Why we did not pay taxes

WHAT’S the most depressing economic statistic that is churned out repetitively in
Pakistan? It’s the number of taxpayers. Time and again, the government and donors
embarrass us for doing our nation a huge disfavour. In his first address, Prime
Minister Shahid Khaqan Abbasi lambasted Pakistanis for not paying taxes.

Yet these are just myths. The fact is, we are one of the most overtaxed nations in the
world. Simple arithmetic will do. Let’s start with disproving the most widely quoted
number: only 1.21 million citizens pay income tax, ie less than one per cent of the
population. But statistics (like the State Bank of Pakistan annual report) suggest that
there are more than 57.5m employed people in the country. Since they are employed,
they must be earning something and incurring expenditures on goods and services.

There is no good or service in Pakistan that is tax-free. Therefore, around 58m people
are paying income tax one way or the other since their expenditures obviously come
from their income.

It is crass anti-intellectualism to repeat this old, tired mantra.

The same number can dispel another myth, that less than 1pc of Pakistan’s population
pays taxes. Since Pakistan’s population is about 200m, the implication is that at least
29pc of the population is paying taxes. This number goes up when one considers the
working-age population (15-59 years of age). As per the Economic Survey 2016-17,
61.4pc of the population is of working age, meaning around 122m people. The 58m
people constitute approximately 48pc of this number.

Around 140m mobile-phone users pay more than 20pc tax on the total amount of load.
By end 2015, the number of registered vehicles in Pakistan had surpassed 17m (and
was growing). They run on fossil fuels, which are subjected to multiple taxes. The rate
of sales tax on different goods and services is one of the highest in the world. Add to
these the plethora of surcharges and duties, and what we have is a mind-boggling list
of extractive and regressive methods of cheating people out of their earnings.

All these taxes are obviously extracted out of the income of those who earn. It is crass
anti-intellectualism, then, to repeat the same old, tired mantra of ‘Pakistanis don’t pay
taxes’. From birth (all the expenses that parents bear before birth and at the time of
birth) to death (burial places, in cities at least, are sold for a price), we are being
excessively taxed. If the intangible taxes (negative spillover of poor governance like
choked roads, polluted air and water, the absence of waste disposal, poor law and
order, etc), are also brought into consideration, then the taxation burden quadruples.

Now that some mistaken taxation myths can safely be buried, we need to probe this
issue further. Begin by asking two all-important questions: What exactly is our tax
‘problem’? And what kinds/forms of taxation policies do we need to implement?
(Your answers need not be the same as mine.)

For policymakers, our ‘tax problem’ is that our revenues (around Rs3.8 trillion) are
not enough to meet our expenditures (around Rs5tr). Wrong! Pakistan is not the only
country where expenditures are more than revenues. Our issue stems from
unproductive use of what’s at hand. If the expenditure is productive, then revenue
shortages are not so debilitating since the expenditures generate increased revenue
possibilities for the future.

Our ‘tax problem’, in short, is that we are poor at managing and judiciously using
revenues. If we could productively use revenues half our revenues would not have
been spent on paying interest on debt.

On to the second question, the answer to which would seem to be a rather settled issue
in Pakistan. Everybody agrees that we need ‘progressive’ taxation, which in simple
English implies taxing the rich more to redistribute. If that were to happen, would
Pakistan be transformed? A probable answer comes from South Africa, which has the
most progressive tax system in the world.
Yet the South African economy suffers from high income inequality. The reason is the
absence of growth and quality-enhancing inclusive institutions. For example, like
Pakistan, South Africa has a poor public education system, an institution that is
critically important in stimulating economic growth and improving life quality in the
long run. Other such institutions (such as research and development culture) are
almost nonexistent in Pakistan.

So, no, progressive taxation is not going to automatically transform Pakistan into
Disneyland. We need to have inclusive institutions and avenues through which tax
expenditures can generate growth and an enhanced quality of life. In Pakistan’s case,
these institutions are either missing or non-functional or in a sorry state. Thus, the
mechanism for transforming tax expenditures into something meaningful is absent.

Not surprisingly, the growth of tax revenue from a mere Rs7.5 billion in 1972 to a
colossal Rs3.8tr in 2017 has never proved enough for the ever-growing leviathan,
which seeks even more without any clear plan for its productive use. What’s the
guarantee that if tax revenues touch the required Rs5tr mark, unproductive
expenditures would not gallop to Rs7tr?

