Pakistan and its massive tax problem

Published: June 6, 2012
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The writer works for the Royal Bank of Canada and is based in the Grand Cayman Islands. The views expressed in the article are his own

The writer works for the Royal Bank of Canada and is based in the Grand Cayman Islands. The views expressed in the article are his own

Readers may be familiar with an inspirational slogan of the American Revolution: “No taxation without representation”. It originating somewhere in the 1750-1760s and was a rallying call by people living in the Colonies, who resented the imposition of taxes by Britain since the levy was done without the expressed will of the people (of the Colonies).

In Pakistan, an arguably perverse view of this American proclamation has been in vogue for some time now: “No taxation with representation”, which means that rich Pakistanis, including a significant percentage of members of the National Assembly and provincial legislatures pay next to nothing in tax, forcing the government to rely on foreign assistance to prop up finances.

In the past, US Secretary of State Hillary Clinton said that Pakistan must tax its elite if it wants to continue receiving financial assistance and for this she came in for some heavy criticism in Pakistan. To quote what she said: “This is one of my pet peeves: countries that will not tax their elite but who expect us to come in and help them serve their people are just not going to get the kind of help from us that historically they may have…. Pakistan cannot have a tax-to-GDP rate of nine per cent when land owners and all the other elites do not pay anything or pay so little it’s laughable. And then when there’s a problem everybody expects the US and others to come in and help.”

British Prime Minister David Cameron also spoke on this point, recently, in interactions with Pakistani leaders and is reported to have said that aid increases were a hard sell when “too many of your richest people are getting away without paying much tax at all”. Clinton and Cameron live in societies where to quote Benjamin Franklin “The only things certain in life are death and taxes.”

Pakistan’s heavy dependence on foreign assistance impacts national sovereignty and has led to a ballooning debt-to-GDP ratio, which now stands at 30 per cent. This has meant that the largest chunk in the 2012-13 budget will be that of debt servicing. This becomes a drag on economic growth because resources are being used to finance what is essentially a purely non-productive item. Normally, low-income countries have tax-to-GDP ratios of 15-18 per cent. Middle-income countries have tax-to-GDP ratios ranging between 22-25 per cent, while the figure for high income countries is around 40 per cent. Quite clearly, Pakistan’s tax-to-GDP ratio needs to increase so that the burden of financing the deficit doesn’t lie on borrowing from foreign countries or foreign multilateral lending organisations. This, however, does not necessarily mean levying higher or punitive taxes, which can stifle growth but through fighting tax evasion and by making tax collection more efficient.

Equitable taxation is particularly important in a country where the rich-poor disconnect has been increasing over time. A 2010 study estimated that 32 per cent of Pakistan’s population of 180 million subsists below the poverty line. According to the most recent UN Human Development Index, 60.3 per cent live on an income of less than two dollars a day. One consequence of the yawning rich-poor gap is that it is exploited by extremists.

Pakistan’s rich have historically paid little of their share in taxes. It has been estimated that the landowning classes have been evading taxes to the tune of over $1.2 billion a year. While the number of national lawmakers from feudal families represented in the country’s feudal democracy appears to be shrinking primarily due to increased urbanisation, their financial clout seems undiminished. The average worth of a member of parliament is $900,000, with the richest member worth over $37 million, according to a recent study by the Pakistan Institute of Legislative Development and Transparency.

There are periodic reports in the media which give the impression that certain politicians, their wives and dependent children have amassed huge assets and which should require due scrutiny by tax authorities. These reports suggest further that the assets amassed by politicians, their wives and dependent children were either not subjected to scrutiny by various tax jurisdictions or are highly understated. There is a need for a correct valuation of the amassed assets of politicians, their wives and dependent children, as in its absence, the tax burden on existing tax payers is unfairly increased. Since the politicians are rich themselves and happily evading taxes, there is little will to change the system.

