Can tax avoidance be discouraged and voluntary tax compliance encouraged by delivering reciprocal public goods for which the taxpayers are entitled to but the cash-strapped governments are largely unable to provide? The answer is yes as demonstrated by the experience of European social democracies.
While the country is stuck with a low tax-to-GDP ratio despite various reforms and administrative measures there is a growing view now that to collect more taxes the government needs to ensure that the revenue is prudently spent on public welfare and infrastructure upgrading for the wheels of the economy to run efficiently.
Development practitioner Shakeel Ahmed Shah rightly points out that if the government is broadening the tax base and levying more taxes, the taxpayers expect some visible improvement in services delivered. He says “it is hard to claim that citizen’s experience of interaction with government service providers has changed at all.” Mr Shah observes that the government tries to raise taxes without bringing reciprocal improvement in public services.
The implementation of the electorate mandate remains a low priority with voter’s accountability of their elected representatives seriously impaired by manipulated elections
Prime Minister Imran Khan recently put the issue more lucidly. He said his government has been trying to assure the people that their money would be spent on them. The reason for low tax collection, he explained, was the trust deficit of the people in governments. People are not paying taxes due to (lack of) trust. As the PTI government earns public confidence, he believes, the tax collection will increase.
In the last three years of the PTI government, it has also become more evident that administrative fiat will not deliver the desired results. During this period, the Federal Board of Revenue (FBR) issued notices to 12.8 million non-filers of income tax returns.
Only 1.31m responded. The FBR recovered a mere Rs2.6bn or 4pc of the tax demand of Rs64.3bn.
The tax notices provoked widespread resentment and the FBR was accused of harassing taxpayers. Tax expert Syed Shabbar Zaidi argues that ‘efforts that lead to overall harassment do not lead to any major contribution to the national exchequer.’
Faced with a low tax–to-GDP ratio at close to 10 per cent of GDP, Finance Minister Shaukat Tarin decided that no notices would be issued by the FBR from July 1 as the taxpayers would be able to carry out self-assessment. “Only 4-5pc of the cases will be sent for audit by a third party and the scrutiny will no longer be done by the tax authority”, he said. Critics allege that the Universal Self-Assessment Tax Scheme introduced by former President Musharraf was subverted by tax officials and tax advisors.
Official measures are also underway to encourage the civil servants to improve their efficiency to expedite the redressal of public grievances. A column addressing the public complaints has been included in the personal evaluation report of the civil servants. Though the move is laudable it may prove to be of limited value; if the system is producing problems for the people, the real remedy lies elsewhere.
Mr Zaidi says so far the growth models employed have failed to reduce income inequality. “If the society does not get a fair share of the wealth,” he said, “the society will collapse.”
The PTI government has responded to the situation with important policy initiatives such as a bottom-up approach for shoring up the labour-intensive economic activities in the small and medium enterprises sector and the housing and construction sector; expansion of social safety nets for the relief of the poor, and shift of policy from stability to economic growth in order to generate employment. But policymakers admit that sustainable growth is a major challenge.
The government has set up the stage to enhance the pace of growth, provided we have sufficient control over structural bottlenecks and institutional rigidities, wrote Dr Karim Khan of Pakistan Institute of Development Economics in his recent article titled ‘Mantra of inclusive development.’
In Pakistan’s context reaching out to the marginalised group is not a simple task, Mr Khan observed, referring to the Rs260 billion Ehsaas programme.
Some tax experts often say voluntary tax compliance is discouraged by what they describe as a ‘regressive, extractive and predatory’ tax system. The current fiscal year’s federal budget is being criticised for its heavy reliance on indirect taxes. Over the past few decades, the taxation policy has been revenue-oriented instead of being growth-oriented.
A heavily indebted country has a very limited capacity to resolve the problem of rising inequality, unemployment, poverty, underpaid jobs, education, health and civic issues confronting the cities or to invest enough for upgrading infrastructure to reduce the cost of doing business.
Pakistan can benefit from the Chinese experience if Pakistan wants to break the crutches of foreign dependence, says eminent scholar Pervez Hoodbhoy. “Among the most important lessons is creating a skilled work force, giving dignity to labour, distributing wealth and public resources reasonably, emphasising birth control and encouraging a mindset oriented to future rather than in the past.”
With a transactional approach governments in Pakistan have been initiating uplift programmes for electoral constituencies to get votes for the ruling party when the national polls are round the corner. The implementation of the electorate mandate remains a low priority with voter’s accountability of their elected representatives seriously impaired by manipulated elections. Dysfunctional democracy serves a few.
With complete disregard of the PTI manifesto, the Khyber Pakhtunkhwa government has reduced the development share of non-elected local governments from earlier 30pc of the provincial Annual Development Plan to 20pc in 2021-22.
“Economic policy cannot be successful until and unless it benefits the common citizen” was the unanimous conclusion reached by participants in the discourse on ‘Growth and stability — hand to hand or poles part’ organised by Islamabad Policy Institute recently.
Published in Dawn, The Business and Finance Weekly, July 19th, 2021