A leading think tank, Policy Research Institute of Market Economy, has recently reviewed tax reforms under the ruling Pakistan Tehreek-e-Insaf (PTI) and the report does not look pretty. Out of the 10 electoral promises about reforming the tax system, ending tax machinery corruption and introducing more equitable taxation, the government is only said to have achieved one target fully over the last two-and-a-half years.
The report does, however, make note of the government’s efforts to reform tax policy and even acknowledges the fact that half a tenure is not sufficient time to roll out effective changes in a country that faces a myriad of socio-economic challenges. Still, the abysmally low number of income tax filers–less than 10 per cent tax-to-GDP ratio–is a worrisome indicator of the gross failure in broadening the extremely narrow tax base. As per an FBR tax report in 2019, around three million people had filed income tax returns, albeit a majority of which had declared below-threshold income. This number was said to have reduced by nearly 23 per cent last year. With the tax collection said to have lagged around Rs 300 billion (according to IMF projections) in the year 2020, Pakistan is all set for an even more disappointing, cash-strapped budget this year. Then again, no progress has been made in the much-touted promise to shift towards direct taxation. “The share of direct taxes has remained fixed at 38 per cent,” lamented the report. The government, surely, can’t rely on indirect taxation in the light of the dismal projected increase (up to 40 per cent) in Pakistanis living below the poverty line post-pandemic. Whether the government wishes to continue burdening its low and middle-income citizens at the expense of the wealthy, there just aren’t enough proletariats to make go!
To bring taxpayers in Pakistan up to the level of other countries, the ruling powers need to convince them of what they would get in return. Increasing transparency as to where would their money be utilised for is a great stepping-stone to build credibility. Quashing concerns over fair distribution of the tax burden could help the government start with a clean slate. Another way to level the field would be for the government officials and political representatives to bring into open the taxes they have been paying, the assets they own and the sources they have used to acquire those assets. Mere tightening of the screws won’t do the trick.
Nonetheless, the FBR should be appreciated for reducing the transaction cost of paying taxes and introducing the electronic payment facility. Its intense crackdown against illicit and smuggled goods led to the seizure of goods to the tune of Rs 29 billion. Under PM Khan, the FBR has also upped its ante against 20,000 wealthy non-filers and 42 corrupt tax collection officers. Still, no notable action has yet been taken against the non-filers and none of the suspended officials has been dismissed.
If renouncing tax evasion is to be pursued comprehensively, the government needs to bring powerful landowners under its net. The agriculture sector, which accounts for 21 per cent of GDP, pays less than one per cent of all taxes. The manufacturing sector, on the other hand, contributes 13 per cent of GDP but pays 52 per cent of all taxes. But politically-mighty agriculturalists would be a slippery catch.
Despite a strong commitment to uphaul the tax system in Pakistan, no effort can succeed unless tax compliance is increased, tax exemptions are reduced and the tax base is broadened–equitably and fairly.