Promoting Tax Culture in Pakistan
Every time you travel in your car or use public transport for commuting, you travel on roads, bridges and highways, which are made and maintained by the government. You study on a nominal fee in government (financed) colleges or Universities, compared to the high fees of private universities. The needy women are given monthly stipends by the government through income support programmes. All these projects are financed by the government through the taxes paid by the masses. Taxes are paid by the elite and the middle class and are used to finance the development of the infrastructure in the country and to establish an egalitarian society.
Pakistan has been in the grip of the taxation crisis since its inception because the country lacks a tax culture. That is why only 0.3% of the total population pays direct tax in Pakistan, which makes Pakistan’s tax-to-GDP ratio only 9.45% – one of the lowest in region.
The Government of Pakistan earns 55% of its tax revenue through indirect taxes, while 45% of it is collected through direct taxes – 70% of which is in the form of withholding tax. This ratio is uneven since indirect taxes effect everyone’s expenditures, including the poor, while direct taxes are only taken from elite and middle class, and is used for the general welfare and human development projects.
As a result of low tax collection, the state funds its development and infrastructural projects through debt financing. Consequently, the major chunk of the state’s revenue is spent on paying these debts with costly interests levied by donors.
The tax net in Pakistan is very low, which is why the current government has taken some positive steps to broaden the tax net in Pakistan. The Federal Board of Revenue (FBR) has started campaigns for promoting tax culture in Pakistan. It has announced various incentives for tax payers, which includes, concession for people who file income taxes, who pay registration, transfer, and provide token fees of motor vehicles. In addition, the FBR is considering a proposal which imposes a low tax rate for those traders and industrialists who disclose their hidden income. The major step for broadening the tax net is the announcement of withholding tax (WHT) on bank transactions above fifty thousand rupees for non-filers of income tax. The trade unions are protesting against WHT for the past few weeks, as the majority of traders are non-filers. By enforcing WHT, they either have to pay tax on bank transactions or they have to become filers of income tax to avoid WHT. After becoming filers, they must pay regular taxes which they are not currently paying. So, the strikes of trade unions are only for the purpose of tax avoidance and do not fall under the tax net category of the country. Sadly, some opposing parties are supporting the strikes of trade unions for petty political gains, whereas, these opposing political parties should support the stance of the government, as the traders have no locus standi.
However, more efforts on behalf of the government are needed to promote tax culture in Pakistan. The Federal Board of Revenue should be declared as an autonomous entity, free from political clutches. The mal-administration of FBR should be corrected in order to make it tax payer friendly. The FBR was known as one of the most corrupt departments in Pakistan by Transparency International, which is why a strict accountability mechanism should be enacted to check the corrupt behavior of officials at the FBR. Optimum tax rates should be levied and everyone should be taxed according to their capacity and ability to pay tax. The FBR should pay due refunds to taxpayers which are dilly-dallied by its officials. One other important demand is the establishment of tax courts in Pakistan because there are no tax courts in Pakistan. The first and second appellant forum for an aggrieved taxpayer is the Commissioner/Collector Appeals, who are also officials of the FBR. The second appeal lies before the tribunal whose members are appointed by the FBR. Hence, the aggrieved taxpayer has to to seek relief against FBR through FBR officials. Tax courts, free from the control of the executive, should be established.
More importantly, the public trust on the taxation system of Pakistan should be established. Transparency should be an important element to be ensured– something that can only happen if everyone is taxed fairly and justly. The public should be guaranteed that their taxes are public money which will be used for their welfare, for establishing a better educational system, better standards health facilities, and for building roads, dams etc.
This development requires money, and money comes from taxes.
There is also a concept of public responsibility, which needs to exist. People should understand that the reason of heavy indirect taxes is the non-payment of legitimate direct taxes. This forces the government to levy indirect taxes, the burden of which is shared by everyone. An example of this would be increasing taxes on fuel and electricity.
If everyone starts paying their due taxes regularly, the state’s revenue will increase. With an increase in revenue, the government will be able to invest more in education, health and development schemes. More dams can be built to prevent floods and to end power crises. Internal security apparatus of the country can be improved by enhancing the capabilities and equipment of law enforcing organizations.
The public phenomenon of tax should be changed. If we want to promote a tax culture in our country, the following principle should be followed:
‘Paying taxes makes state treasury strong, which makes a country stronger.’
The views expressed in this article are those of the author and do not necessarily represent the views of any organization with which he might be associated.