Pakistan has set a challenging tax revenue target of 13 trillion rupees for the year starting 1st July 2024, a near 40 percentage jump from the current fiscal year. The ambitious revenue targets for the fiscal year through June 2025, presented by Finance Minister Muhammad Aurangzeb in parliament, is said to be in line with analyst expectations. Key objectives for the upcoming fiscal year include bringing the public debt-to-GDP ratio to sustainable levels and prioritising improvements in Pakistan’s balance of payments position, the government’s budget document showed. Pakistan has projected a sharp drop in its fiscal deficit for the new financial year to 5.9 percentage of GDP, from an upwardly revised estimate of 7.4 percentage for the current year. Pakistan has to find ways to increase its revenues to reduce its fiscal deficit as part of reforms being discussed with the IMF. Pakistan is in talks with IMF for a loan of USD 6 billion to USD 8 billion, as it seeks to avert a default for an economy growing at the slowest pace in the region. The rise in the tax target is made up of a 48 percentage increase in direct taxes and 35 percentage hike in indirect taxes over revised estimates of the current year. Non-tax revenue, including petroleum levies, is seen increasing by a whopping 64 percentage. Government has also announced that sales tax would increase to 18 percentage on textile and leather products as well as on mobile phones.
The government has also finalised a digital-based system to broaden the country’s narrow tax base. The schemes also include professional services providers like lawyers, doctors, engineers, and other services providers to tax their income.
Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. In the last decade income tax, together with sales tax, has become the principal source of revenue for the federal government. There are several factors that have resulted in this poor state of affairs. Some of these factors are because of the income tax legislation, others are an outcome of the judicial system of the country and are direct result of lobbying and political compromises.
The number of active tax-filers in Pakistan is about 2 million, which is a fraction of the population. While tax-filers in other countries are much higher though the cross-country comparison is usually not very useful because of considerable differences in the economic structures, tax laws and administrative procedures.
For income tax purposes, the population of Pakistan can be categorised as: (1) people having less income or whose incomes are below the income tax threshold, (2) people which fall within the taxable bracket but are exempt from payment of income tax, (3) people which fall within the taxable bracket but have successfully avoided entering the tax net, (4) people which are within the tax net but under-report their incomes, and (5) people which are within the tax net and correctly report their incomes.
Proper work is not done to identify non-tax filers and those who are out of tax net thus there is a large amount of tax leakages. The extent of this leakage is huge and is now causing real problem consequently tax to GDP ratio has significantly dropped in recent years. This should be a system in place to detect evasion primarily through effective tax audit and supplementing it with regular surveys to identify new procedures to by-pass tax laws, identify non-filers and cases of under-declaration and false declaration by them. If tax evasion is detected at the audit stage, then it can be help improving the system at large and can also help in blocking the funds going out of Pakistan.
A good tax system requires a good tax policy but more importantly, an administrative system that can put these policies into practice. Tax reform efforts in the past have concentrated primarily on the issues of policy, the issue of improvement of tax administration and of processes has not been given the importance it deserved. The core of this reform effort is to bring improvement in the tax administrative structure and simplification of processes.
The sale tax is evolving into Pakistan’s key revenue earner is beyond any doubt and is one of the largest revenue collection schemes. Likewise, Pakistan Customs is one of the oldest organisations of the Federal Government. Over the years, as international trade grew, customs administration gained importance, both as a major source of federal tax revenues and as a regulator of the economy.
Corruption in the tax administration is a two-way process, on one side, someone from FBR is corrupt and on other someone from the private sector person is also indulge in corruption either willingly or under duress from his employer.
Putting blame on government for every issue is not appropriate. There is a thinking in the society that why tax is paid to the government when government itself is not controlling corruption and corrupt practices and spending lavishly. In such situation, it is better not to pay taxes as government doesn’t have moral authority to collect tax. This is very negative and inappropriate thinking; we are responsible for our acts and not for others. Not paying taxes means we are also contributing in strengthening the corrupt practices in the country, no sane person can justify such thinking of non-payment of taxes just because governance is poor.
Lack of tax culture is one the biggest challenges of all the governments, despite making efforts, somehow, no government can improve the tax culture. Few years back, a non-filer category was introduced, and rates of some taxes were more for non-fillers than the fillers. Despite higher tax rates for non-filers, number of non-filers has increased over time instead of seeing reduction in non-filers. Consequently, now government has decided to put some stringent conditions on non-filers to bring those people in the tax net. Only time will tell how these non-filers will get away with these conditions. There is also a theory that Pakistan’s tax system is unnecessarily complex and poor quality of governance causing less tax collection. In addition, private sector has ability to engage good tax brains to find ways and means to avoid tax thus breaching tax laws without fear.
It is therefore, important for the government to improve effectiveness of the existing processes through the work re-organization, which will reduce tax payer/tax collector’s interface, assigns and distributes functions and responsibilities in a manner that reduces discretion of the assessing officers, promotes one window operations, assigns functional responsibilities to specialized divisions, relieves assessing officers from non-assessment functions, and moves to a systematic automated basis.
Government should work on creating a healthy relationship amongst the stakeholders in the taxation system (GOP, FBR and taxpayers). As a confidence building measure, government should also demonstrate some genuine austerity at the top levels, arrange public disclosure of tax returns of ruling elite, earmark some percentage of incremental revenues for specific social sectors, and create a linkage between revenue generation and development expenditures of certain city and area. Federal government should also create on enabling environment through legal changes and effective supervision so as to improve the efficiency and integrity of FBR system.
It can be done through improved organizational design and human resource management along with re-engineering of income tax, sales tax and customs processes. It is equally important to implement an information management system to automate the whole tax system.
Government should also focus on strengthening the technical capacity of FBR in development and implementation of standard procedures with respect to systems design and development, documentation, systems deployment, quality assurance and audit, network and data security, planning and project management. In addition, FBR should build specific expertise to manage properly the outsourcing process and relationship, particularly for evaluating the functions to be outsourced, drawing up terms of reference for outsourcing and setting performance benchmarks, identifying suitable vendors and inviting/evaluation bids, negotiating contracts, and monitoring/reviewing outsourced contracts.
Corruption, political instability, trade openness, real per capita income and inflation are considered as main determinants of tax collection. Tax to GDP ratio is used as an indicator of tax revenue which in Pakistan’s case is very low. There is a consensus that corruption is a major hurdle in raising tax revenue for both direct and indirect taxes. Government should introduce more sophisticated online records and should computerize all records through massive e-government campaign in all the ministries and departments. The Govt should focus on creating awareness among people that paying tax is their moral and social obligation and it can be strengthen by improving the transparent collection and utilization of tax collected by improving societal welfare.