Documenting the economy

On being told that 80 percent of the notices sent to the 119,000 non-filers of tax returns, came back on account of wrong address or were actual filers, a decision has reportedly been taken by FBR's Reform Co-ordination Group (RCG) to utilise the data of a national survey conducted by the army in 2000 to bring potential taxpayers, from among the business community, into the tax net.
We are told that the data is lying safe with the FBR in a ready-to-use computerised form. The exercise, when and if conducted, would be the biggest tax enforcement exercise of the sort. According to report, the go-ahead would be given in case the defaulting chunk of the business community, supposedly a big one, fails to satisfactorily respond to FBR's ongoing drive to bring possible dodgers into the tax net.
The announcement of the decision is presumably meant to serve as a warning shot and would hopefully act as an incentive for tax evaders to declare their real income. According to the report the information gathered from the business community during the army survey would be compared with the data provided in the income tax returns to be filed during the current year.
Dodgers would reportedly face penal action including recovery proceedings under the enforcement provisions of the Income Tax Ordinance, 2001. Notices would be served on those who fail to register as taxpayers and action taken against them. This would supposedly be the last opportunity to them. Besides the 2000 army survey, the FBR would also obtain data from property registrars and Nadra. In case of any major discrepancy, the FBR would take strict enforcement action against those deliberately involved in the concealment of their income and properties.
One wonders why the previous government continued to sleep over the survey despite the financial crunch it faced. If the army survey had really provided sufficient actionable information, the then finance minister Shaukat Aziz or his successor should have gone ahead to take the required action.
Was inaction on their part caused by doubts about the reliability of the survey? Or was the action not taken on account of political exigencies? The RCG has however agreed that the FBR should focus on discovering new taxpayers instead of checking regular filers of income tax returns.
There is a widespread belief that the country lacks a tax culture. The point is re-enforced by the tax-to-GDP ratio in Pakistan, which according to the economic survey for 2009-10 was 10.2. This is in strong contrast to the tax revenue to the GDP ratios in developed countries that averages around 35.9 percent.
For instance, in Australia the ratio is 30.6 percent, Belgium 46.8 percent, Canada 33.4 percent, Denmark 50.0 percent, France 46.1 percent, Germany 40.6 percent, Sweden 49.7 percent, Italy 42.6 percent, Norway 43.6 percent and UK 39.0 percent. Compared to the other countries in the region, Pakistan is the second country from the bottom after Bangladesh, whereas India with 18.8 percent, Sri Lanka 14.2 percent, only Nepal 9.6 percent is lower in ranking.
There are several factors behind the low tax-to-GDP ratio in Pakistan. The level of efficiency and honesty is not ideal in the case of the tax collection machinery. It is often maintained by the business community, and rightly so, that the governments misuse funds and indulge in lavish spending which a developing country can ill-afford. Further, the rulers do not provide the facilities as enjoyed by taxpayers in other countries.
The lack of transparency in the working of the government is also cited as a reason by some. While complaints of the sort are by no means baseless, tax dodgers fail to realise that with such a narrow tax base, it is not possible to maintain a reasonable pace of development. What is more, cash-strapped governments in Pakistan are forced to rely on foreign loans which tend to become an unbearable burden. In Pakistan, loan repayments have gradually replaced defence spending as the top item of expenditure in the annual budget. The burden of loans meanwhile continues to increase.
What is more, the country is sometime pressed by aid donors like the IMF to fulfil conditionalities which may not be in consonance with the country's economic interests. Again, aid-giving institutions and countries tend to assume a position where they dictate policies which are sometime detrimental to national interests or lead to the abridgement of national sovereignty. There is a need, under the circumstances, to raise the tax-to-GNP ratio. A country carrying a begging bowl commands little respect in the comity of nations.
The government has to move towards the documentation of the economy. What is required among other things is to computerise the records. The recourse to the army survey raises a number of questions though. Despite being involved in land development and running industries and banks, army officers may not be the best choice to conduct business surveys. Again, even if the survey was a comprehensive exercise, it was prepared a decade back. A lot of water has meanwhile under-flowed the bridge.