Reforming The Tax System

Although they say history is written by the victors, sometimes it’s just written by the elites. One such example can be found in the fall of Roman Empire. The demise of this once-mighty Empire is still the most powerful turning point in the world history. Though numerous causes can be attributed to the destruction of the Romans, one principal cause was the vast economic inequality in the society. The poor state of education and literacy, lack of employment opportunities and advanced economic interaction, along with corruption and political instability were rampant. The medieval feudalism, economic policies of the emperors had a heavy impact on the lives of the citizens of Rome. Empire’s wealth was originally in land, but this gave way to wealth through taxation. Alarming is the fact that today’s Pakistan is also plagued with all these ills.

Today’s Pakistan is facing a serious challenge in form of the rampant inequality; where income, gender, health and educational inequalities exist in extreme forms. We cannot rule out the link between these rising inequalities and violence, political instability and social fragmentation. The main reason for all this state of affairs is an inefficient and discriminatory system of taxation. The incumbent Chairman FBR, Tariq Bajwa, recently stated that in Pakistan millions are outside tax net. This is absolutely an incorrect statement because millions of mobile users alone pay advance income tax though the vast majority of them have below taxable income. Our tax base is not narrow but number of return filers is pitiably low due to the pathetic performance of FBR. The real failure is that of FBR in forcing taxable persons, their number is not less than 15 million.

At present, out of Pakistan’s total workforce of 58 million, less than 2 million are registered taxpayers. There are serious negativities attached to it. One such example is that Pakistan is one of the weakest countries in the world as regards taxation revenue. The country was ranked at 10th position in the Fragile States Index by the Peace Fund.

A report entitled “Fragile States 2014: Domestic Revenue Mobilisation” produced by the Organisation for Economic Cooperation and Development (OECD) in February 2014, says that the major cause behind this failure is a non-functional domestic revenue system — the failing tax system.

It is as clear as day that our successive governments have been taxing the poor and giving extraordinary benefits to the rich. Abuse of taxpayers’ money for personal comforts and luxuries of the ruling elite is also the main malady. Irrational taxes have failed to solve any problem. Debts, both internal and external, are rising and high inflation is crushing the poor. We need fundamental and drastic reforms along with a complete overhaul of the system.

Government’s ineptness becomes more striking when we see that for almost 68 years, no one has gone to jail in Pakistan for not paying taxes. We, as a nation, have a tendency to not pay the taxes. The informal sector doesn’t get itself registered. There is no mechanism to keep a tab on the income of micro-retail. Salons, private tuition centres, tax solicitors, software developers – how many of them pay taxes?

The direst need of the hour is an equitable tax system under which tax payments are based on the amount of benefits received from government services — the Scandinavian social democracy model is a good example in this regard. In social democracies, the costs of government services are apportioned amongst individuals according to the relative benefits they enjoy. In economic terms, this is called “benefit principle” that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. This is the only way to improve our tax base.

With a narrow tax base, development of the country continues to suffer. Due to declining GDP, our development is directly linked to loans. The country, therefore, continues to be under heavy debt. One of the most charitable nations in the world refuses to pay taxes due to a trust deficit on the government.

Now, when we look at government spending on crucial sectors like health and education, astonishingly these are extremely scant. For instance, health only gets a meagre 0.7% of country’s GDP, which is less than half of what other governments in lower middle-income countries spend. Moreover, national expenditure on elementary education is lesser than 2%.

Here the question arises that how the taxation system in Pakistan can be meliorated. For this purpose, following recommendations can be highly helpful:

1. The state must first provide the social contract, i.e., good law and order and security of life.
2. The system that protects only the rich must be dismantled.
3. The system of state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system needs to be ameliorated.
4. Accountable tax system must be introduced.
5. Pakistan’s Federal Board of Revenue (FBR) needs an immediate reinvigoration as it collects a mere 9% of Pakistan’s GDP — the lowest rates of tax collection by a federal government in the world, excluding oil-producing countries.
6. The government should tax the rich and launch programmes for broadening tax base.
7. Broad-based, single-stage sales tax at a lower rate of 5% should replace the present 16% complicated regime to give relief to low-income groups and boost business growth.
8. The government should immediately withdraw all exemptions and immunities and pass asset-seizure law to counter money laundering, tax evasion and rent-seeking.
9. There are 130 million mobile users in the country, out of which one million pay hefty bills. They must be compelled to file tax returns.
10. Pakistan cannot become a democratic welfare State unless the rich and mighty are taxed and billions spent on tax-free benefits of both active and retired Presidents, Governors, Prime Ministers, Chief Ministers, Ministers, Advisers, Judges and high-raking Military-Civil officers, are saved by giving them Composite Packages.

Our leaders speak about democracy and plight of the poor but at the same time, evade and avoid taxes and then whatever they extort from masses is mercilessly wasted on perks and benefits of those who matter in the land. The elites thrive on taxpayers’ money and then befool them by claiming themselves as guardians of their rights. This highlights that our tax system is non-trustworthy due to which people have no incentive to pay taxes. There are too many loopholes in the system due to which the richest end up paying the least tax.

Once the reformed system yields tangible results, people will surely pay their taxes. Our leaders should set the example for the masses. If taxes are collected under a system that takes every one as equal, then there is no reason why Pakistan cannot become a rich, and a prosperous nation.