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Nobody in the world wants to pay taxes. In countries where taxes bring tangible benefits to citizens, individuals and companies wish that others pay and they benefit. One important measure of a functioning state, therefore, is its ability to collect revenues from its citizens. Moreover, when a state is able to collect taxes and spend a major chunk of its revenues on the welfare of its citizens, it is usually characterised as a civilised and democratic state.
With one of the lowest tax-GDP ratios (even in the developing world) and with the bulk of state expenditure going to defence and debt servicing, it goes without saying that Pakistan is seen as a weak and a rather uncivilised state. And this is without adding to a myriad of other issues which have lately given the country a dubious reputation in the comity of nations.
So what is the taxation problem in Pakistan? When expenses of the state are in the region of 18-20 per cent of the GDP and its tax revenues hover around eight to 10 per cent of the GDP, there is obviously a disconnect. In such a situation there are two options to bridge the deficit: One is to borrow and pass the buck on to future generations. The Pakistani state has carried on this borrowing binge to the point that for the last two decades, debt servicing tops the expenditure list in the federal government budget. This essentially means that instead of collecting taxes from the present generation, the burden is passed on to future generations.
The second route to deficit financing is to print money—the more sanitised term used for this indulgence is ‘bank borrowing’. Printing money unleashes inflationary pressures in the economy and is considered the most regressive form of taxation as its burden falls disproportionately on the poor.
So is their any alternative to taxation? One can argue—as populist politicians and TV talk show hosts do ad nauseum—that the state should reduce its expenditure rather than tax further. Well, if we add defence, debt servicing, civil and military pensions, law and order and functioning of courts, it adds to roughly three-fourths of all government expenditure.
Barring this ‘locked-in’ expenditure there is precious little that will make any substantive difference. This is not to say that the optics of lavish expenditure by civil and military personnel is in bad taste and should be reduced. But will it make a substantive difference? No. There is still no option but to improve the tax-GDP ratio.
If the reader then agrees that the state needs to collect more taxes, then we have to first see who pays tax and who doesn’t. At one level, everyone who consumes electricity and gas (and pays for it) and a number of other goods indirectly pays tax.
Beyond this indirect taxation—which by definition is regressive—there is a host of others who are either exempted from paying tax on their incomes or they evade taxation with impunity and the state turns a blind eye to such evasion.
The list of those exempted makes a wonderful list. It is not only agriculturists—as is commonly perceived—but also textile tycoons, carpet barons and leather kings (and queens if any) of this country. These sectors were exempted from sales taxation in 2005 and thus there is no way their incomes can be assessed in a verifiable manner. Add to this list stock brokers and real estate agents whose incomes till recently could not be taxed because they occurred from ‘capital gains’ and, lo and behold, tax on capital gains was exempted. Although a miniscule tax was imposed on them last year, their free ride continues virtually unabated.
Those who are included in the tax net but evade with impunity makes an even more interesting list. These are doctors, lawyers, consultants, big and small traders, shopkeepers and a host of other service providers. This happens because of a ‘self assessment’ scheme on income taxation introduced by the previous military dictator. This policy has severely reduced the ability of taxation authorities to audit incomes of these service providers, who incidentally, have seen their incomes increase faster than all other sectors since the liberalisation of the economy in the last two decades.
Then there is the corporate sector. Although corporate income tax contributes a fourth of tax revenue, in 2008-09 only 10 per cent of those companies registered with the Securities and Exchange Commission (SECP) paid taxes. Moreover, 39 per cent of companies registered with the SECP are not even registered with the SECP and only 31 per cent of those that are registered file their tax returns. According to a World Bank report, tax avoidance and evasion amongst the corporate sector is 218 per cent of the tax they actually pay.
We also hear endlessly of direct deduction of taxes from employees. The picture conveyed is that all those who are not owners of capital, but work as employees pay taxes. The Labour Force Survey in Pakistan tells us that the employed work force in the country is 50 million and those who file income tax returns are a mere 2.1 million. So, yes, those whose salaries are deducted at source are locked in but then there are 20 times those in the same category who are not.
Not considering terrorism, religious extremism and foreign interference, the snapshot picture on taxation alone provides enough reason for the rest of the world to claim that ours is a failed state and by the impunity with which exemptions and evasion are condoned, the accusation of a rogue state does not ring hollow either. Only when we make equitable taxation as the primary focus of state building will we start to ward off such accusations.
The writer is an economist, affiliated with the Collective of Social Science Research, Karachi
