HAFIZABAD-An eminent economist of the country stressed a need for removing the structural imbalances that act as binding constraints to economic growth and national development.

He said that the structural problems including disproportionately higher involvement of government in economic activities, large informal economy, agriculture as the major employer of workforce, concentration on cotton-related production activities, policies biased toward import-substituting activities, neglect of services economy in public policies, low rate of savings and consequently inadequate investment to develop human resources and infrastructure, inability of the government to collect enough tax revenues, neglect of small and medium enterprises, ineffective governance and institutional structures, lack of accountability and tax evasion should be changed for the progress and stability of the country.

Talking to this correspondent, Head of Department Development at NUST Dr Zafar Mehmood said that deep-rooted changes are needed to remove these structural imbalances to increase efficiency, improve competitiveness, and stimulate entrepreneurship and technological progress. He said that when cyclical macroeconomic measures stop producing results, the only way left with economic managers is to introduce fundamental structural reforms.

He said that the government had also introduced Voluntary Tax (Amnesty) Scheme to bring tax-evaders into the tax net but the scheme had also pathetically failed to broaden the tax base. Instead, it further encouraged tax evasion and non-compliance because tax evaders and non-filers understand that such schemes will be available to them in the future too, he added. He disclosed that out of more than three million traders only 8,000 of them availed this scheme till the end of March 2016. Moreover, he said that introduction of such schemes create discrimination and honest tax payers surely feel disgruntled. He suggested that the tax department needs to establish its writ without any discrimination.

Referring to tax evasion, tax avoidance and tax inequality, Dr Zafar said that tax evasion usually involves taxpayers purposely falsifying the true state of their affairs to the tax authorities to reduce their tax liability, which included declaration of less income, profit than the amounts actually earned or overstating deductions and exemptions. In contrast, tax avoidance is the legal use of tax laws to reduce tax liability, he added.

Both tax evasion and avoidance are essentially of tax non-compliance as they describe a range of activities that intend to undermine the tax system, he maintained. In legal term, he said that tax evasion and avoidance are very different but from an economic perspective, the difference between the two is much smaller. Both evasion and avoidance whether offshore tax haven or an anonymous establishment, undermine the tax system ability to meet its most important goals viz: revenue generation, fair distribution of tax services burden across tax payers though not equally and promote growth and equity.

Tax havens are territories which offer foreigners small or no tax liability in a politically and economically stable environment and they also provide partial or no financial information to foreign tax authorities, he maintained. He further said that the tax havens are not just offshore territories but also exist in the underground segment of the domestic economy in developing countries where tax evaders and avoiders directly invest.

However, he said, tax evasion raises significant issues from the viewpoint of economic efficiency. Lower tax revenues may ultimately lead to higher tax burdens on those who do pay. Lower revenue causes lower public investment on infrastructure and lower public expenditure on the provision of social services and for community development, he said.

“Offshore secrecy is another massive source of all kinds of inequalities. When people in power hide wealth in offshore companies, the consequent tax evasion and infringement has the effect of concealing wealth concentration, resulting in political power, creating vicious circles to further raise inequalities,” he maintained.

Some $21-32 trillion in world financial assets sitting offshore including Pakistan’s reportedly $200 billion plus, largely untaxed severely undermines countries’ abilities to effectively increase tax revenue, he said. He further said that offshore wealth is held by the world’s 10 million wealthier people and a large share of that is held by the wealthiest 100,000 individuals and developing countries lose at least $900 billion in illicit outflows every year.

Pakistan has the lowest tax-to-GDP ratio in the world and tax evasion as estimated by the NAB is equal to Rs7 billion a day. He disclosed that the lowest tax evasion in Pakistan was in the 1960s, followed by the 1970s and 2000s and highest tax evasion was observed in 1990s followed by the 1980s and it is evident that in 1990s when the tax evasion was highest the country experienced the high income inequality.

In order to prevent tax evasion, he suggested improvement in tax administration and introducing effective enforcement of laws to control movement of illicit capital abroad. He urged the government to: simplify tax laws and remove loopholes in the tax system; create transparent, less discriminatory tax administration system; educate people about the Tax Laws; and create such an environment in which people pay their due taxes, do not evade taxes and feel proud to pay their taxes. He suggested all NIC holders must file tax returns even if many of them have no income; and all tax administrations (income, sales and customs) must be integrated to make pilferage impossible. All the measures require a strong political will and creation of confidence in potential taxpayers that tax collection will be honestly and fairly spent for the benefit of the nation, he stressed.