Exempting agriculture from taxation imposes a heavy burden on the rest of the economy and is one of the main reasons why there is usually a deficit between what the government collects in tax revenue and what it wants to spend in a budgeting year. Furthermore, given its tax-exempt status, transfers from other sectors of the economy to agriculture are commonplace. Also, since the government cannot seem to broaden the tax base by including agriculture in the tax net, the other option is to rely on indirect taxes. The problem with these are that they disproportionately affect the poor and less well-off, since they spend more on items like fuel and food as a percentage of income than more affluent people. This in turn further skews an already unequal distribution of income, and gives rise to arguments that instead of taxing the rich, the government is making life tougher for a section of the population that already lives a miserable existence. It would certainly be helpful, if external aid providers use their leverage with the Pakistani government, to insist that hitherto untaxed or under-taxed sectors be brought under the tax net.

An equitable national tax policy requires that everyone and every sector with a potential tax liability tax should be taxed. A tax must be perceived as fair and universal. Those who have little should pay little, but they should pay something, anything that displays a commitment to the nation and its goals. The politically and economically powerful elite must demonstrate their stake in society by carrying its share of the tax burden.

Published In The Express Tribune, June 7th, 2012.

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Reader Comments (43)

  • anwar
    Jun 6, 2012 - 10:16PM

    If rich don’t pay taxes then why should the govt.borrow from abroad? (cut you spending) Is the “rest of the economy” something different from “agriculture”? Too many loose ends in these so called “foreign educated” economists articles.

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  • Nadir
    Jun 6, 2012 - 10:31PM

    Patriotism in Pakistan is a sham. Taxation is a civic duty but everyone finds one excuse or another to avoid paying it. The rich dont consider themselves “rich”, and just call on taxing those above them, shunning their own responsibility. Then comes the obligatory, the government is corrupt why should we pay, yet the same people who get outraged and call critics of the military budget, traitors, want the government to keep on pumping money into the military. Yet our patriotic tax dodgers wont pay their taxes to pay the salaries of the jawans manning the border. The same jawans who they consistently refer to when they unleash a nationalistic diatribe on “sacrifices” for our country. The fact is that people are all for taxes, as long as some one else pays it. On top of that, perversely those who are eligible to pay taxes, feel proud that they can get away with not paying it, as a sign of their “honour” and personal connections.

    Perhaps the worst offence to collection in Pakistan is the notion that only the “rich” have to pay it. Sure, but where does “rich” start? For people in the urban middle class, the rich are different. For a farmer in rural Sind or Souther Punjab, that middle class urbanite is rich as well. Everyone has obligations, its only the degree that matters.

    In Pakistan, our perverse, regressive taxation system places the burden on the poor, while subsiding the lifestyles of the affluent. Its shocking that an lower middle class family, living in the urban centre in a small flat, pays municipal taxes, while the rich and oppulent homeowners in F6/F7/E7 in Islamabad, get away with paying nothing or pay a lesser effective rate.

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  • Shyam
    Jun 6, 2012 - 10:41PM

    Freeloading seems to be the favorite sport from national to individual level

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  • Ejaaz
    Jun 6, 2012 - 11:02PM

    When the rulers are corrupt and they have been since 1947, and they line their pockets and business, why should any sane person willingly pay any tax? When the rulers live obscenely ostentatious life styles, and their children drive around in cars worth more than what an average working pakistani whose taxes are withheld from his paycheck will not earn in his lifetime, why should any sensible person want to pay taxes? The taxes are not going to better the country. The taxes will go to Generals so they play with their ideas of ruling the world. The taxes will go the ministers so their families can go for their holidays in Switzerland. The taxes will go so the sons of the waderas and the big zamindars can study at Harvard and Yale in America. Only an idiot who buys into the lies of the crooks about patriotism and good of the country denies his children a few used clothes to pay the filthy taxes in this land.

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  • Falcon
    Jun 6, 2012 - 11:18PM

    Informative article. I would only like to point out that Pakistan’s Debt-to-GDP ratio is reaching 60% (rather than 30% mentioned in your article).

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  • idiot_gee
    Jun 6, 2012 - 11:41PM

    @Ejaaz:
    Ejaaz; guess who elected these officials… YOU! Nahi!!!

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  • elementary
    Jun 7, 2012 - 12:13AM

    everyone knows rich don’t pay the tax,but how and what to do about it?

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  • Wonderful
    Jun 7, 2012 - 12:58AM

    What’s this fuss all about. To Pakistanis. NA has proven to be the power. It has closed the land route of NATO thru Pakistan and all agree. Then why is it that Pakistanis do not understand that NA does not want to tax the rich.

