Opinion: must incentivise taxpayers!

Published: April 22, 2012
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A punishment to some, to some a gift, and to many a favour: Lucius Seneca.
 DESIGN: ESSA MALIK

A punishment to some, to some a gift, and to many a favour: Lucius Seneca. DESIGN: ESSA MALIK

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.

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Reader Comments (6)

  • confused
    Apr 22, 2012 - 10:15PM

    Brother the #1 reform is to make the tax work for the people rather than line the already well lined pockets of our bureucrats, senior army officials and politicians

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  • Meekal Ahmed
    Apr 22, 2012 - 11:27PM

    Your first statement is wrong!

    Not all 180 million people are taxable!!!!!!!!!!!!!!!!!!!!

    Please stop saying that.

    If you count those who are taxed through with-holding, the number who do pay tax is 45 million. Do the math.

    The rest of your article is fine.

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  • Not me
    Apr 23, 2012 - 12:55PM

    58% of the total taxes collected are through witholding of taxes
    My guess is about 150 corporations/entities pay about 75% of the balance taxes

    FBR is a big farce and till FBR and it’s software unit PRAL exists in present form with present mind set and is not drastically changed, there cannot be positive impact of any tax reforms.

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  • Riaz Khan
    Apr 23, 2012 - 5:14PM

    Good suggestions but people do not pay taxes since they feel it will be spent on buying expensive war toys instead of creating jobs, infrastructure, roads, hospitals, etc. Nobody wants that army, air force or navy should be buying useless toys in the name of defence. What are we defending? Poverty, unemployment, misery, pain, hunger, etc.

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  • Falcon
    Apr 23, 2012 - 5:43PM

    Good article in general. However, I think incentives you have proposed might not work out that well because relevance of benefits will vary from person to person and in many cases taxation costs will still far outweigh the benefits. Tax evasion has a lot to do with diving tax morale which itself is tied to lack of trust in the govt. Once we elect better people, it will become relatively easy to improve tax-to-GDP ratio.

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  • Loony toon
    Apr 23, 2012 - 7:13PM

    As tax payer I have never been given the slightest bit of respect intact quite the opposite. My advice to those who don’t pay is not to pay because tax payers are second class citizens. By the way after paying taxes for 20 years I still get audited because the department doesn’t get an envelop with my returns.

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