Tax reform, as the name suggests, is a kind of reform made in the tax system of a nation that can help the government of the same minimize the chances of tax evasion and avoidance. It brings sustainability to the revenue levels, addresses issues and conflicts concerning inequality by employing behavior change and redistribution, and also aids in the development of a nation. Furthermore, tax policy has a significant impact on inclusive growth, income, and wealth redistribution. Owing to a narrow tax base in Pakistan, the ability of taxes to alter the distribution of incomes in favor of the poorest income quintiles has been limited. Is our economy, if it can be questioned, running according to this concept? While talking about “tax,” we are, of course, divulging something that is intensely “disliked.”
Tax reform, as the name suggests, is a kind of reform made in the tax system of a nation that can help the government of the same minimize the chances of tax evasion and avoidance. It brings sustainability to the revenue levels, addresses issues and conflicts concerning inequality by employing behavior change and redistribution, and also aids in the development of a nation. Furthermore, tax policy has a significant impact on inclusive growth, income, and wealth redistribution. Owing to a narrow tax base in Pakistan, the ability of taxes to alter the distribution of incomes in favor of the poorest income quintiles has been limited. Is our economy, if it can be questioned, running according to this concept? While talking about “tax,” we are, of course, divulging something that is intensely “disliked.”
Taxation, besides providing funds to governments to manage their operations, also act as a catalyst for business development and economic progress. Industrial and corporate expansions in Pakistan are suffering from the ill-intentioned, irrational, unjust, and discriminatory tax policies, rules, regulations, and procedures. Without considering its effects on the economy, the primary focus on achieving profit targets has severely hampered trade and manufacturing. With sluggish economic activity and an overtaxed, subpar economy, revenues cannot be increased. The main difficulties are the generalization of taxes and the documentation of the economy.
In comparison to Vietnam, Bangladesh, Singapore, and Sri Lanka, Pakistan has the highest tax rates in the region. In particular, the country’s 17% sales tax encourages tax evasion in an economy that is predominately undocumented, giving the informal sector an unfair edge. The intricacy of Pakistan’s tax regulations is another barrier preventing the undocumented sector from entering the tax net, in addition to the country’s higher sales tax rate of 17 percent (which favors tax evasion). One of the reasons for the high rate of sales tax and heavy reliance on collection through indirect taxes in Pakistan is the fact that the scope of direct taxes is very limited as 61.7 percent of the total population of Pakistan lives in rural areas and around 38.8 percent of households are below the poverty line.
On the one hand, direct taxes are regarded as a fair and impartial method of funding the government. Direct taxes balance income distribution and reduce inequality, which increases the system’s progressiveness. Such redistributive measures have not been used much in Pakistan, and the country’s tax system still favors regressive indirect taxes, which account for about 60 percent of all taxes. In terms of GDP, the revenue from direct taxes for the first six months of the current financial year 2022-23 amounts to Rs3,428 billion against the Rs2,929 billion collected in the corresponding period of last year, depicting an increase of 17 percent. However, the growth in tax collection was low when compared to growing income levels in countries like Sri Lanka, Bangladesh, and India. Within the direct taxes, around 70 percent come from withholding taxes that sometimes become indirect when passed onto consumers. For example, around half of the WHT is collected through advance tax on imports and contracts that add to the final price of goods and services. Excluding WHT, the share of direct taxes in total FBR Taxes falls to 12.5 percent from 40 percent.
The main source of income tax is the personal and corporate income tax, which contribute about 92 percent in direct taxes. Though the number of active income tax payers increased to 3.59 million in FY-22 from 3.37 million in FY-21, it looks too small when compared to the 73.7 million employed labor force. One of the reasons is that out of the total employed labor force, 42.3 percent are dependent on the agriculture sector, which is either exempt from income tax or contributes very little.
Agriculture is a dominant sector of the economy, but it generates very limited revenue from direct taxes on agricultural producers. Given the tax exemption on income that it enjoys, the agriculture sector has become a legal, and sometimes illegal, tax shelter for other forms of income. To avoid income taxes, transfers from other sectors of the economy to agriculture are commonplace. Thus, it is estimated that applying the same tax on agricultural incomes as in other sectors would yield substantial revenues over the medium and long term. Tax authorities are finding it more difficult to stop the flow of money into the black economy. Agriculture revenue should only be excluded if submitted to tax authorities; in this way, economic documentation improves and demographic productive potential is shown.
Another aspect of taxation as a policy tool is its delivery mechanism. As long as taxpayers feel uncomfortable dealing with tax officials, it would not be transparent and true to the government. Due to income tax withholdings at various stages that are not processed and handed back to taxpayers, people with a minimum salary suffer from tax refunds. Processing sales tax and income tax returns is a time-consuming process, even for firms. The actions of tax officials, who view every taxpayer as a tax thief, are adding insult to injury. In contrast, taxpayers view every tax officer as a dishonest member of the government. The existing condition of the federal government, including federal institutions like the Federal Board of Revenue (FBR), is the best example to elaborate on the above discussion.
The government should come up with an excellent strategy to handle the economic crisis and force the current system to adopt it, which will only lead to a worsening of the situation. Even the most effective fiscal strategy would fall short of producing the desired outcomes in such a difficult situation. It is important to comprehend the root causes of the problem and how it is being solved.
Taxation is a corporate social responsibility that affects everyone and must be carried out ethically and morally. A nation’s government must pay back any benefits that are duly received by an individual in the form of taxes, which eventually promotes economic success. Because higher taxes burden people, there are fewer people who file taxes and pay taxes, which leads to an increase in tax evasion. The government has to understand that increased tax rates do not always result in increased tax revenue. The government should lower the tax rate to an appropriate level and improve tax revenue collection. Moreover, the government should also focus on reducing cash transactions and introducing the electronic payment solution at all levels to avoid tax evasion, which will assist the government in the easy collection of taxes. Furthermore, documenting the undocumented sector(s) mentioned above shall be a top priority for our government in order to rebuild taxpayer trust.
The writer is an economic analyst
