MERELY 2.5m or 35pc of the 7.2m total registered taxpayers or NTN holders have filed their returns for tax year 2021. This is very low compliance with the tax laws.
The government’s claims of taking measures to expand the narrow tax base notwithstanding, the reluctance to file highlights why the share of income tax – the only direct charge on personal incomes — in the FBR’s total revenue collection stands at less than 35pc. Even the bulk of income tax is collected ‘at source’ as withholding tax in ‘indirect mode’.
Read more: Pakistan’s stagnant tax base
The large majority of those who should be paying their due share of taxes on their incomes and filing their returns regularly do not do so because few believe that the FBR will take punitive action against them. Little wonder then that tax compliance is declining in spite of the laws prescribing fines, arrests and imprisonment for non-filers. Recently, the FBR also got the powers to cut off the electricity and telephone connections of non-filers of tax returns. But what is the use of such powers if these aren’t or can’t be exercised to punish tax cheaters?
Read more: Good time to broaden tax base, says OICCI
Pakistan’s tax-to-GDP ratio of around 10pc is one of the lowest in the region and in the world. It is at the heart of the country’s chronic economic and financial woes. Successive governments have pledged to raise this ratio to 15pc to bridge fiscal deficit, offload debt, and push economic growth and development. In the last NFC award, both the centre and the provinces had agreed to increase tax revenues.
More than a decade later, taxes as a per cent of the size of the economy remain stagnant. This is because any effort to raise tax revenues anticipates wide-ranging reforms — especially improvement in the income tax regime and collection — aimed at broadening the tax net. Instead of focusing on reforms, successive governments have chosen the easier path of expanding and increasing indirect levies, which spare the wealthy and directly burden the man on the street.
Read more: An unfair taxation system
The incumbent government has proved no different from its predecessors. It has also been struggling to boost the tax-to-GDP ratio through indirect taxation without addressing the difficult challenge of expanding the base of taxpayers. This strategy hasn’t worked in the past and is unlikely to deliver in future. The challenges of tax compliance and mobilisation cannot be dealt with without effectively and directly taxing incomes irrespective of their source, and punishing the tax evaders.
Published in Dawn, October 19th, 2021