What is wrong with our tax system?


The Federal Board of Revenue web site under caption mission says to be a modern, progressive, effective, autonomous and credible organization for optimizing revenue by providing quality service and promoting compliance with tax and related laws. Enhance the capability of the tax system to collect due taxes through application of modern techniques, providing taxpayer assistance and by creating a motivated, satisfied, dedicated and professional workforce by following ingredients that includes integrity, professionalism, teamwork, courtesy, fairness, transparency and responsiveness. Practically it has not met the given parameters. The defective Tax system has partially been responsible for most of our problems like fiscal deficits, capital flight, and concentration of wealth in few hands, large scale Tax evasion, maladministration and corruption within the FBR, arbitrary powers to Tax officials. Creation of LTU and MTU was to ensure that it presented a corruption free unit, it did not serve any useful purpose. It was superficial spending of money to build beautiful buildings with the latest electronic gadgets. This had no relationship with the corruption. Now Prime Minister has taken this job in his own hands and is soon going to revamp the FBR.
Roughly poor people contribute more than 80% tax where as elite pay very less and enjoy all the benefits on the earth. All successive governments have been making tall claims of tax reforms and relief to poor but practically poor continue to suffer due to heavy taxation. The greatest drawback in the existing Tax system is that poor pay same indirect tax as the rich and they enjoy all the privileges. Another major flaw is that poor and rich pay same taxes on utilities that tantamount to sucking blood of poor people.
Prime Minister in his speech said that there are 8 lac Tax payers. It is factually incorrect to suggest such low number of Tax payers. To give a very simple picture WHT is collected on all the utility bills and bank accounts which should roughly reflect the number of tax payers in Pakistan. The FBR figures do not include 157 million mobile phone customers, 2.4 landline customers and consumers of water, power and gas and bank account holders. The figures run in crores as for as tax payers are concerned. But since we don’t have proper system in place and mechanism that could determine the exact number of tax payers as a result wrong figures are quoted. We are still having in house debate how to bring everyone under tax who is earning money irrespective of source. Sometime back former finance minister had said that CNIC number shall be the tax number; a good suggestion must be implemented immediately. That would give you real picture of tax payers in the country
Indirect taxes mostly hurt lower income groups, which represent while the richest segments remain largely undocumented and pay little or no taxes. To provide relief to poor people there is a need for Pakistan to reduce the burden of indirect taxes on them. We need an egalitarian tax system. Pakistanis are paying more taxes as mentioned above than any country in the world but it is not documented. The mantra that people don’t pay taxes should be buried deep perhaps most overtaxed nation in the world
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There is nothing in Pakistan that is tax-free. The rate of sales tax on different goods and services is one of the highest in the world. In spite of such heavy taxes we witness poor governance almost in all the fields, over and above we introduce Tax Amnesty Schemes to whiten the black money. On the other hand people are denied of clean drinking water, everywhere heaps of garbage are seen. Roads are broken, no proper drainage system exists. Our ‘tax problem’ is due to over spending than the revenue earned. Our issue is wastage of money on non productive activities that has remained unchecked and blind use of discretionary powers
Everybody agrees that we need ‘progressive’ taxation, which in simple English implies taxing the rich more that has also been tried. Then we have tax evasion at large scale and the solution is sought through Muk Mukka. At the same time same people spend Rs 650 billion in charity every year voluntarily but don’t come forward to pay taxes. The only reason is improper utilization of the tax collected and massive corruption in almost all the departments. Since the department is not collecting the tax by their own efforts and it is generally through indirect means that’s why figures are misquoted about tax payers. If we have the proper system of tax collection we can double the number of tax payers alone from Karachi leave aside the rest of the country. We do evolve systems and leave plenty of room for tax evasion intentionally. Just imagine the road side barbecues operating in Karachi and other cities of Pakistan doing roaring business. The payment is on cash basis, mostly without any receipt. Likewise doctors, businessman big or small and doing roaring business and paying very little to the government. Look at their life style, is it rocket science to determine their tax. Look at their travelling, immigration can provide complete data. I remember in Yorkshire a Pakistani restaurant was fined one million pound due to tax evasion which was denied by the owner but when confronted accepted his guilt and fine was reduced to one tenth. To determine the tax evasion the tax people would come and take food in the restaurant and leave after closing hours. They would maintain proper account of people visiting the restaurant. Do our tax collectors do any such exercise?
The tax reforms have not been able to provide relief to poor. There is continuous upward trend in the prices of necessities, food, energy, transportation, housing, health and schooling. These expenditures amount to 80 percent of the spending of families and a much higher percentage for the poor. This needs to be tackled to beat the inflation and can only be achieved through proper documentation of tax collection. Taxing already the taxed people is no solution to the problem. We should widen the net. CIT’s have been directed to gather information about investments in real estate in Dubai and other countries. This is a good step in the right direction but won’t it be better to start this exercise at home first.
To realize more taxes, you need to build trust with the people, look after the poor. Once you earn their trust, collection should be no problem. The best solution to collect taxes is on fortnightly basis, this will decrease evasion and collection will be easy, and shall create more job opportunities by inducting young people as tax collectors. Are we ready to work on these lines? Finance minister is confused on economy, the solution adopted by increasing rates on utilities shall hit the poor badly which he has been criticizing; won’t it be better to go to IMF?

The writer is a freelance
journalist and defence Analyst.