Pakistan needs at least 8 per cent sustainable growth rate to provide 1.5 to 2.5 million jobs every year but it is not possible under the existing unfair and anti-business tax system. A fair tax system can easily fetch Rs8500 billion at federal level alone changing the entire fiscal scenario.

In these columns, for the last many years, we have been suggesting measures for fundamental reforms in the tax system for accelerated growth of economy and collecting desired amount for development and providing universal entitlements to the entire population. The government can easily retire debts and make Pakistan a self-reliant nation. However, this dream cannot be achieved the way the Federal Board of Revenue (FBR) is performing at the moment.

On paper, the FBR is an autonomous body created by an act of Parliament, Federal Board of Revenue Act of 2007, but in practice it is handmaid of the rulers of the day and protector of tax evaders and non-filers. History of reforms (sic) reveals that the FBR mercilessly wasted borrowed funds of millions of dollars. The poor performance of the FBR is exposed in a recent report citing the following facts:

"The number of companies and Association of Persons (AOPs) filing annual income tax returns has declined in the tax year 2015.

The number of income tax return filers increased by just 10,745 in tax year 2015. The FBR was supposed to bring in 300,000 additional people in the tax net by serving them tax notices.

The number of income tax filers stood at 1.064 million in tax year 2015 as against 1.053 million of the previous year. In a population of about 200 million, only 3.7 million are registered taxpayers in the country. Out of these, only 1.064 million filed their returns during the tax year 2015.

The FBR registered 135,139 more people last year but only 10,745 or 8 per cent of them filed their tax returns, highlighting weak enforcement.

Out of total 3.5 million registered individuals as of June 2015, only 991,538 filed their tax returns -- up by 12,686. A major reason behind increase in number of individuals filing their returns was the government’s decision to give tax amnesty scheme to traders. As a result of this scheme, 9,090 traders came into the tax net, against the official aim to bring one million.

As against 157,268 registered AOPs, as many as 44,539 AOPs filed their returns -- 1,704 less than even the previous year. Similarly, against the registered 57,186 companies only 28,031 of them filed their returns. As many as 237 companies that were filing their returns earlier became non-compliant in tax year 2015.

After coming into power, the PML-N government introduced a policy of two separate tax rates for filers and non-filers of income tax returns. It set significantly higher income tax rates on dividend income, interest income, cash withdrawals, and all kinds of banking transactions and withholding taxes on almost every kind of transaction. It estimated that these measures would generate extra Rs54.5 billion in fiscal year 2015-16. The FBR’s data revealed that people actually paid Rs85.4 billion, suggesting that they were ready to bear the extra cost but not ready to come into the tax net".

The FBR has been claiming big success in broadening the tax base, but the reality is that it has even failed to regain its lost return filers. There was a time when the FBR used to get over two million returns! The FBR stalwarts need soul-searching to find out what has gone wrong and where these taxpayers have vanished. We have been warning about the devastating effects of high indirect taxation and excessive burden of withholding taxes, yet the government insisted on these even on low income levels and the result is now before us, there is a tax defiance on mass scale -- it is evident from decreasing number of filers and massive tax evasion in withholding tax regime.

The debates and discourse concerning political economy of tax reforms in Pakistan lack objective analyses and rational approach. In a book, The Role of Taxation in Pakistan’s Revival, edited by Jorge Martinez-Vazquez & Musharraf Rasool Cyan), the agenda of IMF is highlighted without taking into account the above arbitrariness of existing tax system. The book contains nine chapters, which are in fact, studies conducted for 7-year-long [December 7, 2004 to December 31, 2011] Pakistan Tax Administration Reform Programme (TARP), carried out with total cost of US$149 million, out of which US$ 102.90 million came as loan from World Bank.

The book explains why TARP was a great failure -- on its conclusion not only did tax-to-GDP ratio fall substantially, there was a tremendous decrease in the number of return filers. After reading the book, an irresistible conclusion which can be drawn is that prescription of the World Bank and IMF suggesting "more taxes" without growth, equity and delivery of social services to the citizens is a poisonous pill, based on a diagnosis by a quack rather than by a qualified physician.

None of the studies in the book has highlighted the most painful aspect of Pakistan’s cruel tax system. On the one hand, the State is least pushed to provide free education and health facilities and on the other, individual income taxation is insensitive to family circumstances to determine ability to pay, in utter violation of Article 3 of the Constitution of Pakistan. In civilised, democratic countries income tax laws recognise the cost of living alone or with family -- expenses to nurture children are always taken into account. The laws thus allow deductions/allowances according to the size of family.

In Pakistan, the FBR not only denies any such allowance or deduction, but extorts advance income tax even from the lower-income earners and their family members having no income on facilities like mobile phones. Adding insult to injury, the FBR expects them to file tax returns to get the money withheld as refund, whereas the cost to get it is much more than the amount due and chances of harassment after filing returns are obnoxiously high.

Successive governments have been emphasising the importance of increasing tax revenues, mainly on the dictates of IMF, but flawed and irrational tax policy has destroyed our economy. In Pakistan, the financial system is for the rich or to lend money to the government, thus small-and medium-size enterprises (SMEs) do not get credit for growth. In such circumstances, demanding the businesses to pay huge taxes in advance through various withholding provisions, ahead of time, before they even know what their income is going to be, is a sure recipe for disaster. This may be well-intended to counter tax evasion, but is actually only destroying SMEs.

This is the sordid story of tax reforms in Pakistan even when enormous funds -- over US$100 million -- and best professional advice was available. The real issue of taxation in Pakistan is appeasing the rich and mighty and lavish spending on comforts of elites which are the main cause of huge budgetary gap. Such wrong policies are responsible for continuous increase in the miseries of the people. 12.7 per cent of Pakistan’s population now lives below $1.25 per day, which is categorised as extreme poverty.