The issue of trust deficit

Amidst protests by the opposition, Finance Minister Muhammad Aurangzeb rolled out with relative calm the national budget 2024-25 at the National Assembly. This budget, by all norms, can be termed “business as usual” following the path of least resistance. Remarkably unusual is the Rs13 trillion tax collection target - a 38 percent increase from last year’s target.

This unprecedented jump is intended to be made good by further taxing the taxed and by enhancing the tax base by bringing more people into the tax net. Both areas, however, appear extremely challenging, to say the least.

There is a general aversion in Pakistan towards tax payment. To understand the cause of disinclination there is a need to comprehend the responsibility of the citizen to pay tax and the responsibility of the government towards the taxpayer as the balancing act between the two.

The universal charter of relationship between a government and its citizens regarding taxation is a complex and nuanced one, built upon a foundation of mutual obligations and benefits. Citizens provide financial support to the government, which, in turn, provides essential services like education, healthcare, public safety, and infrastructure to them. The government, in turn, is obligated to act in the best interests of its citizens, ensuring a just and equitable society for all.

From a legal perspective, the obligation to pay taxes is rooted in the legal framework of the nation. Governments possess the legal authority to impose taxes on their citizens, and this authority is often derived from the constitution and other fundamental laws. Citizens, as members of the society, are bound by these laws and therefore obligated to pay taxes.

The legitimacy of taxation, however, is not solely based on legal authority; it also relies on the perception of fairness and transparency in the tax system. Citizens are more likely to accept their tax obligations when they believe the system is fair, the tax burden is distributed equitably, and the government uses the collected revenue responsibly.

A key element of this unwritten contract is the government’s obligation to be transparent and accountable in its use of tax revenue. Citizens need to understand where their tax money is going and how they are being used to fund public services. This transparency promotes trust and confidence in the system, strengthening the bond between government and the people.

Furthermore, accountability mechanisms, such as independent audits and public reporting, are essential to ensure that tax revenue is used efficiently and effectively.

The contract between government and citizens is not one-sided. Citizens, in addition to their tax obligations, have the right to participate in the political process, hold their elected representatives accountable, and influence tax policy. This participation helps ensure that the tax system remains responsive to the needs and priorities of the people.

The wealthy and powerful often find ways to avoid their tax obligations, undermining the principle of fairness and equity in the system and the fairest way to distribute the tax burden across different income levels and sectors. On the subject of government spending and priorities, concerns arise about government inefficiency, waste, and the allocation of tax revenue to non-essential or controversial programs.

All nations where the citizens and the governments have adopted this charter of relationship based on fairness have achieved excellence in their economy, democracy, social and human values, security for its citizens. In these economies that are based on fairness it is unimaginable that taxpayers do not pay tax or the government fails to provide them an enabling environment to prosper and live well.

The question how far the governments in Pakistan have been fair insofar as their responsibility to provide a fair deal to their citizens in return for the taxes they pay is concerned has no easy answer. Prima facie the government is in default on all aspects of the charter of relationship between the two.

Be that as it may, the Finance Minister Muhammad Aurangzeb, a day before the budget announcement, at a press conference after launching Economic Survey 2023-24 said that: “There are no sacred cows and everyone has to contribute to the economy.”

This raised hope that the privileged elite with a lot of political clout will also share the tax burden in accordance to their obligations. However, to much disappointment, their contribution is not reflected in the budget. The agriculture sector, which is being hailed as the saviour with highest growth rate in years and with 24 percent of state economy based on agriculture, remains out of the tax net.

The argument that agriculture is devolved to provinces and taxing them is their responsibility does not hold ground as the federation is the direct beneficiary of the performance of this segment and controls all that relates to it. Moreover, the ruling parties in Sindh and Punjab, the provinces that primarily host this sector, are the coalition partners in the federal government.

Though the finance minister has underscored the need for reforms in the energy sector and the privatisation of state-owned enterprises, there is nothing tangible happening on ground in this regard. The only reform in place in the power sector is the ‘reforming with subsidies’, thereby placing the lid on all the wrongdoings prevailing in the sector. If the government, by any chance, truly commits itself to the agenda of reforms and privatization, its effects on economy will be reflected after two years at the earliest.

The losses arising out of circular debt on account of misgovernance in the power sector have soared to Rs 2.6 trillion and the losses accumulated by the loss-making SOEs for the same reason are of Rs 1.4 trillion - both being sucked out of the taxpayers’ taxes.

For the salaried class, the government claims that the upper and lower tax limits remain the same and that there are some adjustments in brackets in-between the two limits. Out of the adjustment, the government aims to extract Rs75 billion and the expected category to be affected is the mid- level multitudes of young professionals who are bee-lining to seek opportunities abroad to make ends meet.

Obviously, the government is not meeting its part of obligation to the taxpaying citizenry. The system works in mature markets on account of trust between the taxpaying citizens and the government. In Pakistan, however, there is a trust deficit between the two.

Once the trust is built up, citizens will voluntarily meet their obligations to pay taxes, thereby changing the whole landscape of the tax structure of the country. The government should, in steps, move towards the direction of inculcating trust in taxpayers through good governance and sense of responsibility.

Copyright Business Recorder, 2024