Pakistan has one of the lowest tax-to-GDP ratio in the world and the highest tax rates in the South Asian region. Instead of presenting a roadmap to boost economy or develop a fair and sound mechanism to enhance tax net and tax collections, successive governments in the country have opted for ad-hoc measures to generate money and burden the existing taxpayers with more taxes every year.

In the federal budget, the government has used the same old method, projecting a 16 per cent growth in tax revenues for the coming fiscal year without improving economic conditions and restructuring the tax collection mechanism. According to the international financial institutions, the number of taxpayers in Pakistan is 1.2 million, half of which are from the corporate sector and the ratio is not even 10 per cent in a country of around 200 million people.

The main cause of the lowest tax base is the trust deficit between the taxpayers and tax collection authorities. In the absence of a modern tax collection mechanism, the sporadic incidents of mismanagement and misuse of official authority have so far kept the potential taxpayers at bay. A poor response to recently launched tax amnesty scheme indicates how potential taxpayers avoided to come into the tax net, fearing they would ruin everything they own as a result of years of struggle in an unfavourable business environment.

Therefore, the restoration of the taxpayers’ confidence in government authorities is the first step to increase tax base and it is impossible until and unless a fair administrative mechanism is devised and implemented. A majority of potential taxpayers want to pay taxes but unbridled powers in the hands of the tax authorities, unrealistic tax targets set by the government and coercive moves by black sheep in the vital government departments force them to stay away from tax net by using a method everyone knows in this county.

The government has set a target of Rs3.95 trillion for the next financial year starting in July, hoping that it will raise the tax-to-GDP ratio to above 10 per cent. The outgoing year’s target was Rs3.42 trillion. The dust over the issue of offshore companies has not yet settled and the reason of capital flight is high rate of taxes.

Pakistan is one of the few countries in the world where thrust of the governments always remained on indirect taxes. Slapping indirect taxes through decrees and statutory regulatory orders on individuals is the easiest way to enhance government revenues without annoying the large-scale business concerns. The government achieves short term gains, but ignores a trail of long term losses at the end.

The international donor agencies, including the World Bank and International Monetary Fund, want reforms in the taxation system, though for their own benefits, but it is the need of the hour. While drafting laws, policymakers often ignore a basic point that tough rules and regulations consolidate the hands of tax machinery in developing countries where individuals working in the government institutions lack the capacity to perform. As a result, the new tax measures falter half way during the implementation stage as it happened in the case of tax amnesty scheme in the recent months.

The government has again raised the tax collection target without any improvement in the economic conditions of the country. The energy crisis is still haunting the nation as industry faces acute shortage of electricity, law and order is still a problem and witch-hunting of businessmen is sending wrong signals to the foreign investors.

The present government still has two years in the office and can give a roadmap to put the economy on the right track. Increasing the rate of taxes should not be an option as business activities thrive in an environment where tax relief is available and investors are provided a risk-free environment.

Currently, the share of indirect taxes in total tax revenues reportedly stands around 6.4 per cent of the gross domestic product but direct taxes are half of it -- mere 3.5 per cent. At least 75 per cent of the taxes paid by large-scale companies are collected from customers through their supply chains, due to the fact that the companies merely act as facilitators, collectors and consolidators. Only 25 per cent share is collected through direct taxes.

There is a need to enhance capacity-building of tax officials with training and workshops as well as a process of accountability should be introduced at the departmental and judicial levels to keep them within the limits of law. When assessment of a tax matter is granted to an individual, no one will be able to plug the floodgates of corruption and that is what has been happening in the country since independence.

Sitting in comfort zones, many individuals love to take every advantage of their designated position in the office. Tough laws without any fear of accountability on the part of the officials only encourage corruption, mismanagement and misuse of authority. In many cases, certain individuals in government departments are responsible for sluggish economic activities in the country where corruption is allegedly institutionalised. In this situation, even tax amnesty schemes -- which are insult to the genuine taxpayers -- hardly work.

The government has so far failed to introduce any scheme to encourage the existing taxpayers, no matter small or large and there are little chances for a taxpayer to be treated as a respectable citizen in this country. The government will have to introduce meaningful reforms to increase revenue and tax collections and this will happen when trust deficit will be removed and common taxpayer will be able to proceed against the government for misuse of tax money.

Tax laws are also ambiguous and cumbersome and in ‘foreign language’ which give an edge to the tax officials to interpret the language for their own benefit. The method of filing returns should be simple and plain and tax laws should be enacted in a way to ensure fairness and transparency in the process of revenue collection. The current tax collection system is marred by anomalies and disparities.

In the prevailing conditions, the recent hue and cry about investment of black money in offshore companies is a tip of the iceberg.