The rich in Pakistan are great philanthropists but reluctant taxpayers. This raises a serious issue which the policymakers need to ponder.

Apparently, it indicates a lack of confidence taxpayers have in the dysfunctional tax administration and the government’s inability to ensure that every rupee of revenue is well spent.

The underlying problem is the disconnect between the government’s right to collect taxes and its obligation to deliver. Community services are seen as a much more effective vehicle to provide relief to the needy and are attracting more and more donations. An increasing number of companies are also undertaking social services instead of donating to the government in times of disasters like earthquakes and floods.

Yet another reason for the poor tax culture is the unfair tax system, with a strong segment of the rich, like big farmers, virtually exempt from taxes. The situation is worsened by periodical tax amnesty given to one business segment or the other, while consumer items of mass consumption like fuel are heavily taxed.

The PML-N government has decided not to ask the sources of Greenfield investment (a tax amnesty of sort) to improve the investment climate. With the cash-strapped government unable to finance its budgeted development programme, one would think that it would be the right strategy to stimulate capital spending by the private sector, which has long been recognised as the engine of economic growth.

And as things stand today, investment should be the top priority of the policymakers. The last PPP-government gave conditional amnesty for investment in the stock markets which helped create a boom in the bourses It also gave tax holiday for equity investors who financed their projects without banks loans. Its outcome is not known.

Presently, public corporations are making robust profits, there is excess money in the markets and these need to be diverted from speculative trading to productive investment. Corporate taxes have been reduced by one per cent from the next financial year, and perhaps it is the best way to go about to encourage investors, keeping in view the global trend.

However, given the past record of outcomes of such exercises, Dr Muhammad Yaqub, former governor of State Bank, fears such a move would only encourage a ‘rent-seeking’ culture which to a great extent explains inefficiencies in the economy. The government, however believes, that its decision would lead to documentation and reduce incidence of tax evasion. Yet another way to documentation is bank borrowing for Greenfield projects, but banks now prefer to invest in government papers rather than lend money for long-term investment by the private sector.

Tax collection is a complex and complicated issue. Administrative compliance has, by and large, failed. Voluntary compliance can only succeed when the tax administration and the government enjoy the confidence of the taxpayers. Currently, bulk of the taxes are collected by trade and industry on behalf of the tax authorities. And bulk of the tax revenue comes from withholding tax which in essence is not a direct tax. But if the private sector is to be treated as an engine of growth, a disproportionate share of the earnings/savings with the rich cannot be transferred to the national exchequer.

Tax amnesties have helped collect revenues on a temporary basis but have not provided any solution of a durable basis. The result is a declining or more-or-less stagnant tax-to-GDP ratio. The conventional approach is, in fact, not working.

The taxation system also needs to be revamped and devolved. Currently, the centralised system of collection and distribution is proving inefficient. Since devolution, both Punjab and Sindh have collected more revenue from sales tax on services than the Federal Board of Revenue earlier did.

Similarly, this gives a reasonable hope that if the district governments are empowered to levy local taxes including property tax , now with the provincial governments, the revenue would increase because the benefits of local socio-economic projects would be more visible and palpable to taxpayers of the area. Given representative system, the district governments would also be accountable to the taxpayers.

But the key issue is the disconnect between rights and responsibilities and the policymakers’ top priority should be to close this gap.