Daily Times

Economic development is a vital imperative for all nations worldwide, and the provision of government services and public infrastructure plays an indispensable role in fostering this development. Insufficient access to public services undermines endeavors to elevate living standards, particularly in developing nations, and hampers economic progress. It is evident that numerous governments in the developing world have struggled to furnish essential public services, primarily due to a critical shortfall in tax revenue. Tax revenue is the lifeblood of a nation’s governance, indispensable for its functioning and service delivery.

The Pakistani government’s revenue amounted to just over 17% of GDP during 1980’s. Unfortunately, rather than improving over time, the state of our public resources has deteriorated, resulting in persistent budget deficits that have constrained government spending over the past four decades. The current Tax to GDP ratio is just around 10% which is alarming.

Government revenue is primarily derived from taxes paid by individuals and businesses, as well as various non-tax sources. Non-tax revenue streams include receipts from entities like the State Bank, income generated by other public sector enterprises, and royalties. One of the primary factors contributing to inadequate tax collection in Pakistan is tax evasion. Tax evasion, formally defined as the unlawful act of evading taxation, encompasses all activities aimed at concealing income or exaggerating expenses, ultimately resulting in a loss of tax revenue for the authorities. It differs from tax avoidance, which involves legally permissible methods to lessen the tax liability. The problem of tax evasion is not a recent phenomenon in Pakistan, as it has persisted in the country since the 1960s. However, the situation has deteriorated over time. Regrettably, Pakistan’s tax system suffers from inefficiency, unfairness, and fragmentation, aggravating structural economic imbalances. Tax avoidance and evasion are widespread issues in the country, with audit and chartered accountancy firms, along with financial advisors to private corporations, often playing a central role in helping their clients dodge tax laws. These advisors facilitate practices that enable corporations to appear as if they are running at a loss or burdened by debt to avoid paying substantial taxes.

Insufficient access to public services undermines endeavors to elevate living standards

Many corporations in Pakistan are registered under the Trust Act of Pakistan, granting them tax benefits by designating them as trusts. Unfortunately, this loophole has been overlooked and has not been adequately addressed as a significant impediment to tax collection.

Corporations frequently engage these firms and advisors with the sole purpose of minimizing their tax liabilities, often involving substantial sums in unpaid taxes. The absence of effective checks and balances further enables corporations to exploit these legal avenues to evade taxes and portray themselves as operating at a loss, perpetuating the problem.

Even the largest corporations, including multinational entities, have employed these strategies to evade taxes, which has detrimental consequences for a state’s economy. This practice primarily benefits the ruling elite and capitalists, placing the burden of this misconduct squarely on the shoulders of the general public. Multinational and even national corporations employ various strategies to evade taxes, one of which involves price manipulation within their supply chains. When an entity in the supply chain artificially inflates its prices, it raises production costs for the subsequent stage, thereby diminishing the taxable profit in the jurisdiction of the next plant. Conversely, if an entity sells its product below the market rate, it diminishes the taxable profit in its own jurisdiction while also lowering costs for the following entity in the supply chain.

Tax evasion in Pakistan has reached alarmingly high levels, resulting in a deteriorating economic situation and a deficiency in the delivery of public services. The Constitution of Pakistan establishes the country as a federation comprising four provinces. In terms of revenue generation, the Federal Government accounts for a substantial ninety-five percent of the total tax revenue, leaving only a meager five percent for the provincial governments. Furthermore, the Federal share is distributed among the provinces based on specific criteria outlined in Article 160(1) of the country’s Constitution.

Pakistan’s tax code is burdened with numerous exemptions, resulting in the loss of over PKR 1.7 trillion in tax revenue in the previous year alone. Many of these exemptions are granted at the federal government’s discretion, favoring specific sectors. However, they pose a threat to the integrity of the tax system by potentially distorting the information flow critical to its expansion. Some exemptions even appear arbitrary; for instance, until recently, Pakistan’s tax code exempted red chillies from sales tax while subjecting green chillies to taxation.

Even in cases where tax policies are generally well-designed, the deficiency in information regarding tax obligations and the feeble enforcement mechanisms impede the effective collection of revenue. A significant portion of Pakistan’s economic transactions occurs in cash, resulting in a limited paper trail that the government can rely on for taxation purposes, thereby facilitating tax evasion. To compensate for this information gap, proxies like electricity consumption have been employed to estimate tax liabilities. Unfortunately, influential interest groups have frequently resisted efforts to broaden the tax base.

Every citizen who holds a deep sense of patriotism has a strong desire to contribute to the betterment of their society. Paying taxes is not just a legal obligation but also a civic duty, as these taxes constitute the primary source of revenue for the government. The government, in turn, utilizes these funds to deliver essential services to the public, including defense, public utilities, transportation, education, and infrastructure development. However, the persistent issues of tax avoidance and tax evasion are significant challenges faced by Pakistan. These problems pose disruptions to the government’s ability to efficiently provide these essential services to the general public. There are several recommendations to enhance tax collection in Pakistan:

Firstly, it’s imperative to establish accountability and a rigorous appointment process for chartered accountancy firms, financial advisors, and legal consultants working with corporations, along with implementing effective control and monitoring mechanisms. Secondly, there is a pressing need to amend the Trust Act of Pakistan and discontinue the practice of registering corporations as trusts to prevent tax avoidance. Thirdly, there should be efforts to discourage the use of cash transactions, potentially discontinuing high-denomination notes such as the 5000-rupee note, raising questions about the need for such high denominations and considering alternatives like 1500 or 2000-rupee notes. Fourthly, the legal system should be transparent and free from ambiguity, addressing any loopholes that could protect individuals engaging in tax manipulation. Fifthly, government regulation of chartered accountancy firms is crucial, given their significant role in tax avoidance and evasion. Sixthly, tax evaders and avoiders, who are essentially engaging in criminal behavior, should be appropriately penalized based on the severity of their tax evasion.

All of these measures can be realized with the government’s serious commitment and the utilization of information technology to combat this pervasive issue effectively.

The writer is a PhD scholar and author of various books on international relations, criminology
and gender studies. He can be reached at fastian.mentor@gmail.com