The importance of forcing people to pay taxes honestly
AS Pakistan races along in an environment laced with extreme terrorism, bad governance, and a population among the least educated on earth, it comes as no surprise that our monetary and fiscal picture is also getting from bad to worse. Borrowing money means living on borrowed time, and ultimately time does run out for the best of us. If we can earn more than the original loan plus its interest, then all is well. Otherwise we get poorer, and in trouble. How does the government raise money? From taxes on the population, by borrowing from local banks, by borrowing from foreign banks, and lastly by printing bank notes. Thinking about all four aspects of running an economy is what governance is basically about. Let us take a look at the situation as it stands today in all four sectors.
First comes taxation. As a people deliberately kept relatively illiterate because of our colonial past, we see that paying taxes is seen as giving money to an inefficient and corrupt State, and that in return the people get nothing.
This is especially true of our trading classes who have till now survived by paying bureaucrats bribes to avoid paying their fair share to the State. In a way this is a criminal bent of mind, especially in a modern State.
The point is just how long will the citizens of Pakistan get away by not paying something to the State. If we see the amount of money spent on mobile telephone fees, of which almost 25 per cent is tax, we can get a good measure of the potential. A report on tax levels and mobile phone usage by a Lahore-based university throws up the potential tax base that already exists. The conclusion is that if everyone pays their taxes honestly, there would be no need to borrow, or even to print more notes.
The report focuses on two main markets of Lahore, they being the Shahalami Market in the old city and the Liberty Market of Gulberg. An estimate of sale through 15 shops in each market multiplied by the total number of registered shops in both markets produces amazing results. To be honest the sales are mindboggling. Now the report acknowledges that the sum they have arrived at is an estimate, and so they have calculated a plusminus ten per cent range, and in the worst scenario case the sum is an amazing 21 times that actually collected. This is mindboggling stuff.
Now to borrowing from banks. In this case I looked up the latest figures of the State Bank of Pakistan. The first half of the fiscal year the current account deficit has shot up to a record US$1.127 billion. The trend is clear as we see that within these six months in the first quarter starting July to September the current account deficit was US$357 million. In the second quarter starting October to December it raced to US$915 million. As textile and leather exports continue fall, the trend continues as cheap
to imports from India and China flood the markets and with a devalued rupee against the dollar the chances are grimmer. Bad banking practices and a tendency to loan to government, money they might never, in real cash terms, recover has made government borrowinfg a dicey affair.
On the foreign borrowing front we see the financial institutions seeking reforms, which are difficult for the government to implement. This is so because of a lack of formal planning. To the current government formal planning and monitoring is just not wanted. These creatures of the informal business world, more attuned to the Shahalami-Liberty frame of mind, have grasped political power, and traders and politics is a lethal mix that has been known to destroy the very fabric of societies, and States. It is simple political science at work.
The latest news is that the IMF is dissatisfied with the fear of reforming 'fiscal federalism'. As power is sought to be devolved to the provinces, the IMF feels the chances of tax collection instead of ris- ing is actually falling. To expect otherwise was a utopian fallacy to begin with. If out of a population of Almost 200 million with 40 million plus in the taxable category, we have just 1.12 million submitting their returns, almost entirely from the salaried classes, it is to be expected that indirect taxation is rampant, like the mobile phone cess of 25 per cent, now a major tax contribution. But then even this is peanuts in the total picture.
The question is just how does a government in a situation like that pertaining in Pakistan manage to tax its taxable population? We must accept that it surely is their right to do so. To see traders going on strike over the issue is surely criminals. The fact is our politicians, almost all with feudal mindsets, support such tax evaders. Plus a bloated bureaucracy assists traders. What is the way out?
As suggested in an earlier column, it must be made compulsory for all citizens with a CNIC to submit his returns annually, even if it is a genuine zero. So what? It must be documented come what may. I know of a person who owns a retail business in Lahore, lives in DHA with three posh cars with children going to expensive schools and who dines out like mad, and his total tax return is Rs. 123,980 for 2013-4. I got to know of this because he has challenged the 'high tax imposed' in a tribunal.
In an age where a normal Shahalami trader every day brings home five figure amounts to pay less than a day's profit is criminal for lack of a stronger word. The Liberty or Tariq Road trader is another fish altogether.
My suggestion is that the tax department should establish local tax offices next to every police station to cover the population of the police station territory. This is how it is done in the USA and Britain. So why not in Pakistan. They can start with a pilot project and cover each and every house in their area. The results will be most interesting. There will be resistance. That is fine, for that is to be expected as be progress to being responsible citizens wishing the welfare of Pakistan.