At a Tax Reform Symposium organised by the DFID-funded Raftaar - Research and advocacy for the advancement of allied reforms - yielded some interesting insights last Tuesday in Islamabad. Problem is grave. Tax to GDP ratio of 11 percent (FY15) is not enough to fund public services and needs to more than double for adequate spending to happen. Only one out of every 375 citizens pays income tax.
Tax policy needs to be linked with economic policy. Sakib Sherani, one of the economists headlining Raftaar, noted that burden of taxation was considerably higher on industrial sectors compared to services or agriculture sector. As a result, manufacturing concerns have been de-industrializing, re-locating, or in-formalizing. His rough estimate for informality arbitrage - that is, differential for effective tax paid by formal business over an informal business - was 22 percent!
Sherani urged the authorities to stop focusing on revenue generation and study the tax policy's impact on formal sector. But Haroon Akhtar, special assistant to the prime minister on revenue, was of the view that more important for the government right now was to increase the tax to GDP ratio, and change in tax code could be taken up later.
The government's FBR point man came down hard on suggestions that FBR had become a harassment tool. "FBR's lower tier is corrupt, but the bigger problem lies with the taxpayers. Majority of the people have a mindset to evade taxes. Sending notices to businessmen is deemed as harassment. The country needs revenue and it has to be generated from the economy. FBR is just a collector," Akhtar maintained.
A forceful defence, but the need for reforms in tax administration cannot be swept under the rug. Graham Burnett, an international tax administration expert, suggested that if political commitment was there, tax collection could be simplified through measures such as: only ask needed information in tax forms; reduce GST return-filing frequency for SMEs; merge employers monthly social security and pension payments into one form; have a single standard GST rate; reduce exemptions; use risk-based audit.
Later in the day, FBR's member operations, Dr. Muhammad Irshad, corroborated Sherani's point that the informal economy had been expanding. But he felt the blame lay elsewhere. "We (FBR) may be bad, but we are not all that bad. Problem is that evading taxes is considered a prestigious act.
FBR is the cheapest revenue body in the world. We can achieve a five trillion rupee revenue target. But FBR's capacity needs to be upgraded," he said.
Policy experts have been saying this for long that the tax incidence is discriminatory; tax net needs to be widened; tax policy must support job-creation; and what have you. Considering that it is the rich and the connected who, more than anyone else, need to pay their fair share of taxes, question is who will bell the cat when that same elite is in charge of running the country.
Until and unless taxes become a campaign issue in Pakistan, it is hard to see tax system becoming fair, transparent, and accountable.
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