Daily Times

The Reformed General Sales Tax (RGST) Bill seems to be clinically dead despite the government’s hectic efforts to win over political support for the proposed legislative measure. It was feared from the very beginning that imposing RGST will not be a cakewalk. The outcome is, therefore, not unexpected.

The world history bears testimony to the fact that taxation has always been a thorny issue for governments. Taxes have caused wars, civil disobedience, and ignited revolts. Governments have tumbled and in some cases were voted out of power for unveiling plans to generate new taxes.

But it is also a fact that modern-day principles of representative democracy owe their genesis to taxation. States required money to fight wars and run administration, and people demanded delivery of public goods in exchange of their tax contributions. Thus, taxes forged a social contract between the state and citizenry and paved the way for contemporary democracy. ‘No taxation without representation’ was the slogan of the American Revolution and explains the grievances of British colonists, who had no representation in British parliament, but were required to pay taxes.

Even in the UK, major concessions extracted from the Crown were the outcome of new taxes. Whenever the Crown introduced new taxes, the elite of that time came up with a new charter of demands aimed at clipping the powers of the Crown. This tug of war between the Crown and the elite nurtured the seeds of western democracy. Two points can be inferred from this: first, there is a deep nexus between taxation and democracy and second, the imposition of new taxes is a Herculean task and requires strong political will and support from society’s elite.

Unfortunately, taxation for state building has never been a serious concern in Pakistan. Revenue generation and, to some extent, equity have remained two broad objectives of our taxation policy. As regards meeting tax revenue targets in nominal terms, we have been successful to some extent mainly owing to ad hoc tax measures. But success on this count is not as astounding as has been claimed. Only a small litmus test will obviate the need for assessing the tax revenue performance against technical yardsticks like tax gap and cost of tax compliance, etc, to prove my point. Adjust the revenue tax collections against inflation, i.e. measure it in real terms, and claims of exponential increase in tax revenues will stand vitiated.

On the equity account, we have failed miserably, as the gap between the poor and the rich has widened with each passing day. Wealth, income and opportunity are concentrated in the hands of a small minority. Poverty has become the destiny for the vast majority of populace, who are caught up in the self-perpetuating inequality and poverty traps. Weak distributional impact of the tax system is one of the chief causes responsible for the sharp inequalities prevalent in our society. Further, the lack of resources caused by widespread tax evasion has hampered the capacity of the state to help break these traps through meaningful affirmative action and transfer payments to the poor segments of society.

Indirect taxes constitute the major component of the tax revenue. These taxes are generally regressive in nature and easy to collect. The composition of tax revenue has changed in the past few years but the fact remains that the major chunk of direct taxes is still collected in the mode of indirect taxes through withholding tax and deductions at source.

The majority of Pakistani elite does not pay even a single penny to the government kitty as income tax. Out of the 86 million adult population of Pakistan, only 2.5 million are in the tax net. Captive taxpayers, i.e. salaried class, constitute a major portion of taxpayers’ population. Reports have appeared in the media that a major portion of the national tax number (NTN) holders has not filed their returns for the current year. It speaks volumes about the prevalent tax culture in our country.

Due to perceived unfairness, wide-ranging exemptions and free riding, the informal sector of the economy is huge and people have little motivation to pay due taxes. Additionally, our tax policy has been such that the tax authorities have mainly focused on the individuals and businesses that are already in the tax net. Tax-to-GDP ratio has stagnated between nine and 10 percent for the last three decades, which is a big question mark on the will of the state to raise taxes and competence of the tax machinery. Tax targets are fixed keeping in view the historical trends. If the nature is kind, these targets are achieved; otherwise, there is a downward revision. Dismal economic growth, earthquakes and floods are there to become convincing justifications for such revision.

The opposition to RGST and the government’s inability to go ahead with this tax despite IMF’s arm-twisting indicates how difficult it is to introduce new tax measures. Against this backdrop, the country needs a fresh fiscal social contract, whereby the elite develops a consensus for domestic resource mobilisation and transparency in public spending.

Technical fixes will not work. We cannot promote tax culture in isolation. Reforms targeting detailed tax designs, simplification of tax systems, and automation of tax procedures are not sufficient. Political attitudes towards paying taxes need to be reformed. Narrow tax base and weak taxation system have certainly got political dimensions. Tax collection depends on political and institutional bases and it is not merely a function of income base. If people believe that their tax money will not be returned with better value in the form of improved service delivery and if the perception of corruption remains high, all efforts at revenue generation will go to waste.

It is, therefore, imperative that a new fiscal social contract be based on consensus for broadening of the tax base, transparency in revenue collection and spending, increasing fairness by doing away with exemptions and removing horizontal inequities in the tax system. A fiscal social worked on these lines would enhance trust in the state and strengthen democracy in Pakistan. When you pay taxes, you have better incentive to engage with the political process and become a stakeholder in the democratic system. This explains why democracy is stronger in countries where a higher proportion of citizenry pays taxes.

The write is a graduate from the Columbia University in Economic Policy Management.
He can be reached at jamilnasir1969@gmail.com