Muhammad Nadeem Bhatti

Government of Pakistan collect taxes from its people in order to spend the collection on the welfare of its people which includes national defence, debt servicing and other welfare related issues. While designing the tax policy a country should account the equity and justice for its people because a system is most effective when it is designed on the bases of equal and fair treatment of each tax-payer. But in case of Pakistan the situation is bit different, as a nation we are in debt by the foreign and domestic lenders which is due to our extra expenses incurred due to recent war on terror, our habit of corruption at national and international level and we are also tax averse society in which we don't feel ourselves responsible to pay taxes.

Our current tax collection system is very weak which comprises of loopholes in the system accompanied by the corruption of Federal Board of Revenue (FBR) officers which speaks about the justice and equity of our government officials for their people. After analysing the height of corruption, special favour given to government officials or their friends, (their detail of corruption will be discussed later on with their names). Initially the foreign lenders did not set any targets for us because they somehow believed in our commitments and also felt that we will pay them back their money as per the signed agreement but after the several failures of debt servicing, lenders started to analyse the root cause of this issue in which they found our tax collection system complied with old methodology of taxation ie General Sales Tax (GST) in which all the tax collected at the last stage which makes them aware of the fact that as a corrupt nation and low tax net economy it will become more difficult for them to collect their lent amount from us which lead IMF to set targets for us.

The Indian economy is the 2nd fastest growing economy of the world and 12th largest in term of exchange rate. Although, India does not have impressive track record in the growth of revenues, rising from 6.8 percent of GDP in 1950's to 10.3 percent in 1990's and maximum of 12.9 percent in 2009. But the important thing is that the tax-to-GDP ratio is increasing constantly from 2004 onward. On the other hand, tax-to-GDP ratio in Pakistan has a declining trend from peak 13.2 percent to 8.9 percent in 2009. Sri Lanka has been facing a worsened law and order situation since early 1880's and economy of Sri Lanka showed a very low GDP growth. Although, tax revenues as compared to GDP has decreased in Sri Lanka but still they have high rate of 14.3 percent which is higher than Pakistan. Sri Lanka has coped with the problems in economy by focusing on its tea exports, tourism sector. Furthermore, their government has also tried to improve the revenue collection. Sweden is considered to have highest tax-to-GDP ratio in the world. Tax revenues in Sweden have touched a highest level of over 50 percent of GDP. The personal income tax rate is highest in Sweden which is about 56.4 percent. Tax rate is progressive for the personal income in Sweden while in Pakistan we are facing a regressive taxation.

There are several reasons why we are unable to collect the tax. Corruption is one of the important aspects which are casting great hindrance in taxation system. Other important reason is low literacy rate, which is very low as compared to many countries in the world. Demography of a country also plays an important role in the tax-to-GDP ratio. Pakistan has about 36.7 percent population which is 14 years of age or below. Hence working class is not growing to generate taxes. Terrorism, law and order situation, poverty and unemployment are also playing important role in low tax collection. Tax base in Pakistan is stable at 1 percent. On the other hand, tax base in the US is about 24 percent and it is 20 percent in Malaysia. Tax policy is also not suitable in order to generate taxes and to extend the tax net. Another problem that we are facing is documentation of economy; nearly 52 percent of our economy is undocumented. Audit and enforcement is so weak in Pakistan that the audit agencies themselves are involved in corruption. Looking at different sectors, we can see agriculture has above 20 percent share in GDP but tax collected from this sector are only 1 percent of total tax collection. In this way contribution of different sectors is not properly distributed. Political influence is also a big hurdle in the taxation system. (According to sec 38) departments are molesting the respect of the person which are paying taxes.

One of the reasons Pakistan has not been able to progress as much as other emerging countries is because of the lack of proper infrastructure, low quality of education, and lack of government's ability to spend on public welfare. Almost all of the tax collected by government is spent on either defence or on debt servicing. The stage has come when Pakistan needs loan to pay its loan payments. With VAT the state would be able to collect more taxes with which Pakistan will be able to repay its loans sooner. Once Pakistan pays off all the loans it will be able to spend on infrastructure and improve quality of education. Better infrastructure and education would attract foreign investments which will increase GDP and eventually increasing the tax base; there has been a decrease of more than $3000 million from fiscal year 2007-2008 to 2009-2010 in FDI. According to VAT law there is no difference between retailers and wholesalers. It also does not define manufacturer or manufacture. Every person, who is part of the production supply chain, is required to get registered with VAT if he/she is engaged in carrying out business activity of making supplies of taxable goods/services. Under GST only some of the industries are charged tax. For example, cellular services account for more than 80 percent of the total GST collected, rest of the country's industries pay less than 20 percent of the GST revenue. Now one problem could be that organisations tend to avoid taxes especially when VAT is practiced in the economy. But with the negative effects, payment of taxes has positive consequences as well; paying taxes improves the credibility of organisation. People tend to purchase from organisation that are ethical enough to pay its due taxes, it is most beneficial for small companies. If small organisations mention on their sites that the company is a regular tax payer, it will not just improves its credibility but will also enhance its ability to compete with larger firms.

Tax refund is also a major problem under GST regime, VAT, however has a solution to it. Under VAT system refunds will be paid through speedy Refund Payment System. The system has already been set-up for exporters from the tax period April, 2010 onwards. Under this upgraded system electronic refund payments will be made directly in the bank accounts of the taxpayers. This new refund system will be expanded to cover all other classes of refund claimants in due time. Thus, VAT is the most appropriate tax system for Pakistan as it has the ability to deal with tax refunds without taking much time, its ability to track un-registered business entities, and its ability to increase government revenues and reduce tax gap.

The writer is a chairman of Pakistan Columnist Council. He can be contacted at figure786@hotmail.com