Tax is the most important source of government revenue. Revenues earned by the federal government are then reallocated for federal government’s and provincial government’s expenditures. One of the complexities of our economic system is the ‘tax problem’ that everyone keeps pointing out time and time again. Revenue generation has always been a hardcore problem for Pakistan’s economy which is why our government turned towards Structural Adjustment Programme in the first place. The problem lies with the tax base, that is considerably very narrow as compared to other countries. The reasons behind the low tax base are large number of exemptions given in sales taxes, excise duty, income tax and custom duties and huge number of incidences of tax evasion.This leads to eventual pitching of tax rates resulting in more opportunities and incidences of tax erosion and even higher tax rates; making it a never ending vicious cycle. The overall level of fiscal effort is low and tax-to-GDP ratio has always been nearly stagnant which is why budget deficit has been high.

Repeated and frequent changes in tax legislation have also contributed towards distorted tax system. Changes are done to provide protection or incentives to certain groups and mafias. These policies have contributed towards narrowing the tax base and lowering an overall tax effort. This makes one question the general fairness and transparency of the system. Reports suggest that the main problem with the tax system is the sustained inability to raise adequate revenue to finance the public-sector budget. There is a structural fiscal gap equal to 5% of GDP. The reason of a low tax base is preferential and discriminatory behavior towards different sectors of economy that create many distortions within the economy. Tax laws are such that the individuals with same income, businesses and profits are treated very unequally. For instance, 1/5th of the GDP comes from agriculture and a handsome amount of revenue could be generated by taxing the income from this particular sector but, legally the tax base is not extended to tax the income from agriculture. The shortfall in agriculture and services puts a burden on industrial sector.

Extensive use of withholding taxes as opposed to being adjustable against full liabilities has added to the arbitrariness of tax system. There is an evident overdependence on indirect taxes which until recently accounted for a share in revenues of over 80%. This has increased regressivity of the tax system.  And imposed an excess burden of taxation. The nature of taxation is regressive in general, meaning a tax is imposed uniformly to everyone regardless of individual income. Moreover, within indirect taxes, there is a domination of taxes on international trade which leads to an overall inefficiency and has distorted resource allocation and encouraged illicit trade Another problem is the poor tax administration of tax system. Reports suggest that people while filling their returns, provide incomplete information and data and since our tax system uses orthodox and primitive procedures to analyze the data, it makes it very complex to highlight the offenders (tax evaders) The alleged reasons behind the lag are corruption and institutional inefficiencies.

We have ruled out some of the problems with the tax system, narrow tax base and tax evasion being the most serious concerns. Now, the question arises, why do people evade tax? What could be the possible reasons apart from the fact that people lack the sense of responsibility? Do we actually not pay taxes? According to the stats, only 1.21 million citizens pay income tax making it less than 1% of the total population. But according to state bank of Pakistan’s annual report, 57.5 million people are employed and obviously are earning some income and thus 57.5 million people should be paying income tax one way or the other. So, that rules out the figure of tax payers that keeps on floating here and there. Moreover, Pakistan’s total population is around 200 million. According to the common notion, 29% of the population is paying the taxes. But according to Economic survey of Pakistan. 61.4% population is of working age making 122 million people fall into the working population. The 57.5 million tax payers constitute of 48% these working people.

Approximately 140 million mobile users pay more than 20% taxes on their consumption. People use automobiles which use fossil fuels that are subject to different taxes and consequently people end up paying them. These are the kind of taxes that no one can evade. These taxes are most definitely paid out of personal incomes. Do you still think we do not pay taxes? Do you still think we are not an overtaxed nation?

Now we think that maybe, the problem lies with the imbalance between government expenditure and government revenue. But that’s not something only Pakistan is facing. We are perhaps just poor at managing our resources.

Another question arises in our minds, what if we make the tax system progressive instead of just leaving it regressive? Will that be of any help? I’m afraid, that might not be the case. Progressive taxation is the imposition of higher taxes for the people with higher levels of incomes and vice versa. But did you know, South Africa does have a progressive tax system yet it is revealed that south Africa has the highest income inequality. It is not guaranteed that if today we equalize expenditures and revenues, our budget deficit would not go high tomorrow. If the revenues go up, what if expenditures go up too? In order to correct the situation, progressive taxation is not the only thing we need. We must make sure the inclusiveness of institutions like education, research and development. These institutions are directly corelated with economic growth. 

It should not be concluded that Pakistani do not evade tax. The reason why people evade taxes primarily is absence of trust towards the administration. People do not see their efforts being paid back. So, they don’t find a point of making efforts at all. There is a lack of transparency and accountability within the system that makes public question themselves whether their money is actually being used for their benefit or is gone into satisfying someone else’s vested interests.

Therefore, the inclusiveness of institutions, reforms in system, use of modernized ways to analyze data, ensured trust, accountability and transparency would be a good heads up towards the solution of the tax problem of Pakistan.