Does all this imply that Pakistanis don’t indulge in evading taxes? No. A certain
percentage of Pakistanis, just like any other country in the world, do evade taxes. But
that’s not the issue, which is about why people do so. After all, the same people give
out more than Rs400bn in charity every year. What gives? Obviously, those who
contribute profusely towards charity believe that it will earn rewards (in the afterlife).
The same expectation of reciprocity is absent in the case of paying taxes.

I will bring this article to a close by addressing the respected prime minister. Dear sir,
instead of calling us tax thieves, you should have thanked the Pakistani nation for not
having risen up and burned down the rent-seeking edifice that goes by the name of
government. Please understand that to realise more taxes, you need to build trust with
the people. Once you earn their trust, the apple (taxes) will automatically fall into your
lap.
The writer is an economist.

shahid.mohmand@gmail.com

Twitter: @ShahidMohmand79

Published in Dawn, September 18th, 2017

http://nation.com.pk/14-Sep-2015/pakistan-s-taxing-problem

Taxation problem in Pakistan

Soon after partition, a ticket collector was making the rounds of a train and asked one of
the passengers to show him his ticket. The passenger got upset and exclaimed, “Are
you out of your mind? Haven’t you heard that we are ‘Free’ now? Why should we buy
tickets anymore?” This story might be apocryphal but it succinctly reflects the attitude of
Pakistan’s general public towards taxes. Tax avoidance is an endemic disease in our
part of the world. People would go to all lengths just to save a few bucks in taxes. On
one hand, talk to the person on the street and they will decry the pathetic situation of
public services like government hospitals, educational institutes and law enforcement
agencies. Ask the same person about tax returns and you will receive lengthy rants
about inefficient governance but not a peep about paying taxes. The fact that only 0.3%
(500,000 people) of the population of Pakistan files their income tax returns does not
raise many eyebrows because of our national attitude towards this issue.

Pakistan has a Tax-to-GDP ratio of 9.4%, among the lowest in the world. We do

however boast of having the 6th largest population in the world, the seventh largest
army and third largest nuclear arsenal. A recent report by RAFTAAR (Research and
Advocacy for the Advancement of Allied Reforms) on taxation and public expenditure
in Pakistan sheds some light on this issue. Governments require revenue streams to
pay for services they offer to citizens. Taxes form a major chunk of the revenue that is
collected from citizens in all developed and developing countries in the world. In social
democratic setups of Western Europe, high earners have to pay more taxes than the
average household. The average Tax-to-GDP ratio—the amount of GDP contributed
through taxes—in Western European countries was 34% in 2013-14. Pakistan’s
government requires revenue to pay for public services and in absence of significant tax
returns, indirect taxes are implemented. As a result, 68% of tax revenue comes from
indirect taxation. We pay more for fuel and electricity than other regional countries
because of the surcharges added. The downside of this approach is that people with
lower socioeconomic status have to pay as much tax as the highest earners.

Even with indirect taxes, the government doesn’t earn enough to cover its expenditures.
This situation leads to loans from internal and external sources. Pakistan has a Rs. 17
trillion public debt which amounts to 63% of our Gross Domestic Product (GDP).
Contrary to popular perception, only one third of our debt is foreign while two thirds is
raised through domestic sources. To compound the misery, Domestic debt has an
interest rate of 10.7% while International debt has an interest rate of 1.9%. These facts
pose problems for people who are tasked with formulating the Annual Budget. Majority
of budgetary allocations have to be devoted to paying back the public debt and there is
little room for spending on development projects. More than 53 percent of federal
government’s expenditure is on interest payments on debt, defence spending and
salaries and remuneration. Another 29 percent is allocated towards subsidies and
grants. The remaining expenditure that is fully adjustable is only 18 percent.

The debt servicing cannot be ‘deferred’ indefinitely and withdrawal of subsidies is not
politically feasible. Increasing the tax net or indirect taxes can help increase the
revenues. The recent proposal of implementing a Withholding Tax has sparked protests
in major urban centres, mostly by middle-income traders and retailers. ‘Services’ sector
is resisting a change in the status quo and doesn’t want imposition of even 0.6% tax on
their transactions. Due to apparent religiosity and patriotism displayed by the same
segment of society, cultural critic Nadeem Paracha branded their sentiments
“nationalism minus responsibility”. Similarly, property tax collected in Punjab is about
Rs. 5 Billion annually. In comparison, Mumbai collects more than Rs. 60 Billion annually
while Delhi and Bengalore also collect more.