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  • Ali tanoli
    Jun 7, 2012 - 12:59AM

    @Idiot jee
    its a selection my idiot friend…..

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  • Ejaaz
    Jun 7, 2012 - 2:15AM

    @idiot_gee,

    And what choice did I get since 1947? Did I choose Ayub, Yahya, Zia or Musharaff? Did I choose Nawaz or Shabaz who were handpicked by Zia? Did I pick Imran, the new poster boy of the ISI, who cannot explain where did all his wealth came from? Did I get a choice in that the political system in this country is not allowed to develop at all? Read what Reodad Khan is writing these days? He is openly advocating overthrowing of the civil government. Zardari is corrupt, but name one politician or senior civil government official or a General who is not? Hypocrites all.

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  • Mirza
    Jun 7, 2012 - 3:10AM

    In Pakistan there is nonstop corruption in the society. From fake infant formula to regular milk to medicines it is all fair games for the merchants and traders. No govt can control the addition of water in the milk that is happening for centuries.
    The only dispute in Pakistan is “why is the other getting free money not me?” There is no difference among the supporters of any party, they all from the same culture and society. Unless ZAB, BB, CJ or IK brings angels from abroad nothing is going to change. It is we the people who have to be honest no party or govt can make us tell the truth and be honest. This all comes from home and upbringing. The excuse that corruption is at the top so it is a fair game for me is the basis of our corruption.

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  • saad
    Jun 7, 2012 - 3:23AM

    Thanks Falcon. I should have been clearer that the external debt-to-gdp ratio is 30 per cent, however, we must also take into account the internal debt-to-gdp ratio of 30 plus per cent which adds up to the 60 per cent you reported. In my defence, sovereignty is compromised more by external than internal debt as the government can easily borrow internally with minimal conditions and consequences but your point is well made.

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  • Ch Allah Daad
    Jun 7, 2012 - 5:28AM

    Its the biggest lie that rich don’t pay tax. Total tax collection for the budget year 2012 is Rs. 2.46 trillion and like everywhere else, in Pakistan too, 80% of tax revenue comes from the rich. These taxes are not visible because these are hidden and indirect taxes. These indirect taxes are collected from valuable items like cars, energy, immovable properties, business transactions and other luxuries which are used by rich.
    First show proper use of 2.46 trillion Rs. and then demand more.

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  • ayesha_khan
    Jun 7, 2012 - 6:47AM

    The debt to GDP ratio of PAkistan is 60% not 30%. But this in itself is not so high. The reason Pakistan is in a debt trap is because
    – low tax to GDP ratio
    – structure of the debt which is largely short term and is at high interest rate

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  • Russianroulette
    Jun 7, 2012 - 8:01AM

    Put the police and FBR under the judiciary

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  • Jun 7, 2012 - 8:32AM

    Pakistan was created to be a land of the Feudals and the rich.

    When Nehru threatened the rich landowners with land reform as early as in 1929 and Congress was forced by Nehru to adopt land reforms in its manifesto, the rich Muslim landowners turned towards the Muslim League and Jinnah embraced them.

    Interestingly, while you can find quotes after quotes from Nehru against Feudalism, there isn’t much at all from Jinnah, especially during the mid-1940s when the Feudals had taken refuge in the ML.

    The elite of Pakistan are the decedents of this class. I am sorry, but the sad fact is Pakistan is meant for them, you cannot run away from History.

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  • Ayesha Malik
    Jun 7, 2012 - 9:56AM

    Fuel tax, Gas Tax, Registration Tax, Toll Tax, Gun tax, Car Tax, Home tax, land Tax, Oil Tax ,Income Tax, phone Tax, electricity Tax Pakistan has more Tax then any other country and everyone pays.
    Stop the corruption Ignorant….

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  • Khan
    Jun 7, 2012 - 10:48AM

    What else is Imran Khan shouting for a decade, implement taxes on the riches….!!!

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  • Arshad Zaman
    Jun 7, 2012 - 10:50AM

    Re:

    In Pakistan, an arguably perverse view of this American proclamation has been in vogue for some time now: “No taxation with representation”

    The solution might be to ensure that there is:

    “No representation without taxation”

    In other words, if you haven’t filed tax returns in Pakistan (say for five years), you can’t represent the people. This, in a roundabout way, is what the dual nationality bar to representation seeks to bring about. But there are moves afoot by these non-taxpaying representatives to pass a constitutional amendment to allow this state of affairs to continue. We must not allow it to happen.

