000 for the cost of electricity used and the remaining Rs7,000 rupees are collected in terms of 14 different indirect taxes. That means a total of 35% tax is collected on electricity bills.
These problems can be resolved by drastic changes in policies that can create a lasting and flourishing impact on the taxation system. Firstly, policies should be made to increase the direct tax base while keeping indirect taxes as low as possible. This would make the richer person pay more taxes and the burden of taxes is reduced on poor people. A successful taxation system reduces the wealth gap between the rich and the poor and ensures equitable distribution of income and wealth.
Moreover, an equitable and fair national tax policy should be made where everyone and every sector with a potential tax liability should be taxed. Those who have little should pay little, but they should pay something, anything that displays a commitment to the nation and its goals.
Furthermore, the politically and economically powerful elite must demonstrate their stake in society by carrying its share of the tax burden. The FBR should be free from political influences. Accountability should be established within the department and corrupt officers should be laid off from the department. Examples should be set by penalising corrupt officers. These steps will restore public confidence in the department and contribute towards better tax collection.
Published in The Express Tribune, January 5th, 2019.