According to the State Bank of Pakistan, only 1.21 million citizens pay taxes; making it less than one per cent of the entire population, which is one of the lowest rates in the world. The nation is losing taxes worth Rs 1,000 billion every year in various areas of the economy, which is assessed to be around 70 per cent of potential revenue that should be collected. Moreover, the State Bank of Pakistan’s annual report showed that 57.5 million people are employed and, undoubtedly, earning some income. Now, here, the evasion of tax is ensuing. Pakistan’s total population is around 200 million and according to the common nation, 29 per cent of the population is paying tax. According to the Federal Bureau of Revenue’s data of 2018, tax evasion of Rs 170 billion over Pakistan included more than 580 reports of cases of violation. The official data showed that real estate covered 50,000 transactions worth 600 billion.
Corruption, political intervention in the tax system and the trust deficit of people on government are considered to be the causes of tax evasion, because of the influence of giant politicians in law-making, money laundering and capital shifting. Similarly, business tycoons avert to pay the amount of tax because of no harsh punishment for the person who does tax evasion while tax officials are involved in bribery. On the other hand, our taxation system is so complicated, disintegrated, time-consuming as people have to pay taxes, standing in long queues. To overcome the issue of tax evasion, following a policy option can be useful. Moreover, irrational tax slabs and discrimination in tax rates for different sectors of the economy contribute to tax evasion.
Firstly, there is a need to import equality and justice in the tax system, amass the original amount of tax from everyone according to their incomes, enhance the efficiency of the tax department and give them coaching so that they know how to diminish tax crimes. Taxes collected by people should be spent in such a manner to invest in human capital for the bottom income quantile. So that the deprived people from the far-flung areas will be motivated and that can restore the trust deficit of the deprived segment of society.
Corruption, political intervention in the tax system and the trust deficit of people on government are considered to be the causes of tax evasion, because of the influence of giant politicians in law-making, money laundering and capital shifting
Secondly, special courts must be established who deal with taxation cases. Criminals will face harsh punishment for tax evasion. There is no bail in the punishment of the evaders. In other countries, there is a harsh punishment for the tax evaders like in the US, tax evasion is a crime and should be fined not over $100,000 ($500,000 in the case of corruption) or imprisoned, not more than five years.
Thirdly, there is a need to synchronise the National Database (NADRA) with the National Tax Number. With this linkage, we have NTN numbers of all Pakistanis. It would thus be difficult for people to evade tax. This is an easy method to pay tax and we have more taxpayers. The procedure of filling the tax returns is enhanced by simplifying the process that makes more taxpayers friendly, which avoids tax evasion.
Fourthly, we have to make tax officials powerful so they collect taxes with their power, but there is a need to do a check and balance on tax officials that granting powers to tax officials must not become a source of corruption. There must be auditing to avoid the bribery. We have to give proper data regarding where their taxes are being used and taking taxpayers in their confidence, so the next time they pay taxes cheerfully.
Lastly, there is a need to rationalise our tax rates and tax slabs. In the existing taxation system, there is the main incidence of taxes on the weaker section of the society. We need to collect more taxes from them, who are earning a handsome amount, rather than that who are already hand-to-mouth or those who are on or below the poverty line, collect tax according to their incomes. When tax rates are rational, people do not evade taxes. Rather, they pay tax cheerfully.
Abid Rehman is a PhD Fellow in Economics and Visiting Faculty Member at the National University of Sciences and Technology in Islamabad / Muhammad Usama is an MPhil student of Economics and Finance at Pakistan Institute of Development Economics in Islamabad