Pakistan’s economy is fragile and the government needs to spend more on health,
education and other essential services. This, however, is not possible without
improvement of Tax Collection. We can’t afford more public debt in these
circumstances. What needs to be done in this regard is an increase in the number of tax
payers and more importantly, reduce tax exemptions. Pakistan does not have a solid
industrial base and our economy is not stable enough to finance the requirements of
burgeoning population. Limiting the budget spending on military and reducing corruption
in the public sector are hard steps that have to taken.

Federal Bureau of Revenue has tried to incentivise tax payers and introduced an e-
filling system but these are only baby steps in the right direction. To promote a tax
paying culture, children in primary schools need to be informed about their civic
responsibility of paying taxes. Media should be used to sensitise the common man
about the gravity of this issue. Unless we start paying our taxes, the country will remain
in doldrums and public services will remain dilapidated.

http://www.aboardthedemocracytrain.com/less-than-1-percent-of-pakistanis-pay-tax-
survey

Less than 1 percent of Pakistanis pay tax – SurveyMubarak Zeb Khan - Dawn
ISLAMABAD: The bad news about Pakistan’s weak tax system never stops coming. The latest
revelation emanating from the Federal Bureau of Revenue (FBR) is that nearly 600,000 taxpayers have
‘mysteriously disappeared’ from the tax net in the past one year.

If official documents that reveal this astonishing figure are to be believed, it simply highlights incompetence
and mismanagement of the country’s top tax machinery.

So while the FBR has been claiming happily that it has in its net 1.44 million people who regularly file tax
returns, it turns out that there are only 856,987 taxpayers in the country that the bureau can trace to their homes
or workplaces. Does this mean that the missing numbers — 583,013 — are imaginary tax payers?

This discrepancy has emerged from the data of the National Database and Registration Authority (Nadra) when
it was compared with the figures compiled and maintained by Pakistan Revenue Automation (PRAL), a
subsidiary of the FBR.

The comparison was carried out recently after a request by the FBR and it was revealed that just 856,987 tax
payers were there, and even among them 51,522 did not pay any taxes last year.

This lower figure emerged once discrepancy and errors in data compilation were identified and corrected.

For instance, one mistake emerged when lists of tax return filers were compared with the names submitted by
employers.

As many as 676,367 people have filed income tax returns in the tax-year 2011, while 549,369 statements were
submitted by employers on behalf of their employees, taking the total number of taxpayers to 1.22 million.

The data revealed that out of 1.22 million, 204,069 people overlapped — their names were present in both the
list of those who filed tax returns and in the list of employees whose names were submitted by the employers.

Critics are of the opinion that the names were deliberately counted twice to present a rosier picture than the
reality.
Once this discrepancy was removed, the number of taxpayers stood at a mere 1.021 million for 2011.
However, further miscalculations were removed that had added an extra 164,684 to the taxpayers’ number.
Eventually, the tax officials were left with the miserly 805,465 tax payers in a population of 180 million
people.

The total revenue contributed by these taxpayers stood at Rs80 billion in 2011. If official figures are to be
believed, out of Pakistan’s 805,465 taxpayers, each pays about Rs13, 673 as income tax every year.

The Nadra data, which has forced the FBR to accept a harsh reality, has sent its officials scurrying. A senior
tax official confirmed that around 600,000 taxpayers were missing and that the FBR was clueless.

Requesting anonymity, he said the FBR was trying to locate the missing taxpayers.

Whether or not the FBR will unearth a more palatable number remains to be seen.
However, this latest revelation has driven home the low compliance of Pakistan to income tax rules.

TAX AND AID: This scandal is likely to encourage international donors who want the country to widen its
tax base before asking for more aid.

Only 0.6 per cent of the population pays taxes in Pakistan, as against 4.7 per cent in India, 58 per cent in
France and 80 per cent in Canada.

This is despite the fact that the government has doubled salaries of tax officials in the hope that it will improve
the compliance level, but to no avail.

Pakistan continues to have the lowest number of active taxpayers per tax administrator in South Asia — 64. In
India, taxpayers per tax administrator share stands at 537, in Sri Lanka 232, in the United States 1,990 and
Switzerland 3,182.

