Pakistan’s tax to GDP ratio at 9.5 percent is among the lowest in the world and the government is under pressure from foreign donors and lenders, including IMF, to increase collection to boost the struggling economy. Revenue authorities say they have identified about a quarter of a million new taxpayers who they project will add around Rs 14 billion ($140 million) to government coffers.
Broadening the tax base and improving the economy after years of lethargic growth under the last government was a key pledge in Prime Minister Nawaz Sharifs 2013 election campaign, when he was swept to power for a third term.
Currently less than one percent of Pakistani pay income tax and the government collected just $8 billion in total income tax in the 2013- 14 fiscal year – barely enough to cover just the country’s defense expenditure of $7 billion.
The strategy aimed by the Ministry of Finance on issuance notices to 261,250 potential tax payers and the intelligence was gathered through vehicle registration authority, car manufactures, utility companies, telecom companies an property registration offices.
Pakistan is a country where wealth and political influence go hand in hand. For generations, landowners and industrialists have given patronage to political parties and scant attention has been paid to their assets by the tax man. Huge shortfall in revenues due to exemptions through statutory regulatory orders (SROs) and otherwise given by parliament jeopardize projection of revenue collection and fiscal deficit every year (Federal Budget FY 15: Tale of fiscal stabilization, Muhammed Sabir, Business Recorder, September 17, 2014 and Federal Board of Revenue (FBR): tax collection Performance, Huzaima Bukhari and Dr. Ikramul Haq, Business Recorder March, 2015)
FBR has been persistently failing to meet budgetary targets for the last many years contrary to real potential is Rs. 7 trillion (FBR, New Chairman, old challenges, Business recorder August 2, 2013). Due to the poor performance in revenue collection, provinces which are wholly dependent on federally divisible pool – which is very meager and have not adequate space to spend on welfare of the people or on essential services. Furthermore, this is a vital role of taxes to spend on essential services, which we call it redistribution of wealth, whose create harmony and equalize the society. On the other side, provinces are not ready to collect their own taxes because of landlord elite capture of the system. If we look at the anomalies of political system, this is local government mandate to generate their own resources (under article 140 A of the constitution, this elite capture makes the whole system in their own hand.
In contradict to earlier FBR aimed strategy to issuance of notice of quarter of the million people, National Database and Registration Authority (NADRA) there are three million people who even do not have National Tax Numbers (NTNs), lives in very aristocratic places, have multiple bank accounts, vast majority of government servants, elected legislators, even judges and generals are out of tax nets. Since 2009, on average 7 % decline in income tax returns filers (Federal Board of Revenue (FBR): tax collection Performance, Huzaima Bukhari and Dr. Ikramul Haq, Business Recorder March, 2015). Furthermore, sales tax regime, 100,000 registered tax payers, out of which less than 30,000 pay any tax. FBR out of 2.5 million retailers; it has managed to register only 8,000 outlets. (Ibid)
“About 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling, (Shahid Javed Burki, ‘Provincial Rights and Responsibilities’, Journal of Economics, September 2010). Indeed, about 15 Million people improved their economic status even in this slow-moving economy. And FBR isn’t put any effort to tap this resource and tax them. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs. 1.5 million. And FBR just tap this potential then estimated tax collection on the prevalent rate would be Rs. 1650 billion. On similar line, if corporate entities at prevalent rate and already registered then it would be Rs. 4500 billion. On contrast situation is very bleak at this time, FBR only generating Rs. 880 billion. Another joint study conducted by Andrew Young school of Policy Studies at Georgia State University and World Bank, indicates that FBR actual collection is not more than 50 percent of potential – due to leakages in sales tax, federal excise duty and custom duties.
By concluding, there is need of take such courageous measures i.e. to stop massive tax evasion in custom, sales tax and income tax implement the integrated the automated tax intelligence system which have ability to record, store and cross check all the input and out information, and independent National Tax Collection agency which will be free from political pressures. Indeed, it will be run by the independent Board of Directors selected by National Finance Commission or Council of Common Interests.