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No tax vision

Updated February 22, 2019

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IN a ceremony to give awards to the top taxpayers of the country, the prime minister spoke about his own cost-cutting efforts as well as berated former rulers for getting medical treatment abroad.

The one thing he did not do was offer a vision of how his government intended to broaden the tax base, and document the economy.

Simplifying tax forms and ceremonial awards for taxpayers is fine, since it will streamline the filing process and perhaps create a culture of respecting those who are paying their taxes. But it cannot be considered a vision for broadening the tax base.

Pakistan has one of the world’s highest cash-to-bank deposit ratios, and the large cash-based undocumented economy thrives not because tax forms are too difficult to fill, but because there are ingrained rackets and severe mistrust of the tax authorities among undocumented players.

Overcoming these challenges requires a vision far more expansive than anything the government has offered thus far.

Simple encouragement to file returns or assuring people that their money will not be wasted now that we have a prime minister who claims to lead an unostentatious life can be helpful in a symbolic way. But getting retail and wholesale trade — which accounts for half of the country’s GDP and yet pays very little in taxes other than indirect taxes — to start documenting their transactions will require a far more sophisticated approach.

One of these approaches is the so-called Value Added Tax that other countries with large undocumented sectors have been able to use with some measure of success to document their economies.

Maintaining an active taxpayer list and creating an increasingly restrictive environment for non-filers is another way, but ongoing experience with this approach is showing that it is effective only when coupled with other incentives, and traders’ incomes (to take one example) are still likely to evade capture through it.

The government needs to shed its political approach to every policy question. Symbolic moves like showing off one’s simple lifestyle are not going to broaden the base of taxation.

Nor will pandering excessively to the business community do the trick. A vision would involve a structure of incentives and penalties in the shape of a larger policy. Given the state of the fiscal framework, data for which became available on the same day as the ceremony was held, it would seem the urgency to develop a strong policy thrust on the revenue side is increasingly becoming a priority.

The second quarter of the fiscal year actually saw a net decline in revenue collection from the corresponding period last year, which is highly anomalous especially in an environment of rising inflation. If this trend continues, the government will be forced to take some very unpleasant steps in the near future.

Published in Dawn, February 22nd, 2019