According to the tax official, the FBR has already launched the system audit of PRAL to assess its
performance. He said that PRAL had purchased costly software but these had not been used effectively. “We
will fix the responsibility regarding the
missing taxpayers etc,” the official added.

http://nation.com.pk/23-Oct-2017/why-do-people-avoid-paying-tax

There is reoccurring news coming time and again that the number of taxpayers in our
country is very low. Our new Prime Minister Shahid Khaqan Abbasi also lamented in his
first address that Pakistanis don’t pay taxes. This is what our every government
narrates. But such statements are contrary to the fact and also oppose to a common
saying that no one can spare himself from death and taxes, here I want to discuss a
story of a chartered accountant read a year ago. “Mr A works in a factory, he goes to
work at 8 am and finishes his day at 5 in the evening, at the end of the day the owner
gives him 6 apples as his wage. Returning home he encounters a man (Mr B) who asks
him to give 2 apples, Mr A asks why he should give 2 apples to him, as a reply B says
this is “tax” on his earnings required as per government rule. Despised Mr A gives Mr B
2 apples and goes home. The next day he goes to the factory and says to his master
that he needs 8 apples today as 2 will be taken by Mr B as  tax . The master refuses and
says I have already given many apples to B as tax on his income, and cannot afford to
pay 2 more apples to Mr A. Returning home the next day Mr A encounters a Mr C who
offers to save him from Mr B by offering an alternate route home, in return he asks for
quarter of an apple. Mr A happily agrees to settle for this scheme and goes with him.
Later during the month Mr B finds out about this alternate route and catches Mr A on the
way, as a consequence Mr B asks for 4 apples per day from the day he took the
alternate route otherwise face legal action.

Now in this story we have the following observations like Mr A is the taxpayer, the
alternate route home is the tax evasion scheme, Mr C is the facilitator of tax evasion
who woes Mr A into this scheme and the reasons which make Mr A opt for the alternate
route home will be high rate of tax in the country, sense of ownership on the hard
earned wages, availability of facilitators (Mr C), lack of education among tax payers
about possible consequences of tax evasion, weak legislation in relation to tax evasion
and hoarding of wealth with masters.

Only those who are clever accountants can keep the later one at minimum level. We all
know that there is a difference between tax evasion and tax avoidance. Tax evasion is
illegal. It involves not paying the taxes one owes. Tax avoidance is behaviour that keeps
you from having that legal obligation to pay taxes. This can include using
legal tax shelters, tax exemptions and deductions etc. Tax evasion is bad and a criminal
offence. Tax avoidance is something different.

There is a grim reality which is not appraised by the government that we are one of the
most overtaxed nations in the world. We pay taxes from birth to death. Here are some
fine examples of paying the taxes. There are around 58 million people who are doing
jobs and get their salary after tax deduction. There is hardly any service in our country
that is tax-free. The figure easily dispels the myth in government circles that less than 1
percent of Pakistan`s population pays taxes. If Pakistan`s population is about 200
million then according this figure around 29 percent of the population is paying taxes.
Similarly, telecom industry witnessed a boom in last 16 years. According to reports
there are around 140 million mobile-phone users in our country which pay more than 20
percent tax on the total amount of load. Same is the case with automobile industry. The
number of registered vehicles in Pakistan is in millions and the number is advancing
with every day. All these run on fossil fuels which are subjected to multiple taxes.
Besides, there are multiple surcharges and duties which are being extracted from the
pockets of people . All these facts say that we are a tax paying nation. But,
unfortunately, our higher authorities always show grave concerns even after realising
the fact that Pakistan’s tax revenue has been increasing consistently. They keep
introducing new tax reforms and burdening people with more taxes. One of their major
concerns is that our revenues are not enough to meet our expenditures.

The basic reasons why they don’t meet their expenditures are the corruption within the
bureaucracy and political administrations, misuse of government funds
and tax exemptions for influential people . It is very common in Pakistan for politicians to
be tax evaders. We live in a system which favours elitism. The rich in our country don’t
pay taxes and there is no one to question them. If Pakistan’s wealthiest do not pay
meaningful amounts of income tax then that doesn’t mean to raise taxes on everyone.
This is about asking people to pay their fair share and what the law requires them to. On
the other hand common people feel seriously burdened and cheated when they see the
rich getting richer by hook or by crook, without paying their fair share to the society.

It is not our real issue that we don’t pay taxes but the real issue is the unproductive use
of what`s at hand. If the expenditure is productive then it generates increased revenue
possibilities for the future. Our real tax problem is that we are poor at managing and
using revenues. If we could productively use revenues half our revenues would not
have been spent on paying interest on debt. Several studies and articles have pointed
to these issues but they have either not been taken seriously or the  people who are in a
position to address these issues, are themselves part of the problem.

So instead of calling us tax thieves the government should be thankful to the nation and
especially the middle class (which is vanishing) for paying taxes. The ministers
and tax authorities should understand that to collect more taxes, they need to build trust
with the people that the money is used fairly and the they are getting benefit from
their tax paid money. Once the government is successful in it their tax collection job will
become easier. Besides, the government should look to remove exemptions, simplify
the tax collection system and drive out corruption.