The focus of the International Monetary Fund (IMF) on developing a more equitable, inclusive and predictable tax structure in Pakistan brings to fore one of the most entrenched economic issues plaguing the country. Even after multiple attempts at reform, the tax load continues to remain unfairly skewed towards salaried workers, documented enterprises and others within the formal economy whereas some major economic players are undertaxed when compared to their economic capability. Until this issue is sorted out, it will be difficult for Pakistan to leverage the stabilization of its macroeconomic environment into economic growth and prosperity.
It has been pointed out by the IMF that there is a need to tax the un-taxed segments of the economy, rationalize exemptions and reduce the burden on the taxed population. These suggestions have been raised many times in the past by the IMF and continue to surface because of the lack of structural changes in the tax system. A tax system which continuously manages to squeeze more out of compliant taxpayers and leaves large segments of the economy un-taxed is certainly not equitable or sustainable.
There are three interlinked issues that exist in Pakistan’s taxation system; the small tax base, pressure from influential economic groups and tax evasion. Further, these issues become even worse due to the inefficiencies in the administration, corruption and bribery opportunities in the tax process. This has resulted in the creation of a situation where the law-abiding citizens are facing more burden while influential persons find ways to escape from their responsibilities.
Citizens, who earn on salaries and companies and corporations that are functioning officially, are always subjected to the wrath of the government every time there is a need for additional taxes to be collected in order to fulfill the fiscal objectives. The higher income tax deductions, added tax burden and various other measures of taxation have made the lives of these citizens tough and troublesome.
It is not simply that there is a lack of tax revenue being collected from the population. The real problem is that the FBR has been unsuccessful in creating a means of tracking economic activities outside the recorded economy in order to make sure that those earning money do pay their fair share of taxes. Rather than improving its ability to identify income earners who are making money without declaring, the tax system has depended on raising rates of those people and companies who are easier to track. Thus, the vicious circle continues. The idea to assign a higher role to Pakistan Revenue Automation Limited (PRAL) should be taken into account. It acts as an IT Infrastructure and tax automation for the FBR. Some of its functions include support of the IRIS system, which is an electronic tax registration, filing and administration. Despite the fact that the PRAL is functioning as an independent public sector organization with a separate board of directors, its relationship with the FBR hinders it from independently taking up a technological approach.
Enhancing PRAL’s operational independence, its professionalism, and its availability to up-to-date analysis techniques can play an essential role in changing the approach that Pakistan uses for taxpayer identification and monitoring of the economy. Rather than using the discretionary power of individual tax officers, the government can use objective data, automation, and risk assessment to detect tax evasions.
Pakistan has many elements necessary for the creation of such a system. First of all, computerized national ID cards provide a way to identify people, which can be employed through the proper legal protection. A well-governed data exchange including NADRA, banks, property registers, utilities, companies, and other entities can greatly enhance the understanding of the situation in the country’s economy.
The analysis of data could possibly detect inconsistencies between reported income levels and possession of valuable real estate, cars, financial assets, or business stakes. Data on transactions with real estate, consumption of utilities and banking operations could also be used to discover those whose financial capability is out of sync with their reported taxable income. It is not going to be a proof of a tax claim, but rather a ground for a check.
The introduction of the technology-based system will also help limit unnecessary contacts between taxpayers and the tax authorities. Too many personal contacts always provide an opportunity for rent-seeking, harassment and bribery. The automated system will allow the government to limit the use of discretion and increase the transparency of tax collection. While it is possible to make economic transactions visible through technology, it is incapable of overcoming the political obstacles in the process of taxing the powerful groups. Also, it won’t eliminate the corruption unless the government itself will be held responsible. Any tax system that uses the data has to guarantee citizens from arbitrary taxation, the misuse of their private information and unauthorized access to the financial records.
At the same time, the government has to show its willpower in order to incorporate the traditionally undertaxed industries in the tax system. Among those industries are retailers, wholesalers, the real estate market and agriculture. Those industries comprise a big part of economic activity, but the contribution of their income to the state budget is still far below their possibilities.
Taxation of agriculture, for example, needs proper coordination between the federal and provincial governments after the devolution of the powers in the constitution. In the same manner, there should be an efficient mechanism in place for retail and wholesale trade that will facilitate the process of registration and documentation without putting undue burden on small businesses.
The intention here should not be to punish the businesses or individuals that have stayed out of the tax net. Instead, the government needs to design a system where tax compliance is easy, implementation is regular, and taxes are paid by those who have capability to pay. In this way, the tax net can be widened, and higher rates can be reduced for those already paying taxes.
Prosperity will not come to Pakistan by taxing the same few individuals and firms time after time. The nation should not rely on indirect taxes and increases in levies to meet their budget targets when there are significant economic activities going unrecorded. The goal should be to bring about visibility in economic activities and have everybody pay as per their capability.
Empowerment of the PRAL and using the appropriate technology can serve as a good way to start. But eventually, success will depend on the political will and the determination to question vested economic interests. An equitable tax structure is not just a condition demanded by international creditors; it is important for Pakistan’s economic sovereignty and development.