There is one way to ensure the country’s progress and viability — make the rich start paying taxes
During Fiscal Year 2016, Pakistan celebrated a tax collection of over $31 billion. Not only did the Federal Bureau of Revenue (FBR) surpass its own target, but also managed to increase revenue collection by $7 billion when compared to previous year’s figure. This is laudable, but only until we don’t consider the mechanisms of tax increment. The brazenly unethical structure of our economy prevailed as always, and the tax burden was yet again shifted towards low income households. The state continued to rely on intensifying tax collections through indirect means such as increasing sales taxes on petroleum products, which favoured the elite. Last year, the country collected over 60 percent of its taxes through such unfair methods. Although the government is working on increasing the share of direct taxes, the progress is painstakingly slow and remains biased towards the rich.
An overwhelming majority of direct taxes are collected through withholding taxes received from salaried individuals, whereas the elites contribute less than 5 percent to the revenue at a time when it controls over 44 percent of the wealth. Wealthy businessmen have found inventive methods to dodge taxes, whereas most individuals engaged in property and construction businesses prefer to operate from outside the tax system. Same goes for other self-employed professionals. As a result, Pakistan’s tax-to-GDP ratio hovers around 10 percent, which is comparable to other countries such as Haiti and Gabon. This ratio is much lower if we account for the 36 percent of our economy that remains undocumented. Comparatively, India’s tax-to-GDP ratio is 18 percent. According to Research and Advocacy for the Advancement of Allied Reforms (RAFTAAR), less than half a percent of our population pays taxes which is a mere 0.5 million out of 4 million potential taxpayers.
It is an open secret that Pakistan is in an abysmal fiscal state, which desperately needs to increase its tax base. Increasing the base requires extensive administrative reforms within the FBR with immediate focus on incompetent regional tax offices (RTOs). According to the Tax Reforms Commission (TRC) report, RTOs collect a mere $68 million in taxes, whereas the cost incurred by the FBR to maintain these offices is $78 million. In other words, the government would be in a better financial shape without them. Hence, the core problem is the outdated organisational structure followed by the FBR.
Countries around the world are moving towards a centralised structure based on the type of taxpayers, rather than the region they belong to. Advancement in Information Technology (IT) has contributed to this move that allowed taxation departments to process data at centralised locations. The Internal Revenue Services (IRS) of the United States., for example, adopted such structure back in 1998 through four divisions. These divisions operate through their national offices, dealing with taxpayers based on their specific needs. Catering to specific customers means that each division is defter in handling and aware of the laws that govern them. The needs and laws governing a self-employed doctor, for example, would be different to that of a vegetable whole-seller. Operating at scale and providing specialised services decreases the cost by streamlining the process while reducing direct contact with taxpayers. Hence, low chances of corrupt practices.
Moreover, modern data management techniques have made it possible to easily detect tax evasion. Adopting proper IT tools can help the FBR synthesise data from the National Database and Registration Authority (NADRA) with its own tax return database to identify non-filers. Similarly, consolidating data from airline companies, private schools and banks can help generate algorithms to single out individuals for tax audit. If properly implemented, such systems can substantially reduce, if not eliminate, corruption and illegal wealth accumulation.
This isn’t rocket science and is already being used by states around the world to combat such practices. The question remains is whether the government has the political will to implement these reforms. In recent years, Finance Minister Ishaq Dar has tried to institute some reforms such as introducing withholding taxes on banking transactions and new property taxes. However, these reforms were met with tough opposition from traders and property dealers. The government has no option but to take on their vested interests and ensure fair and effective tax collection. Desperate monetary measures are required to provide services such as policing, education and healthcare that have deteriorated owing to lack of funds. In addition, there are high chances of unrest should such matters aren’t resolved duly.
Pakistan is already under tremendous pressure from the International Monetary Fund (IMF) and the World Bank due to an annual fiscal account deficit of over 4 percent, which forces the state to continue accumulating loans. If we are to ensure the progress and viability of the country then we’ll have to make sure that the rich and influential pay their due tax shares for there is no alternative.
Obed Pasha is lecturer of Public Policy at the University of Massachusetts, Amherst. He can be reached at [email protected] or @ramblingsufi