Saad Gul
Taxes matter. People talk about them, complain about them, and try to ‘optimise’ them when they can. Governments need tax revenue for the provision of public goods and services, poverty alleviation and to pay for social expenditures. The need for collecting taxes in developing countries, where tax revenue is often less than 20 percent of the Gross Domestic Product (GDP), is particularly acute. Inability to increase revenues through taxes forces countries to borrow – which increases the public debt and can potentially cause a fiscal crisis if the debt to GDP ratio becomes too high, a crisis situation that Pakistan currently faces.
Tax administration, therefore, is an integral focus of all countries. Several governments, as they transitioned from developing to developed economies, have implemented significant reforms along their journeys with the aim of attaining higher tax revenue collections, improved taxpayer compliance and more efficient service delivery. Similar to what the current Pakistan government wants to achieve.
Efforts of widening the tax net are underway and some success has been achieved. The tax base has improved in the first year of the new government. As many as 783,039 new taxpayers filed returns as a result of various tools – including simplification of some procedures by the Federal Board of Revenue (FBR). The Amnesty scheme was one of the primary drivers, which added some Rs. 177 billion to the liquidity of national banks.
As a whole, Pakistan still has a long way to go for mass acceptance of the need to pay taxes. Coupled with the lack of public trust in government institutions, the mindset i.e. the aversion to taxes will take more than just enforcement. It is a game of changing mindsets and raising awareness. As well as bridging the trust gap by alleviating poverty, convincing the public that state revenue will be spent on their well-being is another challenge.
In Scandinavian countries, taxes collected by the governments from rich and affluent classes are spent on the welfare of poor and low-income classes. It is like an accomplishment that requires maintenance. The results, however, differ from country to country depending on the nature of the reforms implemented and the circumstances surrounding them. But for others, it is a dream to be chased.
Sadly, Pakistan falls into the latter category. The current tax reform effort has scared a lot of people instead of luring them into the tax net. The consequence? Possibly, more avoidance and evasion. Similarly, a lot of business owners and corporates, who were already paying taxes, are disappointed because they have had to incur higher costs as a result of much higher tax rates and weakening of the rupee.
A primary challenge for Pakistan will be how to raise the necessary revenue in the context of a large informal sector. Many small business owners as well as females, who make up almost half of the country’s population, remain elusive to the economy.
How to turn this around? Technology can be a great enabler as well as creator of a conducive environment for doing business. Deployment of technology also improves scrutiny and access to capital markets.
It is unfortunate that we have had incapable and insensitive people in positions of power – who abused, thrived off and laundered taxpayers’ money. Although, this has widened the trust gap between the government and citizens, we must understand that if we don’t pay taxes, the government would not have resources to run the country. This will enforce more borrowing and ultimately lead to an even higher debt ratio including myriad spill over adverse effects.
This will require, on our part, to learn to trust the new government and be vulnerable. But the government too has to work on restoring public confidence in state institutions. The government, it seems, has started doing its part. Now it’s our turn.
Plainly, for tax reforms to be successful in Pakistan, they must be driven by both the tax administration as well as the government leadership.
Secondly, this requires a mindset transformation of both tax administrators and taxpayers.
Thirdly, early success of tax reforms must be matched with visible improvement in public service to restore trust of the masses.
Fourthly, tax administrators must be empowered to perform their duties without political interference – this one will be a major challenge when it comes to implementation.
Fifth, tax laws and reforms must be applied equally to all taxpayers.
Last but not the least, incentives like salary increments for tax administrators must be matched with an increased probability of detection of corruption and punishments such as guaranteed termination of employment should a tax official be found involved in graft.
