Scot-free untaxed

The chorus of voices calling on the government to fix the tax system keeps growing, and the latest notable suggestion comes from the local head of the lender that policymakers regularly use as a scapegoat. IMF Pakistan Representative Dr Mahir Binici recently credited the government's efforts to stabilise the economy, but followed it up by noting that the tax system needs to be made "broader, simpler, fairer and more predictable" to finance human capital, infrastructure and investment. That is about as diplomatic as anyone can be while describing Pakistan's narrow, disproportionate and highly regressive tax system.

But while ministers and government officials - regardless of the party in charge - keep blaming the IMF and other lenders for creating the conditions that led to our broken tax system, it is our own failure to craft a better system that is to blame. This is because the IMF doesn't dictate policy rates or other nuances, per se, but instead sets broad targets, leaving the finer points to borrowing governments. That we chose to chase those targets by squeezing salaried workers is a problem of our own policymakers' making.

Pakistan's revenue effort remains far below the roughly 15% of GDP that is considered the minimum for a well-run state. Even after recent gains, the tax-to-GDP ratio stands at just 12.3% including provincial levies, and around 10% on the narrower federal measure. Meanwhile, the contribution of the salaried class has risen from Rs391 billion to Rs629 billion in two fiscal years. In contrast, agriculture, despite its raw size, carries an effective tax rate of just 0.3%; real-estate income tax fell 38% after rate cuts; and exporters pay less than salaried persons and also benefit from subsidies, while retailers remain largely outside the net.

Salaried individuals are justified in thinking their government does not care about them. Pakistan's tax problem is actually a fairness problem that needs to be addressed before the salaried class is forced to cough up more for economic development that only benefits the barely taxed.