Economically speaking, due to poor tax collection, the country is not only plagued by huge gap between the revenues and expenditure, resulting in abysmal reliance on foreign loans, but it is also compelled to increase the burden of taxation on business class, hence reducing their capacity, to engage in new industrial ventures, which is, of course, a predominant reason behind slow economic growth in the country. Economic miseries in turn add to social woes of the country. Because of crunch in revenues spawned by poor tax collection, the government is faced with the reduced ability to invest in the public sector, thus aggravating the conditions in the sphere of basic services like education, health, security, etc. Needless to say, the state's alarming performance in public services leads to the erosion of public trust in the democratic system, thus adding to the country's political woes. Thus, it becomes quite clear that an efficient and vibrant tax culture is a strategic imperative for the state. Without promising hike in the tax revenues, the country cannot embark on the path to bold reforms in key areas of governance.
The prevalence of alarming conditions with respect to promotion of tax culture in the country is not the result of any single challenge. Rather, a host of challenges are involved in spawning a dilapidated tax collection system in the country. It would be quite imperative to take these challenges into consideration in order to have a better perspective of the issue.
Pakistan has been in the grip of the taxation crisis since its inception because the country lacks a tax culture. That is why, only 0.3% of the total population pays direct tax in Pakistan, which makes Pakistan's tax-to-GDP ratio only 9.45% - one of the lowest in region. The country earns 55% of its tax revenues through indirect taxes, while 45% of it is collected through direct taxes -- 70% of which is in the form of withholding taxes. This ratio is uneven, given the fact that indirect taxes affect everyone's expenditures, including the poor, while direct taxes are only taken from elite and middle class, and are used for the general welfare and human development projects.
As a result of low tax collection, the state funds its development and infrastructural projects through debt financing. Consequently, the major chunk of the state's revenue is spent on paying these debts with costly interests levied by donors.
The tax net in Pakistan is very low, that is why the current government has taken some positive steps to broaden the tax net in Pakistan. The Federal Board of Revenue (FBR) has started campaigns for promoting tax culture in Pakistan. It has announced various incentives for tax payers, which include concessions for people filing income tax returns, at the time of paying registration, transfer, and token fees of motor vehicles. In addition, negotiations are also underway between the government and traders with respect to imposing a low tax rate for those traders and industrialists who disclose their hidden income.
The prevalence of alarming conditions with respect to promotion of tax culture in the country is not the result of any single challenge. Rather, a host of challenges are involved in spawning a dilapidated tax collection system in the country. It would be quite imperative to take these challenges into consideration in order to have a better perspective of the issue.
The poor development of tax culture in our country is not without reason. If we compare our circumstances with that of the developed countries, we easily know that there are huge differences in our and in their situation. The difference of situation due to some reasons has not allowed our tax culture to flourish. The most prominent reason is related with the literacy gap between us and them. In developed countries, more than 90% are well-educated whereas in our country only 57 % are educated including those who can only write their names. The prevalence of deep-rooted illiteracy among the masses has given rise to poor awareness of tax laws in the country. Needless to say, such poor awareness is a significant challenge in the way of promotion of tax culture in the country.
The other major challenge appears in the form of the incidence of informal and undocumented economy. Undeniably, documentation of economy is a must for the promotion of tax culture in any country. In Pakistan, the state under successive regimes has failed to bring the economy into the net of documentation. Agriculture and service sector constitute major components of the economy. It is a sad fact that these sectors escape the tax net. Agriculture sector is exempted from taxation, whereas service sector (doctors, lawyers, consultants, hotels, restaurants etc.) being significantly undocumented is involved in widespread and shameless tax evasion. Thus, it goes without saying that undocumented economy is an overwhelming impediment in the way of promotion of tax culture in the country.
There are also other factors behind widespread tax evasion in the country. The most important of them is tax evasion of the political elite. If one observes the figures of tax payments of the politicians, which are available on FBR Website, one is shocked to the bone. It becomes evident that majority of politicians do not pay any taxes on their incomes. If political elite being role model for the masses is involved in the tax evasion, how one can expect from other masses to contribute towards tax collection. There is no denying that change comes from the top. Unless politicians avoid tax evasion, the promotion of taxışulture in the country is bound to falter again and again. Thus, bringing political elite into the tax net is another major challenge for the tax collection machinery of the state.
Obviously, the phenomenon of tax evasion of the political elite leads to the deficit of trust between the rulers and the masses. Such trust deficit assumes alarming proportions when common people see the ruling political elite living luxurious lives in the country and abroad and the perks and privileges they enjoy. Needless to say, this extravagant style is a brutal waste of taxpayers' money. Thus, such luxurious way of living on the part of political elite makes people hesitant to pay taxes. The majority thinks that these taxes will be wasted on foreign tours or private functions of the officials. To be honest, the dire trust deficit among the masses and the rulers is a huge impediment in the way of tax culture in the country.
