The biggest issue in Pakistani politics always is corruption by the ruling politicians and govt officials. People think they have been looted by corrupt govt. officials and politicians, who have deposited their tax money either in Swiss banks or used it to buy properties in London.
The question is: whether the money taken away from the country was of tax paid by the people or was it the loans and grants give to us by the foreign governments or financial institutions such the International Monetary Fund (IMF), World Bank or Asian Development Bank?
In the eyes of people, they pay their taxes to the government so that it could provide essential facilities of life to them.
In order to provide the facilities, the government first must be able to get sufficient tax collection.
In this article, let us see how much tax the government is able to collect and what steps the government should take to increase this collection.
Are we paying enough taxes in Pakistan to enable our country function properly? Is the current revenue generation from the taxes is sufficient for the government to deliver all what is expected of it?
The current tax-to-GDP ratio in Pakistan is roughly 11-12 percent, which is lowest in the SAARC countries with India at 17.7 percent. If we compare this ratio with any of the developed countries, we are far below in numbers. The tax-to-GDP ratio in Australia is 25.8%, in America 26.9% and all European countries around 37-39%.
The second question is, how many people submit their annual income tax returns to the Federal Board of Revenue. In 2015, despite all government efforts like extensions for 10 months after the year end and tax amnesty scheme, the total number of income tax returns filed were approximately 1.4 million (1%), out of total population of 200 million.
If we take out the non-working population, still millions of people in Pakistan don’t file their income tax returns. The list includes landlords, traders, farmers, working class; all of whom require facilities, but are not ready to pay taxes. In the light of above given facts, it is difficult for any government to function and fulfil the basic needs of its people.
The government, in order to finance development projects in the country has to borrow loans from the local banks, other countries or financial institutions. These loans all come not only with finance costs but other implicit costs like putting pressure on the government to take steps which affect the lives of common people.
The ever-increasing budget deficit is putting the nation under more and more debt burden every year. The government’s main focus is on indirect taxes or collection of tax at source. The indirect taxes provide revenues to the government but they have their worse effects on the lives of ordinary people.
So, what is the solution? How can the problem be overcome? The first step should be the promotion of banking channels for all transactions. All the government charges collection and disbursements should be made through bank accounts only.
The government can make rules for accepting the utility bills through account payment only and make rules for the private sector to pay for all purchases such as sugar and textile industry, payments to farmers, salary payment to employees can also be linked to bank accounts.
This will not only improve documentation of the economy but will also reduce the amount of money in the government and private sector generated through corruption.
The value of note issuance should be reduced from Rs5,000 to Rs 100. With this step, the circulation of cash will be reduced and it will be difficult for the black market to operate. The government should also provide incentives to the banks to open their branches at the village or district levels to facilitate the common people.
The State Bank should take steps for using National Identity Cards as ATM cards as well as National Tax Numbers. This system is used successfully in all the western countries and even in gulf countries like Saudi Arabia and UAE. The use of cash is very limited in this case.
The most important step is to get properly qualified and trained people employed in the tax collection department like the Federal Board of Revenue.
In Australia, for example, a tax advisor should. be possessing a degree in taxation.
The same rule can be adopted in Pakistan with the help of accounting bodies, like Institute of Chartered Accountants of Pakistan (ICAP) or ICMAP.
The civil servants should only be allowed to join the Income Tax department, if they have a degree or certification in tax laws. If merit system is followed in tax department, we can enhance the effectiveness of our taxation system.
The last step is to provide full access to the FBR to all banking details of all citizens. The State Bank of Pakistan can play an important role in this regard. The system at FBR should be linked to the banking system, so that details of all transactions can be monitored.
All these steps require the will of the government. Once the government is able to document all the transactions, tax revenues will increase automatically, and indirect tax collection will be curtailed. This will also help the government reduce its dependence on loans and grants.