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Pay up, Pakistanis: Tax-exempt patriotism won’t cut it anymore

Pay up, Pakistanis: Tax-exempt patriotism won’t cut it anymore

Surveys show repeatedly that Pakistanis carry and exhibit high levels of patriotism. Yet, despite this, these citizens do not fulfill an important component of their social contract with the state that they eulogise or want to strengthen: paying taxes.

Very few Pakistanis are bothered to pay what is due from them, yet, they are always ready and willing to display their patriotism at the drop of a hat.

This is nationalism minus responsibility. In addition, not enough attention is being given to Pakistan's underlying fiscal fragility that has compounded itself over 30 years.

All the issues topical today, be it child protection, increased internal security and human development needs, all need to be financed. Fixing taxation is the only solution.

A series of three in-depth studies and reports by RAFTAAR (Research and Advocacy for the Advancement of Allied Reforms) on the issue of Tax in Pakistan have shown just how important it is for the state, government and polity of Pakistan to understand the significance of this issue in the context of Pakistan surviving as a truly sovereign nation.

Take a look: Taxation issues: Pakistan's Ignored Existential Crisis

The reports’ findings are rather startling. Only 0.3 per cent of the population of Pakistan files their income tax returns. India, on the other hand, which has a greater percentage of people in poverty, manages up to 3 per cent.

Since 2003, Pakistan’s revenue collection has remained flat. Expenditures by the state have continued to grow as newer challenges to the country emerge, such as natural disasters, annual flooding, internal security, etc. How is the state to meet these expenditures without receiving much assistance from its citizens?

Pakistan’s tax to GDP ratio is just 9.4 per cent, this is close to the bottom of countries worldwide in terms of revenue generation.

The country’s budgetary deficit is crawling with debt because we do not collect enough taxes. And it’s an expensive debt. One third of it is foreign, two thirds is raised through domestic sources. Foreign debt has an interest rate of 1.9 per cent. Domestic debt has an interest rate of 10.7 per cent. Foreign debt is cheaper, but access to it for Pakistan is harder. So the cost of interest on our debt is 1.3 trillion, of which 92 per cent goes to domestic creditors, and 8 per cent to international lenders.

The reports further inform that in 2008, Pakistan’s public debt was Rs 6.3 trillion. Today it’s 17 trillion! That is a three-fold increase. And it will continue to increase unless the state can increase revenue, because otherwise, it will continue to finance through debt.

This debt is eating up our current revenue.

This squeezes the state’s ability to invest in the people of Pakistan because as debt interests are paid, there is less left for development.

We just can’t continue to depend upon the international community. The reports declare that its role is overstated. Over the last eight years, foreign project assistance in the development budget has only been 15 per cent. Overall, net external assistance has only financed 4 per cent of the budget. Pakistan’s real source of budgetary gaps is deficit financing through loans.

Pakistan’s ability to endure through unexpected crises is also dependent upon improving taxation. Right now, 60 per cent of the federal budget is earmarked to interest payments, wages, pensions and defense. 12 per cent goes to subsidies and grants. Only 28 per cent is adjustable. Thus, any unforeseen event gives the country little fiscal room. We have a fiscally fragile economy.

Despite the fact that only 0.3 per cent Pakistani file income tax returns, the people largely feel they are being taxed a lot. This is relatively correct because the government has not been able to collect direct taxes. So in desperation, it resorts to indirect taxation.

68 per cent of tax revenue in Pakistan comes from indirect taxation. Pakistanis pay more for fuel and electricity than other regional countries because of the surcharges added.

But the problem with indirect taxation is that for some items it penalises the poorer more than those with higher incomes. As one of RAFTAAR’s reports explains, for example, tax on a loaf of bread will be the same for the rich and the poor. Without improvements in the direct taxation system and more compliance there will be continued pressure to levy indirect taxes on consumption.

Because of non-revenue sources of funds Pakistan has historically functioned on loans, and aid. Consequently, Pakistan has not been compelled to develop its tax system adequately. As a result, there is no tax-culture in Pakistan.

There are now a number of groups with political clout who oppose tax reform. But tax reform is a cross-party issue that will require all parties to come together in order to ensure progress, otherwise reform-losers will shift allegiances to those promising no change.

The reports suggest that Pakistan needs to embed taxation into its education system in order to create a next generation of compliant taxpayers. Students need to be taught why taxation is integral to the state and is one of the cornerstones of citizenship as is done in many countries around the world.

The state also needs to explain how it delivers services to the people, however imperfect. The existing quid-pro-quo between taxation and services needs to be emphasised in order for increased tax literacy and to address the information deficit in the people.

The system of the FBR also needs to be simplified so that more people are able to file returns without the help of specialists.

Better and improved tax collection will pay for itself. If Pakistan can raise its own revenues to improve the quality of its infrastructure, it could mean a growth of 3.7 per cent GDP per capita

Pakistan’s development expenditure has declined from 7 per cent to 2.5 per cent of the GDP. With increased tax revenues this trend can be reversed and Pakistan will be able to invest more in education, health and other human development initiatives.


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