Tax woes of Pakistan
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.