Saddam Hussein
Ever since 1947, Pakistan has been confronting the taxation system imbroglio. After more than 70 years of its independence, the country is still going by the book of colonial legacy. It still thinks of a state as a distinct entity in comparison to its people; hence the extractive institutions continue to flourish. What needs to be understood is that we need to focus more on voluntary taxes rather than forced tax collection. For voluntary taxation, first thing on the ‘to do list’ should be to simplify the whole machinery of taxation; though, other reforms in this regard, would also go hand in hand.
It is binding on the government to make the tax compliance process less cumbersome, so that it does not result in unjustified transaction cost to the tax payer. Moreover, large-scale tax evasion by the affluent and tax mobilization strategies that rely on regressive taxation disproportionately affect the poor and salaried classes. Thus, there is also a need to broaden the tax-base, so to avoid excessive taxation on those who are already paying; the remaining just become free-riders then.
The major sectors of the national economy – large agri-business, real estate, banking and finance – all well represented in the established power matrix, are taxed far below their potential. In contrast, the bulk of the tax burden is placed on common people through indirect taxes on fuel, electricity and everyday items, coupled with income taxes on salaried workers and import tariffs. Agriculture accounts for one fifth of GDP but yields only one percent of public revenue; services sector accounts for more than half of GDP but generates only a quarter in taxes.
Additionally, hundreds of billions in tax revenues are also lost through the issuance of Statutory Regulatory Ordinances (SROs) by tax authorities for tax concessions, waivers and exemptions to powerful industrial and financial interest groups.
In this context, to accomplish any concrete economic feat, Pakistan needs to entirely overhaul its taxation system on a progressive basis and integrate it with an economic plan for growth in domestic production, to trigger the factor of real productivity. This can materialize only through the convergence of political will and across the board support for clamping-down powerful tax evading business interests.
This would also necessitate a laborious countrywide effort to document the economy. Tax policy needs to be detached from administration in order to equip, empower and capacitate tax collection officials and systems. The authority for granting tax exemptions and waivers ought to be given back to the parliament and provincial assemblies, making tax administrators directly and democratically accountable to the people.
Another critical issue in Pakistan’s taxation machinery is that of a perception – a negative image of revenue authority and the government. People often shout-out ‘why should we pay taxes”? What is our money being spent on? The public is not ready to trust the government even if it turns out to be benevolent. Obviously, people too have logical reasons. Yet, the government can use smart methods to win the trust of the people and help change the perception.
Let’s suppose, what if we scribble something like this inside metro buses: ‘This metro bus service has been established with your taxes. Pay your taxes to enjoy more and better public services’. Similar signs may be displayed inside public hospitals and schools, near motorways, flyovers and bridges in every nook and corner of the country. A look at these notices would tell people that at least a part of their tax money is being put to good use. Eventually, they may be less reluctant to pay their taxes.
Nevertheless, in revamping the system, ‘simplification’ should be at the core. Tax complexity has many dimensions and could plausibly be defined in different ways. In simple words, it can be termed as the sum of compliance costs – which are incurred directly by individuals and businesses and administrative costs – which are incurred by government. Compliance costs include the time taxpayers spend preparing and filing tax forms, learning about the law, and maintaining record-keeping for tax purposes. The costs also include expenditures of time and money by taxpayers to avoid or evade taxes, to have their taxes prepared by others, and to respond to audits, as well as any costs imposed on any third-parties, such as employers. Administrative costs, although incurred by government, are ultimately borne by individuals. These costs include the budget of the tax collection agency, and the tax-related budgets of other agencies that help administer tax programs.
If we calculate aggregate transaction cost of paying and collecting taxes within the country, it would be gigantic. This is why, most economists opine that taxes should be easy to understand and comply with. Hence, Federal Board of Revenue (FBR) – Pakistan’s central revenue authority – needs to initiate some reforms which include the simplification of tax laws, filing system and appellate system. Tax codes also need to be simplified for a layman to understand and ensure one-window facility in its true essence.
In fact, FBR has already initiated efforts in this direction. At present, World Bank’s Program is assisting the FBR to simplify the tax system, reduce the burden of withholding regime, harmonize tax collection across the federal government and the provinces, and to introduce automation to minimize contact between taxpayer and tax collector. Tariff determination has also been taken away from FBR and entrusted to National Tariff Commission. These reforms are on-going and the Prime Minister is personally supervising the restructuring and strengthening of FBR because of it being a key issue for the economy.
However, the progress has been very slow, and COVID-19 just happened to be another major road-block. Hope, the pace for reforms would soon pick up and would be able to harvest some tangible outcomes. From now on, whatever the case may be, we need to bring in out of the box ideas. The futuristic approach should be ‘to make it exceedingly simple for the people to pay taxes’ instead of ‘to collect more and more taxes’. Amid all this, there is big question mark due to global pandemic of COVID-19. Probably, in near future all existing tax systems may become obsolete and entirely new prototype may emerge, who knows.
The author Saddam Hussein is a Development Economist, while he serves as a Research Fellow at Center for Research and Security Studies (CRSS), and Program Officer for CRSS’ sister organization – Afghan Studies Center, Islamabad. He tweets @saddampide.
