Taxation is the most preferred mode of generating money in a state that is ultimately aimed at furthering economic development and prosperity of its people. In the civilised world the state authority levies tax on goods, firms, individuals, and societies with a view to facilitate the overall governance. Direct and indirect taxation are the general modes in practice that pursued by taxation authorities of a state. Direct taxes include salaries, interest on securities, income from property, and income from the business whereas indirect taxes include sales taxes and many other similar forms. The ideal method to generate money in state is the direct method but unfortunately only 5 per cent of people in Pakistan pay taxes directly. The remaining 95 per cent either do not show their income or avoid paying by forming a close relationship with a tax practitioner.
Tax collection is a major economic challenge being faced by Pakistan. There are many reasons behind the poor tax system such as poor management in tax offices, unprofessional behaviour of tax officials, complex and ambiguous tax laws, lack of public awareness about the tax system, harassment by the tax administration, and above all people’s hesitation when it comes to paying taxes. Lack of confidence in the state’s ability to handle taxpayers honestly and professionally and to spend their money is perhaps the most important reason why Pakistanis refuse to pay taxes. The number of non-taxpayers in Pakistan is also low because inflation is rising rapidly. That is why a non-filer is not at all ready to become a filer. There are only 3 million filers in the country.
In the current situation, Pakistan is facing a deficit of payments. The government says financial aid from China, Qatar, Saudi Arabia, United Arab Emirates, and others were used to pay off debts last year. The government incessantly claims that Pakistanis do not pay taxes to cover up their incompetence while this is not the case at all. People are paying taxes but none of the financial wizards acknowledge this fact. Pakistanis regularly cough out money in the name of paying taxes on daily necessities like tea leaf, milk, sugar, flour, pulses and meat. Another example is the mobile phone service providers to whom millions of consumers pay billions of rupees in monthly taxes. Billions of rupees are being collected from millions of Pakistanis without any discrimination in terms of sales tax.
Talking about the performance of the government’s two-year tenure, it can be said that the existing taxation system has failed to perform well. That is why tax reforms need to be introduced which will increase the tax net through proper documentation while reducing taxes on the formal sector. This will provide access to regular financing for the small and medium enterprise (SME) sector, which is currently only 5 per cent of the bank’s financing. The government should take immediate and meaningful steps to increase loans to the private sector through tax incentives. Private sector credit in Pakistan is currently only 18.8 per cent of GDP, compared to 50 per cent in India. Lending more to the private sector will also have a multiplier effect on GDP growth. Implementing these reforms will enable Pakistan to move on a new path towards a growing country which can depend upon their taxes.
Tax evasion is precisely the reason that has prompted the government of PM Imran Khan to call for introducing track, trace system to curtail tax evasion. In this respect, the Prime Minister stressed the need to introduce a track and trace system to avoid massive tax evasion. He emphasised that tax evasion is a major problem prevalent in many major industrial sectors such as the sugar, cement, fertilizer, and tobacco industry and added that only two companies are paying taxes in the cigarette industry whilst forty per cent cigarettes are being sold in black. He also pointed out that the Federal Board of Revenue (FBR) has been striving to make this transition for the last fifteen years but their efforts are sabotaged every time. He further mentioned that the FBR had assured to roll out the track and trace system by July this year but now the Sindh High Court has given a stay on it. The premier directed the law minister to appraise the high court of the actual situation to get the stay vacated as tax evasion cannot be checked without automation and noted that due to tax evasion, the reliance on indirect taxes leads to a price hike.
It is this context it was earlier reported that the government will operationalise by 1 July a track-and-trace system aimed at addressing sales tax evasion and counterfeiting. The FBR has hired a multinational consortium to set up the system, which would entail electronic monitoring of goods by affixing tax stamps on them at the production stage. This would allow them to be tracked throughout the supply chain and reduce the chances of goods ‘disappearing’ into the black economy. The FBR estimates that about 45 million tonnes of cement, four billion cigarette sticks, four million tonnes of sugar and 30 million tonnes of fertiliser would ‘reappear’ in the tax net if the plan works out. The PM also recently noted that taxes are evaded on about 40% of the cigarettes sold domestically. This alone costs the government billions of rupees.
If the plan works, it could easily be expanded to other sectors. Taking advantage of the increasing digitisation of the economy, it could help rapidly address structural issues that have plagued the economy for decades. Apart from raising government revenue, this could have knock-on benefits for taxpayers. We might actually see tax cuts one day if more tax evaders are brought into the net. Unfortunately, while the plan itself is very much necessary, the implementation has already become unnecessarily controversial. The contract award is currently under a Sindh High Court stay order. The stay was granted because the FBR side-stepped transparency rules and chose a bid that was 52% more expensive than the lowest one.
Another allegation in the lawsuit is that the winning bidder has a conflict of interest as it trades in many of the sectors that the government aims to tax. The stay has already delayed the implementation schedule for the project. The FBR argues that it went with the winning bidder because they had a better technical score, but we will have to wait and see if this argument is accepted by the court. If it isn’t, we will have to conclude that even the solutions chosen to address illegalities in the economy are literally based on illegal policy actions.
The government is under tremendous pressure from IMF to generate much needed income and it is left with no recourse but to secure emergency approval for immediately withdrawing Rs.140 billion worth of income tax exemptions to save the one-month-old staff-level agreement with the International Monetary Fund (IMF). The urgency is such that instead of 1 July, as earlier announced by the Federal Board of Revenue chairman, these income tax exemptions will now be withdrawn with immediate effect, subject to the cabinet’s approval. The urgent approval of the proposal will enable the issuance of the ordinance in order to keep hopes for revival of the IMF programme alive. TW