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Inherent complexities in the tax code further add to the tax miseries of the country, hence resulting in the lack of tax payment by the educated class. Most of them do not pay taxes incumbent upon them. The reason for this is the lack of awareness among them and the complex tax codes, which are too difficult to grasp. The complexity in the tax code further aggravates people's lack of the awareness about the payment of taxes and that how taxes can prove helpful for their lives. Briefly speaking, the complete system of tax payment coupled with hefty procedures involved while paying taxes is one of the significant challenges hindering the fostering of tax culture in the country.
Furthermore, the harassment of the common people at the hands of the administration is also a prominent challenge in nurturing tax culture in Pakistan. Most of the staff members lack the proper training of how to deal with customers in a polite manner and black sheep in the administration instead of motivating them to pay tax, lure 74 them into bribery for personal benefits. This deteriorates the already bad image of Federal Board of Revenue and other institutions dealing with tax collection and further demotivates the public from paying taxes.
These malpractices are further reinforced when corrupt officials and non-payers do not get any sort of punishment. Most of the corrupt mafia roams around freely in the country with no accountability and punishment. This triggers an impression among the people that non-payment of taxes does not entail any hardships for them. Besides, lack of punishment for the corrupt elements gives rise to corruption in the tax collection machinery which goes a long way in promoting tax evasion in the country. Thus, deeprooted corruption is a huge impediment in the advancement of tax culture in the country.
The fact that successive governments have used unconventional methods instead of resorting to strict measures such as punishment is not only symptomatic of the weak writ of the state, but also promotes the culture of the non-payment of taxes. One such example is the tax amnesty schemes announced by the governments from time to time to motivate non-payers to pay their taxes. To be honest, this provides them with some sort of flexibility or concession in their payment but does not help in fostering a healthy tax culture in the country. Majority of people engage in tax evasion while waiting for the announcement of amnesty schemes by the government. It can be inferred that amnesty schemes are temporary relief for the government in the short run. But in the long run, these schemes are a hurdle in nurturing an efficient and robust tax culture in the country.
Apart from tax amnesty schemes, lack of professional people in the tax collection machinery is also a significant challenge in the advancement of tax culture in the country. It is a fact that majority of officials working in tax departments do not have specialized educational background which could help them a lot in discharging their duties as efficient tax men. Inherent complexity in the tax code further debilitates their understanding of the tax laws. Needless to say, such phenomenon proves an overwhelming hurdle in the advancement of healthy tax culture in the country.
Without an iota of doubt, the presence of weak and lacklustre tax culture in the country has given birth to a plethora of ramifications on different fronts. Most important among them are the ones impinging on the national economy. This is evident in the low growth of our GDP and economic crunch faced by our country. If one takes a look at the developed countries, one comes io know that their tax-to-GDP ratio is quite high which reduces the budget deficit and as a result, they are living lives with much more facilities than people in Pakistan. While in case of Pakistan, owing to low tax-to-GDP ratio, the country is often afflicted with budget deficit which reduces the government's capacity to invest in the sector of public services, engendering multiple economic disparities in the country.
These economic disparities mainly appear in the non-availability of quality education in public institutes, lack of facilities in hospitals and other basic needs of life. While rich people get these facilities from abroad or from areas where they are available at high prices, but poor people do not have the money to pay for it and as a result, they remain deprived. Consequently, it has increased class gap at a very high pace and is kept on increasing. Lack of facilities in the public sector has, of course, spawned illiteracy and poverty in the society.
When the rich are involved in the evasion of taxes on their incomes, the government is forced to resort to indirect taxes in order to meet its expenditures. This is exactly the case in Pakistan. Each year, the government adds to the burden of indirect taxation on the people. Such burden is affordable for the rich. But as regards the poor, it aggravates the grip of poverty on them. Commodities of daily life become difficult to buy for them. Due to each year's increase in indirect taxation, their purchasing power keeps on decreasing. Subsequently, they are bound to linger in the cycle of poverty with no hope to break it ever. Thus, poverty becomes their ultimate fate. The poor become a miserable tale of dreams unfulfilled, thanks to the shameless tax evasion of the rich.
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One of the main manifestations of poor governance appears in the form of the deterioration of law and order situation in the country. This law and order situation is not only a problem in itself but has also many other tentacles which need to be considered. Bad law and order situation has resulted in the reduction of foreign direct investment and in the number of foreign tourists. Thus, the country not only loses some valuable investment but also results in a bad image of the country abroad, being highly unsafe place for the tourists.
The image of the country is also deteriorated in some other aspects. Owing to constant reliance on foreign aids and loans, in the comity of nations, the country, the land of the pure, is considered as a parasite state always holding a begging bowl and feeding on the money of foreign taxpayers. Needless to say, overreliance on foreign aid is not only a matter of national shame, but also a severe threat to the sovereignty of the state as the donor countries are in a position to interfere the internal affairs of the country.
