Structural weakness: The tall order against high-profile tax evaders

Difficulty in probing influential individuals due to lack of control.

ISLAMABAD: Haphazard and impractical comments are the norm when tax authorities release collection figures of major political personalities. Newspaper columnists and television anchors try their level best to humiliate them but the endeavour is too shallow to spark a relevant public debate.

There is no doubt politicians pay income tax in absurdly small sums. That makes them appear as importunate tax thieves who conceal the opulence revealed only by their lifestyles.

Given the lifestyle and political spending highlighted by the media, a few millions in taxes means they have under-declared their income by huge margins.

If a politician can spend over a million a week on political and household activity, his spending a year comes to no less than Rs52 million. Undoubtedly, most politicians spend far beyond these amounts and their earnings cannot practically be below Rs100 million a year.

If this individual is paying less than Rs25 million a year, it is surely underpayment. Obviously, the tax authorities do nothing about this proposition or else tax litigation will actually be an issue for Pakistani politicians.

The culture of tax evasion

There are two problems. One is defeating the culture of non-payment or underpayment of taxes, while the other is that they do not want to. If the actual tax figures of politicians come under public scrutiny, the entire system of governance and mafia-maintaining will be on the entire country’s television screens day in day out. The rich and the powerful will be standing directly under the sun.

The actual issue in Pakistan is far bigger than under-payment of tax by politicians. It is the structure of taxation that helps to maintain the non-payment tendency and the under-payment culture. Without naming any single politician, however, one can put two relevant questions to start a public debate on the culture of tax evasion.

The question is: can they underpay without the abetment and laxity of the tax authorities? And how do politicians and businessmen, lawyers, judges, bureaucrats and generals assess the due amounts of tax with impunity?

It is obvious that the tendency to underpay and the culture of non-payment reinforce each other in an environment where the state overspends and meets the budget deficit through expensive loans. No taxpayer is induced in this incorrigible environment to correctly assess the tax payable.

Politicians have the authority available to protect them if they are confronted by the taxation department. And it is rare that some taxmen would undertake a serious probe into the under-assessment of a politician who can manipulate the law and seek protection against serious queries. So are businessmen, judges, lawyers and generals whose persona can discourage probe into assets, spending, taxable income and under-assessment.

This culture and environment is protected even by the international loan providers for meeting the budgetary deficit. Numerous policy framework papers under which the IMF and other agencies offered loans to Pakistan, mention instrument for increasing tax money for repayment of the loans, even those relevant to plugging the tax evasion, but none mentions the underpayment by the section of society that have the nuisance and authority available to discourage probes.

On the other hand, tax authorities fail to tell how much is being evaded annually by this section of society. But all the efforts to devise methods and implement them went to waste over the past 15 years because they were not realistic: the authorities never determined the trick to know how much a person should be evading if he or she is spending a certain amount that lifts the lifestyle beyond the middle-level-income group.

The gangs of tax thieves could not operate and organise without this taxation structure, its abetting machinery and the policy of indirect taxation. And this picture cannot come in its real colours without taking a close view of the state overspending without check and maintaining an ever-hefty budget deficit.

In the presence of such trends and the structure, evaders would always be helped to stay untouched by the law no matter how boisterous the media becomes. I have been asking a number of senior tax officials over the past two decades as to how this section of society gets away so regularly with declarations of income that is not acceptable from any other section that cannot play with authority.

Their answers can be summed up into the following, “The very initiation of probe into their spending and earnings is a task beyond us; no serious probe is helped in checking of documentation and no court encourages litigation against them.”

The Election Commission of Pakistan does receive party expenditure details, but it is not the parties that spend the largest of amounts; it is the leading personalities that do, either from their ill-earned money or from the national exchequer by manipulating the system.

Even if realistic calculations are made, the actual earnings cannot be determined. Tax evasion cannot be detected this way and no accountability can be initiated against the evader and the abetting tax officials. In this failure is the protection of a system running on overspending-loans-deficit-high-taxation-inflation.

The writer has worked with major newspapers and specialises in analysis of public finance and
geo-economics of terrorism

Published in The Express Tribune, April 27^th,  2015.

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