Untouched, the industrialists and agriculturists have little to lose from the new budget unleashed on Wednesday by the new government. With the GST increased from 16 to 17 percent, cost of living has increased manifold for those who have already been finding it hard to eke out a decent living. Missing, of course, are substantial taxation measures, especially direct taxation, which could have generated revenues from the resourceful. Pakistan is a classic example of a state that has no visible tax bargain or financial contract with its citizens. That explains why our tax system is highly inequitable and crafted to favour the rich and fleece the poor. A meagre nine percent of the GDP is collected in tax each year, one of the lowest rates in the world. The state relies heavily on financial aid from donor and international lending organisations to meet its expenditures. The national debt stands at 63 percent of the GDP. Most of what we acquire from international financial organisations is spent on the repayment of debt. With debt repayment and defence swallowing up most of the budget, the government is left with little or no money to spend on things as vital as education or health, making the situation abysmal for these two sectors. The GDP does not reflect the country’s financial situation as much as the fact that most of our government school buildings stand empty, because the schools inspection regime has collapsed long ago, leaving ‘ghost’ schools in its wake. A lot of tax collected from the people is wasted on government expenditure that has no direct bearing on the wellbeing of the people. In his last days in office, Raja Pervez Ashraf had allowed the leakage of Rs 600 billion in tax refunds, the largest tax refund scam in the history of the country. That being the case, how could one think of taxes becoming the backbone of Pakistan’s economic development? During his visit to Pakistan in 2011, David Cameron, Prime Minister of the UK, warned Pakistan of not getting aid form the the UK if it did not take measures to improve its tax system. The taxpayers in the UK have been asking their government about the rationale of spending 650 million pounds in a country where only a few people pay tax. The development of strong state institutions cannot be possible unless government is able to find resources for them. State building and governance have been at the heart of the tax reforms adopted by several countries. Usually known as the ‘tax bargain’ or ‘fiscal contract’, citizens pay taxes in exchange for effective services, law and order, and accountability. Taxing people is the normal, usual, and even the primary way a non-oil producing state generates revenue to meet its expenditure. However, people have always been reluctant to pay taxes. The thought of being ‘robbed’ of their hard-earned money gets profound as the state is found squandering the taxpayers’ money. In order to turn around the situation it is not only the system that requires amendments and readjustment, a new relationship is to be built between the state and its citizens. At the first level, there is a need to create trust between the state and citizen, and for that the leadership must pledge to use the taxpayers’ money wisely. This step would be followed by development and governance. All international organisations, including the IMF, the World Bank and the UN share a common definition of governance that depends on the rule of law, a participatory democracy, equity and accountability. The 2008 Doha Declaration on Financing and Development called for pursuing tax reform ‘with an overarching view to make the tax system more pro-poor’. Taxation can improve governance in three ways: 1. By developing a shared interest in economic growth: when a government is dependent on taxes it works for the prosperity of the taxpayers, which in turn brings about economic growth. 2. By developing the state apparatus: when the state depends on taxes, especially direct taxes, it builds a complex bureaucratic infrastructure for tax collection. This may lead to a wider and broader development in public administration. 3. Through accountability and responsiveness: people who pay taxes become engaged in politics and can make a claim on the government. And in order to ensure tax compliance so that the state’s revenue is sustained, governments respond to citizens’ demands. It is not only how much tax is collected but how it is collected that is equally important. It was in 1980 that reform in the taxation system was debated on the premise that economic distortions caused by the taxation system should be minimised for effective revenue collection. Thus, there was a shift toward VAT; corporate and income tax rates were reduced; the tax base was broadened and tax codes simplified. For the state to be able to collect taxes it is important that the state knows who is liable to pay tax. Then comes the registration of those people, ensuring that they know how to pay taxes and that no one can slip through the net and creating the capacity to monitor and enforce compliance. It is thus that the term ‘tax net’ is used. The effective functioning of the tax authority requires that it has the capacity to catch people and minimise the chance of escape of tax evaders. The developing countries are faced with double challenges, one of having an archaic tax collection system, and two of having a state that has no power over its people so as to collect maximum tax. Therefore, the ‘net’ in the developing countries has many holes and bringing people into that net becomes a challenge for government. The outcome is that only a fraction of the population actually gets registered with the tax authorities. According to the former finance minister of Pakistan, Saleem Mandviwala, only 0.9 million people pay taxes in Pakistan. However, around 1.5 million have their National Tax Number. Therefore, when fewer people are paying taxes and the state lacks the ability to make people pay, the opportunities for the free-riders become legion. ‘Rational’ people will choose not to pay. On the state side, for the lack of revenue the state would not be in a position to deliver effective services. To ensure that people pay taxes and these taxes become the cause of social and economic development, there are a number of things that the state has to do, such as create awareness among taxpayers on the importance of paying taxes, make the tax system transparent, and ensuring that taxpayers and the state have a high level of mutual interest. There is adequate trust in the integrity of the system. Taxpayers are organised politically. People will not pay taxes because the state wants them to. The taxpayer will be motivated to give money to government when there is a better tax system in place, established on the principle of equity, fairness, inclusivity and reciprocity. The writer is an Assistant Editor at Daily Times and can be reached at durdananajam1@gmail.com