Lahore: Pakistan has the potential to raise its tax to 22 percent of its GDP from 11 percent but the reasons for missing this target are generous tax concessions and exemptions, weak and fragmented revenue administrations, and structural economic deficiencies, reveals the International Monetary Fund’s new report, “Unlocking Pakistan’s tax potential.”
By a simple arithmetic 22 percent means that Pakistan could generate approximately Rs 8 trillion in revenue annually just at the federal level.
The report helps readers understand exactly why the government falls short of resources it needs to run its powerhouses along with other entities at the optimal level.
Of the 1.4 million retailers and 3.4 million commercial and industrial electricity users only 178,000 or 5.25 percent of the entities, pay general sales tax.
With this tax landscape, no wonder Pakistan relies heavily on indirect taxes and remains vulnerable to fluctuations in import prices, concludes the report.
Article 25A of the Constitution of Pakistan says that it is the responsibility of the state to provide free primary and secondary education to its citizens. Pakistan is one of the 115 countries in the world that provides constitutional rights of health to its people.
In reality, however, the country is only spending approximately 3 percent of the GDP respectively on both these facilities at both the federal and provincial levels.
Financial experts believe that the private sector is making an exponential profit in both these sectors and that there is 42 percent illiteracy in the country.
An ordinary man in Pakistan spends all his life striving to provide a decent living to his family.
Talha works at a private company in Karachi as an Assistant Manager, Human Resource South Region. He earns Rs 55,000 per month but since he lives in a rented house and has two daughters to look after he could hardly make his ends meet with this salary. Therefore, he works at two places. As soon as, Talha is back to home from work at 6 pm, he starts preparing to leave for another job.
“In the evening, I teach at an academy to the students of Mass Communication from Karachi University. Unless I do two jobs, I cannot fully fulfill my children’s needs. I am paying 20,000 as rent while a good part of my salary goes to pay school fees of my two daughters. It is tough for a salaried class person to meet his/her expenses.”
“The burden of indirect taxes has broken the back of a salaried person like me. Tax is deducted from my salary at the source. Similarly, before I buy anything whether it is a mobile phone, credit to make calls, and petrol to run my car I pay tax on each one of these items,” said Talha.
However, on the flip side, the businesses are given tax incentives, rebates, and a flexible tax environment.
“For example, take the case of an exporter, who gets 1 percent rebate on taxes. The employees, who make efforts to produce the export, hardly get the benefits of this relaxation,” he added. He said the government is least concerned to find out if the salaried people are getting the benefits they deserve.
Pakistan’s tax regime consists of four components: General Sales Tax, Central Excise Duty, Customs Duty, and Income Tax.
Indirect Taxes contribute almost 68 percent in the revenue, and if surcharges are also added, the figure goes up to 76 percent.
Asif Haroon, a businessman and chairman, Indirect Taxation Committee, blames the government for promoting the culture of tax evasion. He told News Lens Pakistan that almost 70 percent of Pakistan’s economic activity happens in the informal sector.
He argued that the retailers and wholesalers prefer doing business with this sector so that they could take advantage of either under- invoicing or no invoicing at all. If the government, he elaborated had been serious about expanding the tax base, it would have strived to document the informal sector. Haroon further said that when loopholes are intentionally left open for businesses to evade taxes, then inequality breeds, making poor poorer and rich richer.
The government in Pakistan robs the poor to feed the rich, says Dr Qais Aslam, Professor of Economics at the University of Central Punjab, Lahore, while talking to News Lens Pakistan.
“Take the example of diesel, an essential input in producing agricultural goods, for running transport, tube wells, and heavy machinery. Instead of keeping its price low, the government has laid 47 percent indirect tax on it. Similarly, the agriculture sector contributes 21 percent to the GDP, but no substantial tax has ever been imposed on it.” The service industry that makes 60 percent of the GDP is largely left untaxed. Doctors, for instance, earn millions in private practices, but their income is kept out of the tax loop. So is the case with the income generated by the lawyers, confectioners and milk sellers, said Aslam.
According to the World Trade Organisation, said Aslam, Pakistan can only lay income and sales tax.
Elaborating on Pakistan’s tax regime and how does it benefits the business class, Aslam quoted the amnesty scheme recently launched by the government. He termed it a slap in the face of those paying taxes honestly. Her further said that it is a wrong impression that the existing tax system has been molded on the whims of the IMF, instead, he said, it is the government that proposes such lopsided ideas to the IMF to save the skin of the business class.