ISLAMABAD: A new United Nations report says that the weak personal income tax (PIT) compliance in Pakistan poses serious questions about the accountability and fairness of the system and this in the long run casts a shadow on the efforts to create conducive tax culture in society.
The importance of closing the personal income tax loopholes exploited by the rich should not be overlooked, says the report released by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).
Citing examples, the report says in Pakistan the Federal Board of Revenue discovered a few years ago that more than 1.5 million adult citizens, who had travelled abroad at least once a year over many years, had not been registered with the tax authorities.
About half a million who had multiple bank accounts also had not registered. Moreover, of the 341 members of the National Assembly, only 90 had filed tax returns in 2012. The damage from such weak personal income tax compliance among the rich goes beyond forgone revenue or unfulfilled redistributive promise, the report regrets.
According to the report, countries should be fully aware that there is no one-size-fits-all formula for PIT implementation. The timing, sequencing and detailed design of PIT policies need to take into account the local economic, social and cultural context, as well as capacity constraints for both compliance and administration.
In general, countries should choose their PIT implementation strategy according to their development stage and their accumulated experience and capacity in PIT administration. A country with small middle class and large poor population could focus on not imposing tax on the poor and introducing an easy-to-manage PIT design mainly targeting the top income earners.
A middle-income developing country could adopt a more balanced approach of gradually broadening the PIT base by including the emerging middle class into the coverage and at the same time strengthening PIT administration to effectively tap capital and other non-wage forms of income.
A higher-income developing country with stronger governance and administrative capacity could experiment with a more ideal PIT design offering broad coverage, suggests the report.
The report points out that excessive inequality in income and wealth undermines social cohesion, hurts long-term growth and reinforces inequality of opportunities. International evidence suggests that income and wealth inequality may have a tendency towards self-perpetuation if unchecked by public policies.
Published in Dawn, December 4th, 2016