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  • Noor
    Jun 7, 2012 - 10:54AM

    @Ayesha Malik:
    Tax the rich, besides stopping corruption

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  • Faysal
    Jun 7, 2012 - 11:19AM

    What about the tax which is collected? where does it go? last year the Government collected some 1500 billion out which only less than 150 billion was spent on development. What incentive is there for me to pay taxes if I have to purchase education, health, security etc from the private sector.

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  • Jun 7, 2012 - 11:37AM

    Taxing agriculturists? Blasphemy! They are the chosen ones, they don’t pay taxes but they get elected to parliament and force us to pay taxes. If ever there was an example of perfect injustice, this is it.

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  • Hajira Amir
    Jun 7, 2012 - 11:49AM

    Funny to see so many comments confusing direct taxes with indirect taxes.
    Indirect taxes can NEVER substitute direct tax. The author too is also talking about direct tax.
    As far is corruption is concerned, you need better oversight mechanisms. The sad fact is that with the exception of the army, there is hardly any worthwhile institution in Pakistan, only individuals.

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  • Jun 7, 2012 - 1:30PM

    The author has indicated one thing only that agriculture income which is presently exempted from paying income tax and may be considered for taxation.
    No data is given about the share of indirect taxes like sales tax, Excise duty,service tax etc, as the data could be analysed to have their share of total tax collection, or percentile of GDP. Also to be noted that tax on agriculture income is exempted in majority of countries so as to boost the agriculture production. This will create harassment to small and poor farmers if taxed. Alternative should be explored to levy tax on rich land lords. The article lacks the depth on the subject.

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  • Social Capitalist
    Jun 7, 2012 - 1:41PM

    The elite should pay the due taxes but on the other hand they do not have any motivation to pay tax. No one is sure where their money is going to end: on development or in the pockets of corrupt politicians and bureaucrats.

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  • Adnan
    Jun 7, 2012 - 1:55PM

    Hilarious- written from one of the world’s biggest tax havens!!!!

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  • R. Khan
    Jun 7, 2012 - 2:17PM

    Tax the feudals, agriculturists, etc but not a common man & businessmen who are already paying too many taxes. Reduce defence budget by 75%. Let the standing army of half a million do some productive activities. Stop testing missiles & ban any more purchases of fighter aircrafts. Put nuclear submarines in National Museum. Let PAF start maintaining PIA aircrafts. I can go on but anybody listening & ready to do it. No PM or President has the courage to implement these suggestions. We will continue living on aid & will keep on blaming West for all our self created problems.

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  • Rational
    Jun 7, 2012 - 4:44PM

    Even if tax is collected it will be wasted by these corrupt and insincere politicians & bureaucrats…….first find a formula to make humans from beasts

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  • Suresh
    Jun 7, 2012 - 4:51PM

    Forget rich not paying tax, many are not even citizens of Pakistan. This is called rubbing salt over the wounds!

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  • Ali tanoli
    Jun 7, 2012 - 5:11PM

    Sir,
    I think there should be a national law any one holding public offices whether MNA or forces officers should allowed to have Bank Loan or Account in foriegn banks may be some of our problems get solved and i asked Ms Clinton and Brit PM why they allowed swiss illegal money banks if they are so concerned about poor countries peoples its called hypo and also
    legal hawala.

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  • usmani
    Jun 7, 2012 - 5:15PM

    Saad sb- Why to pursue the foreign aid giving agencies to use their leverage to tax the rich of this country.why we don’t have our common opinion so strong to change the govt policies.

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  • Ali tanoli
    Jun 7, 2012 - 5:36PM

    Correction ; when i said whether MNA or forces officer s should NOT allowed to have Bank Loans or account s in foriegn banks…

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  • asim
    Jun 7, 2012 - 6:23PM

    It is required to concentrate on these aspects also:
    1) Banks deduct zakat automatically on 1st Ramadan (This is also a Tax)
    Is this money accounted in total calculations.
    2) Every body pays zakat and also Tax(On electricity, phone, Airport tax, Vehicle Token Tax, GST etc as sales tas, toll Plaza Tax, etc etc
    WHERE IS THE MONEY GOING??

