Tax avoidance

As rate of tax payers in the country is the lowest in the world

According to the State Bank of Pakistan (SBP), only 1.21 million citizens — less than one per cent of the entire population — pay tax. The rate is the lowest in the world. The country is losing taxes valued at Rs1,000 billion every year, which is almost 70% of the potential revenue that could be collected. Moreover, the SBP’s annual report shows that 57.5 million people are employed and undoubtedly earning some income and this is where tax evasion ensues. According to the Federal Bureau of Revenue (FBR) data, year 2018 recorded a tax evasion of Rs170 billion across the country.

Corruption, political intervention in the tax system and a lack of trust in the government are considered to be the root causes of tax evasion. Many politicians are able to influence law-making, and are involved in money laundering and capital shifting. Similarly, business tycoons avoid paying taxes as there is no harsh punishment for those involved in tax evasion and bribery. On the other hand, our taxation system is complicated, disintegrated, and time-consuming. People have to stand in long queues in order to pay their taxes returns. Moreover, irrational tax slabs and different tax rates for various sectors of the economy contribute to tax evasion.

In order to overcome this issue, the following policy option can be useful. Firstly, there is a need for equality and justice in the tax system. Taxes need to be collected from everyone, according to their incomes, and the efficiency of the tax department needs to be enhanced. The tax collection department needs to be given adequate coaching to diminish tax-related crimes. The amount of tax collected should be invested in human capital from the bottom income quintile, in order to restore the trust in government of the taxpayers and also of the deprived segment of society.

Secondly, there must be special courts to deal with taxation cases, and criminals should be given harsh punishments for tax evasion, including non-bailable arrests. In countries like the United States, tax evaders are handed out fines of a maximum of $100,000 ($500,000 in case of corruption) or a prison sentence of up to 5 years.

Thirdly — and the government has taken steps for this — the national database, NADRA, needed to be synchronised with the National Tax Number (NTN). With this linkage, it is difficult for people to evade tax and it is an easy method to pay tax, hence increasing the number of taxpayers. The procedure of filing tax returns is further simplified through this process.

Fourthly, we have to give tax officials the powers to collect taxes but also there needs to be a check and balance to ensure this does not lead to further corruption by the officials. This can be ensured by conducting audits providing proper data to citizens regarding where their tax is being used.

Lastly, there is a need to rationalise our tax rates and tax slabs. In the existing tax system, the weaker segment of society – the middle class – is impacted the most. We need to collect more tax from those with greater incomes rather than those who are already hand to mouth. When tax rates are rational, it will limit tax evasion.

Abid Rehman is a PhD Fellow in Economics and Visiting Faculty Member at the National University of Sciences and Technology in Islamabad.