Every column dissecting the problem of taxation in Pakistan cites one particular statistic, expecting readers to gasp in horror. Less than one percent of Pakistanis file their Income Tax returns.
Shocking, right? Except, it probably isn’t.
More than 60 percent of Pakistanis have consistently had a low level of trust in government. Would you pay your taxes to a government that you do not trust, and does not have the resources or the capability to catch you? Probably not.
This is the story of Pakistan’s broken system of tax collection, an eager government that lacks the capability to make you pay your taxes, and millions of citizens who think the government isn’t doing enough to warrant paying.
All reform efforts to shake up Pakistan’s tax machinery have attempted to address this lack of state capability to make individuals pay. This is completely understandable, given our current situation. An informal, cash-based economy that makes it especially difficult for tax officials to gather concrete evidence for audit purposes. A workforce that does not have the adequate skills to navigate our income tax labyrinth. A government agency that is starved for resources making it difficult for officials to perform their duties. Lack of state capability is vital to explaining Pakistan’s abysmal tax collections.
In my experience, tax evaders almost always start their defence by saying that corrupt governments have no authority to levy taxes. This defence has no legal basis, of course. But it clearly points to the fact that Pakistanis do not see paying taxes as an ethical responsibility
But none of these reform efforts address the issue of a population unwilling to pay taxes voluntarily. No tax department in the world has the capability to audit every single individual and force them to pay their income tax. Compliance to the tax code is required by law, but this compliance is often determined by the strength of the social contract between the state and the citizens. If citizens do not trust the government and do not want to pay their taxes voluntarily, there is no way the government can force everyone to pay. This is the main reason why tax boycott is one of the most powerful tools of protest.
So how can policymakers convince Pakistani citizens to voluntarily pay their taxes?
Doing so requires a two-pronged approach. First, the government must convince Pakistanis that it is an ethical responsibility to pay taxes. While people often consider charity and Zakat as religious obligations and hence the right thing to do from an ethical standpoint, this is not the case with taxes. In my experience, tax evaders almost always start their defence by saying that corrupt governments have no authority to levy taxes. This defence has no legal basis, of course. But it clearly points to the fact that Pakistanis do not see paying taxes as an ethical responsibility.
To changing this perception, we must design and implement a campaign to inform people about why taxes are important, what they are used for, how the country cannot function without them, and why paying them is an ethical responsibility. If such a campaign is consistently implemented, it will go a long way in changing perceptions.
Changing the perception that citizens’ money is being wasted would require telling people about the successful development projects being implemented across the country, as much as improving transparency and eliminating inefficiency. In the short term, the government can start informing people about existing projects that aim to take Pakistan forward
Second, the government must convince Pakistanis that their money is not being wasted. This is the tough part, because Pakistan has historically had issues with corruption and inefficiency. It would be incorrect, however, to assume that the government is not doing anything, which is the popular perception. Pakistan’s economy has consistently grown at four percent over the last decade. It has experienced a dramatic reduction in poverty rates over the last 25 years. And the country is undertaking an ambitious infrastructure project in collaboration with China that aims to transform the country. The government can certainly improve, but it is functioning.
Changing the perception that citizens’ money is being wasted would require telling people about the successful development projects being implemented across the country as much as improving transparency and eliminating inefficiency. In the short term, the government can start informing people about existing projects that aim to take Pakistan forward. In the long term, however, the government will have to tackle the difficult problems of improving transparency and reducing inefficiencies if it really wants to convince people to pay their taxes voluntarily.
In my own work as a tax official, I always brushed aside the regular statements of defence that questioned the authority of the government to tax as baseless. Reflecting upon the regularity of these incidents made me realise that there is more to the problem of taxation in Pakistan than simply looking at widely discussed factors such as the informality of the economy. Over time, I hope that reformers and policymakers expand their understanding of underlying causes to make future reform efforts more comprehensive, and resultantly, more successful.
The writer is a PhD student at the University of Oxford and is a graduate of the Harvard Kennedy School of Government. He has also worked as a civil servant in Pakistan. He is interested in issues of social justice, political economy and public finance
Published in Daily Times, August 31st 2018.