    3) And above all what is the benefit for Tax payers?
    4) In canada this money is refunded to those with low incomes?
    5)what system we follow? Zakat & Tax both deducted?

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  • Seema
    Jun 7, 2012 - 7:46PM

    PLZ tax cantonment areas too. Why to spare them????

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  • Shahzad Kazi
    Jun 7, 2012 - 9:45PM

    @Mirza:
    Good read Mirza sahib. The nation has become corrupt. It is part of the lives and culture of the entire population. The question always is “What’s in it for me?”.

    In a democracy people get the government they deserve. A corrupt nation will end up electing corrupt rulers.

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  • Ilyad
    Jun 7, 2012 - 9:46PM

    A lot of comments about who to tax next, but what about the taxes that already exits and are not being collected? I think the problem lies with the system of tax collection; like the old saying that everybody wants to go to heaven but nobody wants to die; everybody wants the corruption and tax collection to get better but nobody is willing to chip in their part. Are people ready to to pay due taxes willingly? the answer I guess would be an overwhelmingly NO. Has there ever been any conviction for a tax evasion case(s) and somebody rich and powerful put behind bars for that? fix that and the revenue stream will improve.

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  • Shahzad Kazi
    Jun 7, 2012 - 10:48PM

    @Noor:
    Most of the rich are rich because they are stealing, either from others or from the government. Taxation will be ineffective on bribes and stolen money.

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  • Shahzad Kazi
    Jun 7, 2012 - 10:51PM

    @p r sharma:
    Has anyone estimated what the tax revenue would be from agricultural income if it were taxed? I suspect that it would be very small. Most agriculturists do not make a lot of money and of the few who do, the majority get their income from non-agricultural sources and simply use agriculture as a whitener.

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  • Shakir Lakhani
    Jun 7, 2012 - 11:32PM

    @ Shahzad Kazi: “Most agriculturists do not make a lot of money”. That’s a big joke. Not only do they make a lot of money, they get bank loans written off whenever there are floods, even though if crops are not affected.

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  • Jibbs
    Jun 8, 2012 - 11:15AM

    In Pakistan Landlords, Feudals and agriculturist millionaires will never pay taxes, their siblings and family members are sitting in armed forces and assemblies… hence no tax on income from agricultural sources. Even if a person is earning hundreds of millions from his farms, he’s is exempted from all taxes! and a lower middle class who earns, 35k per month, has to pay tax, and bear the burden of paying excessive utility bills and indirect taxes, just because the government cannot force their own siblings to pay direct taxes. Even then the common tax paying Pakistani will never get any respect from the government and its officials. That’s the tragedy of Pakistan.No wonder 80% of Pakistanis want to fled this country forever.

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  • Hajira Amir
    Jun 8, 2012 - 6:15PM

    @Shahzad Kazi:
    You are right. Most agriculturists do not make much. Not only that but they also go through cyclical ups and downs over a period of many years, so in a good year they make lots of money but in a bad year they lose money or barely subsist. That is one of the reasons why most countries do not charge farmers because it would be unfair to tax when they are doing well and not pay anything when they lose.
    However the situation in Pakistan is different. Here agriculturists are feudal landlords holding vast swathes of land and running their operations as companies but hiding under the guise of farmers. Pakistan is one of the few countries left in the world that never abolished feudalism or underwent land reform.

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  • Mirza
    Jun 9, 2012 - 6:57AM

    @Shakir Lakhani:
    Sir, Pakistan was never owned by 22 farmers or landlords but industrialists. Just look at the plundering by industrialists and the huge loans write-offs. Landlords do not make billions; they make peanuts compared to industrialists and real estate tycoons. One recent example is the case involving CJ’s son. The real estate tycoon not only hired him but also nine generals! One cannot imaginethe amount of money these kinds of guys have. Be that as it may there should be a reasonable agriculture tax.
    Regards,
    Mirza

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  • anwar
    Jun 11, 2012 - 8:45AM

    Religion is fine but when it becomes an addiction ; I am not sure that even God will like it. The purpose of religion was not to wean you off one addiction and get on another. Religious states are just officially acceptable addiction centers. Now will everyone get off this case, there are other tings in life more important than Israel and Pakistan

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