From the prevalence of alarming conditions with respect to tax culture, it is evident that the whole system of tax culture is in dire need of reforms. Vibrant and forceful efforts on behalf of the government are needed to promote tax culture in Pakistan. The Federal Board of Revenue should be declared as an autonomous entity, free from political clutches. The maladministration of FBR should be corrected in order to make it taxpayer friendly. The FBR was known as one of the most corrupt departments in Pakistan by Transparency International. That is why a strict accountability mechanism should be enacted to check the corrupt behaviour of officials at the FBR. Optimum tax rates should be levied and everyone should be taxed according to their capacity and ability to pay tax. The FBR should pay due refunds to taxpayers which are dilly-dallied by its officials. One other important demand is the establishment of tax courts in Pakistan because there are no tax courts in Pakistan. The first and second appellant forum for an aggrieved taxpayer is the Commissioner/Collector Appeals, who are also officials of the FBR. The second appeal lies before the tribunal whose members are appointed by the FBR. Hence, the aggrieved taxpayer has to seek relief against FBR through FBR officials. Tax courts, free from the control of the executive, should be established. More importantly, the public trust on the taxation system of Pakistan should be established.
Transparency should be an important element to be ensured, something that can only happen if everyone is taxed fairly and justly. The public should be guaranteed that their taxes are public money which will be used for their welfare, for establishing a better educational system, better health facilities, and for building roads, dams, etc. This development requires money, and money comes from taxes.
Another important step to promote the tax culture in the country is to educate the coming youth. This will raise a sense of duty among them to pay their taxes. They should be motivated to fulfil their obligations while living in the state. The code tax should be simple and understandable for the common public and there should be proper check and balance on the Federal Board of Revenue administration so that they cannot harass or behave negatively with taxpayers.
Steps should be taken to revive the trust of people in the system. The two major steps in this regard would be the example of rulers. If rulers do not pay taxes then it is not justified to expect that common people will pay taxes. The government should also raise awareness among the society by various print and electronic media campaigns. Social media can also prove to be instrumental in such awareness campaigns.
From the above discussion, it can be concluded that the taxation system is in such dire condition that it is in need of major overhaul. Despite passing of seven decades, the country has miserably failed to promote a vigorous and efficient tax culture. To be sure, many factors have contributed to such alarming phenomenon. Most prominent of them are poor awareness of tax laws among the masses, the incidence of informal and undocumented economy in the country, shameless tax evasion by the political elite, luxurious style of living of the rulers, trust deficit between the rulers and the masses, increasingly complex nature of tax system, massive corruption in the taxation machinery and lack of punishment for tax evaders and corrupt officials in the tax administration.
Needless to say, massive reforms are needed in order to ensure due payment of taxes, leading to the emergence of a strong culture in the country. Vigorous tax culture will not only stabilize the economic condition of our country but will also improve the living standard of people. The class gap will reduce significantly amid the improving financial conditions of poor and literacy rate will improve drastically due to a high number and quality of public education institutes. More public hospitals will be built, which means that public will have access to advanced and less-expensive medical facilities. The financial sector will improve significantly, which will result in less or no debt financing on part of the government. The money which the government pays in exchange for the loans they take from donors will be diverted towards poor people.
Another major output will be the reduction in indirect taxes and increase in direct taxes. The reduction of indirect taxes means that daily life commodities will be less expensive to buy for the poor whereas direct taxes will further help the government in expanding its financial pool. The improvement in financial resources means the improvement in security and safety of the citizens both from internal and external threats. This improved security situation will also encourage foreign investors to invest in Pakistan, which will drastically change the lifestyle of the poor, bringing a positive change to their lives through employment opportunities. Briefly speaking, a healthy tax culture will make the state treasury strong, which in turn will make the country stronger.
OUTLINE
- Introduction
- Currency of the Issue
- Challenges in the Way of the Growth of a Vibrant Tax Culture in Pakistan
- Lack of awareness of tax laws among the masses
- Informal and undocumented economy
- Absence of tax culture in political elite
- Trust deficit between the rulers and the masses
- Increasingly complex nature of tax system
- Uncontrolled corruption in the taxation machinery
- Harassment of the tax-payers
- Lack of punishment for non-payers and corrupt officials
- Badly carried out amnesty scheme
- Lack of professionals in the system
- Wide-ranging Effects of Dysfunctional Tax System
- Low tax-to-GDP ratio
- Abysmal conditions in public service sector
- Widespread illiteracy
- Entrenched poverty
- Accelerated institutional decay
- Increased burden of indirect taxation
- Over-reliance on foreign aid and loans
- Poor painting of national image
- How to Improve Prospects with Respect to Tax Collection
- Educating the nation
- Simplification of the tax system and codes
- Friendly environment for the tax-payers
- Punishing the culprits
- Rulers leading by example
- Reviving trust of the common people on the government
- Awareness campaigns through print and electronic media
- Conclusion
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