Mistrust or ignorance - Only 0.3% Pakistanis pay income tax: Report
More people flying globally in airplanes at any point than there are direct tax payers in Pakistan
LAHORE: (Web Desk) – Either due to mistrust or owing to the lack of knowledge among the common people of Pakistan, the number of Pakistanis who pay taxes is just around 500,000 which makes only 0.3% of the country’s population. Another 400,000 file their returns according to the Federal Board of Revenue (FBR) data but declare that they don’t have any taxable income.
A recent report by RAFTAAR (Research and Advocacy for the Advancement of Allied Reforms), a DFID (Department for International Development, UK) funded project, identifies the low collection of taxes as an ‘existential crisis that truly affects Pakistan’. It says that Pakistan’s tax to GDP ratio is 9.4%. “This is close to the bottom of countries worldwide in terms of revenue generation”. According to the report, around 3% population of the neighboring India pays taxes. This is 10 times more than Pakistan despite the fact that the poverty ratio is higher in India.
One-third of Pakistan’s debts are foreign while the remaining two-thirds are generated through local sources. While the foreign debt is cheaper (with an interest rate of 1.9%), Pakistan’s access to it is difficult and thus the country is forced to borrow local at an interest rate of 10.7%.
As a result, the state funds all the development and infrastructure projects with the help of loans i.e. debt financing. It says that Pakistan’s public debt has increased three-folds during the last 7 years. However, during these years, the state expenditures have continued to rise steadily and the challenges including natural disasters, annual flooding and terrorism and security have forced the state to spend high sums on non-developmental ventures.
Moreover, Pakistan’s debt is expensive debt. According to the report, one-third of Pakistan’s debts are foreign while the remaining two-thirds are generated through local sources. While the foreign debt is cheaper (with an interest rate of 1.9%), Pakistan’s access to it is difficult and thus the country is forced to borrow local at an interest rate of 10.7%.
Out of the meager tax-collections that we make, around 44% is spent only on the payment of interests. The interest payment per person is Rs. 6,684.
Consequently, we are forced to spend most of our revenues in payment of debts and the interests on the loans and there is too little left with us to spend on development sector i.e. education, health etc. Currently, Pakistan’s per person health expenditure is Rs. 1009 only.
International community’s role is overstated:
Foreign projects assistance has remained just around 15% during the last 8 years. Pakistan has been filling its budgetary gaps mainly through loans.
Fiscally fragile economy:
The report says that 60% of Pakistan’s budget goes in payments of loans and interest, wages, pensions and defense. Another 12% is spent on subsidies and other grants. This leaves only 28% of the budget to be spent on the rest of the things. This is why the country barely manages in the hour of an unforeseen event such as flood, earthquake or any other natural disaster.
Misunderstandings between state and citizens:
Although only 0.3% of the citizens pay income tax, a large majority of the country believes that they are taxed a lot. It is mainly because in order to increase its revenue, the state is forced to implement indirect taxes. However, this is only because of the inability of the successive governments in the country to collect direct taxes. 68% of Pakistan’s tax revenue is generated through indirect taxes.
Because the state is unable to collect more through direct taxation, the burden is shared by the middle class as they are taxed on basic needs like fuel and electricity. The poor are taxed more than the rich, considering the tax to income ratio. While the poor earn less, they pay as much taxes as the rich pay simply because the taxes are indirect. A liter of milk costs the same to both the rich and the poor while there is a massive gap in the incomes of the two groups. This makes the citizens feel, and rightly so, that they are taxed a lot.
We have recently seen nationwide demonstrations and strikes by the traders against a measure taken to bring them into tax net. The political parties, on the other hand, stand divided and play pawns in the hands of these highly influential groups.
However, it is unfortunate that while the socially and politically powerful groups are all united in evading taxes (we have recently seen nationwide demonstrations and strikes by the traders against a measure taken to bring them into tax net), the political parties, in order to pursue their petty political goals, stand divided and play pawns in the hands of these highly influential groups. Instead of supporting the governments in tax reforms, the opposition parties generally side with the traders and big landowners against agriculture and income taxes.
It is highly important therefore that Pakistan at least educates its coming generation about the value of taxes through embedding the need of taxation in its curricular system. Because as long as we are unable to redefine this social contract between the citizens and the state, the fiscal woes of the country are not going to an end.
And the state also needs to prove through better financial management, curbing corruption and taking other measures that the taxes that the people pay are utilized for the welfare of the public only and are not going to waste. This will help improve the credibility of the state and will urge the citizens to pay taxes.
Dividends improved tax collection can bring:
The report says that “if Pakistan can raise its own revenues to improve the quality of its infrastructure, it could mean a growth of 3.7% GDP per capita”
“If Pakistan can raise its own revenues to address the energy shortfall in the country, it can stem estimated losses to the economy of Rs. 1.5 trillion (that is more than the annual interest payments the country has to make)”
As of now, the country’s development expenditure stands at around 2.5% while that of the other countries in the region is much higher. “With increased tax revenues this trend can be reversed and Pakistan will be able to invest more in education, health and other human development initiatives”.
