Tax avoidance is cheating Pakistan
Until Pakistan can raise enough money through tax, it will continue to be excessively dependent on loans and aid.
The writer is Britain’s High Commissioner to Pakistan
About one in three Pakistanis live on Rs50 a day or less. They need help and jobs. Around 12 million Pakistani children are out of primary school. They need quality education. Without raising more money through taxation, Pakistan will not be able to meet the needs of its rapidly growing population. Pakistan’s future is at stake.
According to the Federal Board of Revenue (FBR), less than 0.5 per cent of Pakistanis pay income tax. That’s just 750,000 individuals out of a population of some 180 million. Tax revenue in Pakistan, as a proportion of GDP is around nine per cent — compared with 14 per cent for countries with similar per capita incomes. Until Pakistan can raise enough money through tax, it will continue to be excessively dependent on loans and foreign aid. Debt to repay loans now stands at $60 billion. This means that over 60 per cent of Pakistan’s federal revenue is spent simply on paying back interest and debt every year, instead of being spent on vital services, such as education, health and infrastructure.
That’s bad housekeeping. It’s bad for the ordinary men and women of Pakistan. It’s bad for Pakistan’s international friends, who want to trade, not give aid and whose taxpayers should not have to subsidise those in Pakistan who should pay tax but don’t. The problem starts at the top. By paying their fair share of taxes and backing tax reform, businesses, wealthy individuals and elected politicians in Pakistan can lead by example. These people should be paving the way, helping to close tax loopholes and encourage others to pay what they owe. Sadly, for now anyway, not all these people are the role models they should be.
The Pakistan government recognises that it has one of the lowest tax collection rates in the world. The PML-N manifesto set out the commitment to increase tax as a proportion of GDP to 15 per cent. Independent analysis shows this commitment is achievable. Better still, the government has given the FBR a clear mandate to increase tax collections by enforcing existing tax laws and bringing more people into the tax net who are, at best, creatively interpreting the rules or, at worst, cheating the system. According to Pakistan’s finance minister, in the past 11 months, the FBR has witnessed a tax receipt of nearly 18 per cent. This increase is a testament to the hard work of the finance minister and his colleagues. Any increase in tax receipts is to be welcomed. But the gains are still lower than needed. Not enough tax is raised to fully finance improvements in the quality of life for poor people. Surely, it can’t be good for Pakistan that the elite can afford luxury cars and foreign trips but can’t afford to pay their taxes?
The government is also looking to remove exemptions, simplify the tax collection system and drive out corruption. The other side of the deal, however, is that if more people are paying their taxes, it is essential that these people can see that their money is being spent effectively on public services and securing value for money. Many people in Pakistan, who live below the poverty line, benefit from aid programmes from international partners in areas such as education, health and governance. The UK plans to increase bilateral aid to Pakistan in 2014-15, making Pakistan the largest recipient of UK aid. But we can’t expect people in the UK to pay taxes to improve education and health in Pakistan if Pakistan’s wealthiest do not pay meaningful amounts of income tax. This is not about raising taxes on everyone. This is about asking people to pay their fair share and what the law requires them to.
In any case, foreign aid is not a long-term solution. As a friend of Pakistan, the UK wants it to be on a healthy growth trajectory, competing on the global stage. We fully support Pakistan’s efforts, alongside the World Bank and others, to achieve its tax-to-GDP target of 15 per cent. The UK is supporting Pakistan at both federal and provincial levels in the implementation of the recently agreed IMF programme, including in the area of raising tax revenues. The UK’s equivalent of FBR, HM Revenue and Customs department stands ready to share its experience of revenue-raising. We continue to champion the importance of more people paying their tax, more direct taxation and better enforcement against those who don’t pay what they should. Pakistan has in its hands its own economic health and economic sovereignty. Tax avoidance and poor tax enforcement is cheating Pakistan’s future.
Published in The Express Tribune, December 14th, 2013.
According to the Federal Board of Revenue (FBR), less than 0.5 per cent of Pakistanis pay income tax. That’s just 750,000 individuals out of a population of some 180 million. Tax revenue in Pakistan, as a proportion of GDP is around nine per cent — compared with 14 per cent for countries with similar per capita incomes. Until Pakistan can raise enough money through tax, it will continue to be excessively dependent on loans and foreign aid. Debt to repay loans now stands at $60 billion. This means that over 60 per cent of Pakistan’s federal revenue is spent simply on paying back interest and debt every year, instead of being spent on vital services, such as education, health and infrastructure.
That’s bad housekeeping. It’s bad for the ordinary men and women of Pakistan. It’s bad for Pakistan’s international friends, who want to trade, not give aid and whose taxpayers should not have to subsidise those in Pakistan who should pay tax but don’t. The problem starts at the top. By paying their fair share of taxes and backing tax reform, businesses, wealthy individuals and elected politicians in Pakistan can lead by example. These people should be paving the way, helping to close tax loopholes and encourage others to pay what they owe. Sadly, for now anyway, not all these people are the role models they should be.
The Pakistan government recognises that it has one of the lowest tax collection rates in the world. The PML-N manifesto set out the commitment to increase tax as a proportion of GDP to 15 per cent. Independent analysis shows this commitment is achievable. Better still, the government has given the FBR a clear mandate to increase tax collections by enforcing existing tax laws and bringing more people into the tax net who are, at best, creatively interpreting the rules or, at worst, cheating the system. According to Pakistan’s finance minister, in the past 11 months, the FBR has witnessed a tax receipt of nearly 18 per cent. This increase is a testament to the hard work of the finance minister and his colleagues. Any increase in tax receipts is to be welcomed. But the gains are still lower than needed. Not enough tax is raised to fully finance improvements in the quality of life for poor people. Surely, it can’t be good for Pakistan that the elite can afford luxury cars and foreign trips but can’t afford to pay their taxes?
The government is also looking to remove exemptions, simplify the tax collection system and drive out corruption. The other side of the deal, however, is that if more people are paying their taxes, it is essential that these people can see that their money is being spent effectively on public services and securing value for money. Many people in Pakistan, who live below the poverty line, benefit from aid programmes from international partners in areas such as education, health and governance. The UK plans to increase bilateral aid to Pakistan in 2014-15, making Pakistan the largest recipient of UK aid. But we can’t expect people in the UK to pay taxes to improve education and health in Pakistan if Pakistan’s wealthiest do not pay meaningful amounts of income tax. This is not about raising taxes on everyone. This is about asking people to pay their fair share and what the law requires them to.
In any case, foreign aid is not a long-term solution. As a friend of Pakistan, the UK wants it to be on a healthy growth trajectory, competing on the global stage. We fully support Pakistan’s efforts, alongside the World Bank and others, to achieve its tax-to-GDP target of 15 per cent. The UK is supporting Pakistan at both federal and provincial levels in the implementation of the recently agreed IMF programme, including in the area of raising tax revenues. The UK’s equivalent of FBR, HM Revenue and Customs department stands ready to share its experience of revenue-raising. We continue to champion the importance of more people paying their tax, more direct taxation and better enforcement against those who don’t pay what they should. Pakistan has in its hands its own economic health and economic sovereignty. Tax avoidance and poor tax enforcement is cheating Pakistan’s future.
Published in The Express Tribune, December 14th, 2013.