Broadening the tax net
In the midst of galloping inflation and its impact on the common man, it is high time that the government took measures to mitigate people’s sufferings and improve the sagging economy. It is also important for Pakistan to free itself from the curse of foreign aid and assistance and start moving towards self-sufficiency and survival through its own resources. It is imperative that the government set itself seriously to introducing focused reforms towards poverty alleviation, controlling the non-stop price hike, reviving industry and stabilizing the macro-economic outlook. The government also needs to allocate more funds for power and energy projects to bring the closed industrial units out of forced hibernation and creating opportunities for large scale employment. The business community too, in order to be competitive, needs relaxation in taxes, uninterrupted power supply and improvement in the law and order situation. A fair tax system lies at the heart of all this.
It is interesting to note that only about 2 million of 180 million Pakistanis pay income tax. Of them, 1.8 million are salaried. They paid Rs.27.37 billion in taxes during fiscal year 2008-09, according to a report presented to the Senate by Minister of State for Finance and Economic Affairs, Hina Rabbani Khar. Pakistan also faces budget deficits of around 5% of its GDP, while the government collects less than 10% of GDP in tax revenues which is among the lowest in the world. To top it all, a large portion of these deficits is funded by foreign aid and loans.
It is also true that Pakistan’s tax policies are among the most regressive in the world. Direct taxes make up for less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society. The major part of the tax is collected in the form of sales tax, placing the heaviest burden on the lower-income groups who spend almost their entire earnings on basic needs.
Pakistan’s is predominantly an agricultural economy but agri income, mostly earned by the country’s large land holders – those very people who also comprise the ruling elite - is entirely exempt from any income tax. Tax evasion in Pakistan is estimated at a whopping Rs. 500 to 600 billion a year. This untapped chunk is almost equivalent to the country’s annual budget deficit. Therefore, while Finance Minister, Dr. Abdul Hafeez Shaikh is perfectly right in seeking cooperation of the business community in broadening the tax net and revenue generation from all sectors of economy, he also needs to make a strong case in the next budget for proper taxation on agricultural income. It was in this backdrop that the former Finance Minister Shaukat Tarin had stressed back in 2008 that all sectors of the economy be brought into the tax net for fair play and promotion of tax culture in the country. Can the government muster enough courage to broaden the tax net in a major way or will the economy be left to bleed the way it has all through these years?