Solving Pakistan's Tax Woes And Fiscal Deficits: The Bottom Line

Solving Pakistan's Tax Woes And Fiscal Deficits: The Bottom Line
It seems that the government is adamant on taxing people more and more and to gather revenue from whatever it can lay its hands on.

Currently, a handful of companies are responsible for almost 80% of tax collection through them (telecoms, OMCs, tobacco companies, banks and some FMCGs).

People are taxed at source (mostly by these companies) and are also paying indirect taxes on everything that they consume (except for air, which is polluted and if they purchase an air purifier , they have to pay taxes for the purchase and then on the electricity used to run it).

In my opinion, taxation is the cost that citizens have to pay for use of public goods. If citizens are forced to pay separately for most public goods (as extortion money), then tax compliance will exponentially go down.

The fallacy that people in Pakistan do not pay taxes is completely baseless and false. Everyone is paying taxes directly and indirectly. Even a beggar cannot beg unless he pays someone (a government official), nor can a street vendor sell anything unless they pay someone from the local authorities (again a government official). To sum it up, everyone is paying taxes: the only question is how much of it is going into the government exchequer and what percentage is going into public servants’ personal pockets.

The tax system – or the authority regulated with collecting taxes, the FBR – has failed us on so many levels that I am convinced that it cannot be reformed. It can only be dismantled and redesigned as a new entity (even though that experiment has failed in the past, from CBR to FBR).

The current setup only serves the tax evaders and there is no incentive for the legitimate taxpayer or entrepreneur to register as one. It is merely a source of extortion. It is a broken system with many loopholes, with no incentive for an official to do the right thing. This has purely become a culture of creating tax demand (mostly erroneous, which results in frivolous litigation and backlog of a few million cases dating back decades). The PM is wrong in assuming that “Rs 2,500 billion” stuck in the judicial process is actually collectible. It is mostly the wrong demands by the tax department which have resulted in frivolous taxation.

The income tax system is completely subjective and based on personal assessment of the taxman – and thus primarily corrupt.

Let us consider how it actually works.

Assistant Commissioners (ACs) and Deputy Commissioners (DCs) create demand to meet their targets. They know most of it is wrong, but they don’t care: they have "done their job," the taxpayer can contest it in the appeals stage or something might get recovered. Or even better, they can earn extortion money whilst bringing down the demand.
The basic premise of all my arguments above is that in a country where there is a huge trust deficit towards the government and the taxman, as well as rampant corruption which forces people have to pay separately for their basic rights, it is not possible to force them to pay income taxes

I can quote tens of personal experiences, as well as anecdotes from those who I know personally, where nothing “jaiz” or fair is done, because it is simply in nobody’s interest to do the right thing at the relevant department – unless they are paid.

Now I know of cases where a few billion rupees’ worth of tax evasion was caught by the directorate of intelligence and investigation at the FBR, but in the end, the settlement came to the following: Rs170 million being divided amongst the AC, DC and the Commissioner, while depositing Rs 200 million in the exchequer. The remaining amount was all written off.

The basic premise of all my arguments above is that in a country where there is a huge trust deficit towards the government and the taxman, as well as rampant corruption which forces people have to pay separately for their basic rights, it is not possible to force them to pay income taxes. Incomes will be undeclared, or concealed/under-declared, and this will result in more corruption and frivolous litigations.

When it comes to consumption on the other hand, people are (reluctantly) willing to pay taxes on it. For example, if I desire to eat out three times a week, then I am fine with paying the taxes being charged on that food – and likewise on my petrol, electricity and phone bills. All we need to do is make sure this tax being charged on consumption actually goes into the exchequer. It is also necessary to ensure, of course, that it is objective and quantifiable. Income estimations and calculations are subjective and will always lead to extortion and issues mentioned above.

In any case, most of us involved in businesses know these realities, so there is no point in just pointing out the same. I want to move forward to suggesting solutions.

Begin by taking away the taxman’s powers to exploit. In doing this, we can create a culture of safety from being exploited – on income taxes only. No notices, no bank accounts being seized, no ongoing tax issues and litigation.

Let people work and focus their energies on creating wealth which will increase the overall size of the pie automatically – and thus the tax revenue from it.

Bring corporate tax rates to single digits so that companies, especially small and medium enterprises (SMEs) leave maximum profits on their balance sheets rather than taking them out. Increased profits will result in reinvestment and a smaller black economy.

Bring Income taxes to single digits so that salaried people have more purchasing and spending power. In any case, their consumption will be taxed and their savings/investments will lead to increased economic activity. This means more taxation – i.e. increasing the pie.
The government’s argument is always the fiscal deficit. What they need to understand and accept is that the deficit is not because of low tax collection, but because our government expenditures are simply too high

Digitise the retail sector, so that the government can collect taxation on spending. If I eat at a restaurant four times a month, then 17% of that should actually go into the exchequer (especially when I have paid it).

Incentivise the companies who are investing in this ecosystem. We need to incentivise digital payments massively.

Continue to take extra taxes from unregistered people. If it is worth their while, they will come into the tax net. There has to be a relief for the ones who are already in the tax net, rather than them cursing the day they decided to enrol into the taxpayers’ club.

At the moment, there is no incentive to become a taxpayer, as the government continues its policy to squeeze and exploit those already in the net. We need to overcome this obsession of increasing the tax base. The base is already increased, as discussed earlier: anyone who is doing anything is already paying one form of taxation or the other.

We need to work on putting an end to smuggling and counterfeit. For example, the tobacco industry alone pays over a billion dollars in taxation to the government and almost US $400 million is lost due to smuggling and counterfeiting. Taxmen should just focus on sales tax (ST) collection and stopping evasion on that front. Leave income taxes out of it!

The government’s argument is always the fiscal deficit. What they need to understand and accept is that the deficit is not because of low tax collection, but because our government expenditures are simply too high. This includes defence expenditure – which needs to be revisited and reduced massively, since we are a nuclear state now and need a much smaller conventional deterrent. I am no defence policy expert, but there is definitely a fundamental shift required on this front.

The government needs to declare an emergency and work on privatising the state-owned enterprises (SOEs), reducing government expenditures, selling unproductive assets like the 100-kanal commissioner house in Sargodha and the smaller 12-kanal SP houses in Kasur. These sales will generate massive revenues for the government. And reduce ongoing operational expenditures of running these huge establishments.

Every district and city has these legacies of the British Raj, who came to rule over us, only to be replaced by the Babu, the brown gora sahib.

Public servants need to remain actual servants of the public (as the name suggests). They should all be living in apartments with decent facilities or small rented houses like employees of corporate entities do. Housing allowances can be added to their pay.

Digitising the retail and front-end is the only way forward. That way, whatever anyone consumes, the government will get its share – without human intervention! Digital payments and expenditures have to be incentivised through cards and bank instruments.

Lastly, the NAB experiment has failed to recover the “looted billions.” One can understand the temptation for Imran Khan to think in terms of MBS-style “lock them up till they pay” solutions. But the important point is that now all the looted wealth needs to be incentivised to come back home.

That might be the subject of my next article.

The author is a graduate of London School of Economics and Political Science and an Adjunct Faculty at the Lahore University of Management Sciences. He is also an ex-Citibanker from Europe and has served as a co-convenor of the tax committee at the Lahore Chamber of Commerce and Industry. For comments and suggestions please email: qrrs43@gmail.com