KARACHI: Expanding the tax net is a major challenge that our country continues to face without a lot of success. To grasp the severity of the situation here are some striking statistics:
a) Less than 2% of citizens pay taxes
b) Industry sector accounts for +60% of taxes but represents only 24% of GDP
c) Agriculture sector accounts for over 20% of GDP but pays less than 1% in taxes
d) Tax/GDP ratio remains below 9% and is one of the lowest in the region.
All these factors scream for the need for reforms, for rethinking our strategy on tax collection and in coming up with new and innovative ways to attract and incentivize people to pay taxes.
One glaring deficiency in our existing taxation environment is the lack of differentiation between taxpayers and non-taxpayers. The irony is that non-taxpayers continue with their lives without any major repercussion or consequences. This fact is extremely upsetting for honest taxpayers and counterproductive in attracting new taxpayers.
To understand this predicament facing taxpayers, let me share an example. Assume there are two neighbouring retailers, one in the tax net and the other absconding. The absconder’s life is worry free, he makes a higher margin as he pockets the taxes, has no fear of an FBR tax audit, and gets the same treatment as a taxpayer when interacting with government institutions, banks and other companies. In fact I would not be surprised if the non-taxpayer retailer may even flaunt the benefits he accrues to his neighbouring retailer. In such a scenario the taxpaying retailer must be regretting his decision of becoming part of the tax net.
In psychology in order to change or influence behaviour of a person or an entire community or society, ‘reinforcement’ or ‘punishment’ are core tools of operant conditioning; stimulus which encourages or discourages certain select behaviours. Many countries use these tools to achieve their goals.
Why don’t we use the power of operant conditioning to help deliver the objective of expansion of the tax net? One prominent business chamber, the American Business Council, has been recommending for many years to introduce a “Tax Payer Card” with clear benefits to taxpayers such as
a) Quick processing of application and major discounts on government fees like passport fee, NIC fee, driving license fee and waiver from police enquiry
b) Special lines at immigration, airline and railway check-ins as well as waiver from CVT on property, vehicles, and international air tickets
c) Waiver on loan processing fee, reduced mark-up rates or any other one-time charges taken by banks for loan/finance processing
e) Priority in obtaining new connections for utilities like electricity, telephone, gas and water
f) Offer tax credit on education and medical expenses.
In short, a taxpayer must be treated as a preferred citizen of Pakistan.
In addition, it is also an established economic model that if sales tax rate exceeds 10%, people start engaging in widespread tax evasion. Hence focus should be on expanding the tax net while reducing its overall rate.
I strongly believe that reinforcement works better and its results are sustainable versus if one punishes an offender. Our tax policymakers must focus on building incentives into our tax culture, reducing its overall burden and making the general public realise that the benefits of paying taxes far outweigh the constant fear of being an offender.
The writer is the President of the American Business Council (ABC) and Chairman of its Taxation Sub-committee
Published in The Express Tribune, April 23rd, 2012.