Tax woes of Pak­istan

The Pak Banker - - OPINION - Muham­mad Waqas

IN a des­per­ate at­tempt to broaden Pak­istan's tax base, the Sharif govern­ment has an­nounced a tax amnesty scheme for traders - just pay a nom­i­nal one per­cent on un­taxed amount of up to Rs50 mil­lion and there will be no ques­tions asked. This is yet an­other ex­am­ple of the govern­ment's short­sight­ed­ness and lack of political will in for­mal­iz­ing the coun­try's thriv­ing black econ­omy, now es­ti­mated to be about 60 per­cent of the reg­is­tered econ­omy. Such short-term fixes have been im­ple­mented pre­vi­ously dur­ing the era of Mushar­raf and last PPP govern­ment as well. How­ever, th­ese schemes have al­ways failed to yield de­sired re­sults, as the af­flu­ent re­main un­will­ing to pay taxes and a heav­ier tax bur­den is even­tu­ally pushed on to con­sumers.

In a let­ter to the govern­ment, the Trans­parency In­ter­na­tional Pak­istan (TIP) has strongly op­posed the con­ces­sion as "the move will amount to a 'Fi­nan­cial NRO (Na­tional Rec­on­cil­i­a­tion Or­di­nance)' for tax evaders and big tax dodgers." Global in­sti­tu­tions like the In­ter­na­tional Mon­e­tary Fund (IMF) and the World Bank have also raised a con­cern that fre­quent tax amnesty schemes only en­cour­age non-com­pli­ance by cre­at­ing an im­pres­sion that the govern­ment is tooth­less and can­not take stern ac­tions against the non-fil­ers. Ex­pe­ri­ence from other coun­tries also sug­gests that th­ese con­ces­sions have a neg­a­tive or min­i­mal long term im­pact on the coun­try's tax rev­enues and com­pli­ance. At the same time, th­ese schemes make a mock­ery of the hon­est and com­pli­ant tax­pay­ers as they feel cheated by the state.

Pak­istan's tax woes have haunted suc­ces­sive gov­ern­ments for decades. Ev­ery year, the govern­ment faces a daunting task of in­creas­ing tax rev­enue col­lec­tion and num­ber of tax­pay­ers. And ev­ery year it fails mis­er­ably at both th­ese tasks, which re­sult in new quick fixes in­stead of a de­tailed thought process to iden­tify new rev­enue sources. Tax eva­sion and tax avoid­ance is a deeply rooted cul­tural and mind­set is­sue in Pak­istan. But, an in­ef­fec­tive tax ma­chin­ery and lack of ac­count­abil­ity makes it just too easy to get away with­out pay­ing the due share of taxes. It is then no sur­prise that the govern­ment strug­gles to de­liver qual­ity pub­lic ser­vices and has to rely on for­eign loans to meet its bud­getary deficits. Rather than in­tro­duc­ing amnesty schemes that are likely to cause huge losses to the na­tional ex­che­quer, Pak­istan needs to con­duct a com­plete over­haul of its tax sys­tem. For a start, the tax re­forms should fo­cus on sim­pli­fy­ing the tax code and tax ad­min­is­tra­tion process to en­cour­age more cit­i­zens to file their re­turns.

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