Islamabad: Wealthy individuals and large firms are contributing to Pakistan’s reliance on foreign loans by using their strong political connections to avoid income tax, economists say.
“The low level of tax collection is one of the reasons behind dependence on foreign debt,” he told News Lens Pakistan,”economic affairs expert and associate professor at International Islamic University Islamabad (IIUI), Dr. Abdul Rashid told News Lens Pakistan.
“Pakistan’s tax base needs to broaden.”
A review of the 2015-16 budget by the Institute of Policy Studies (IPS) think-tank found the overall debt burden of debt has continued to rise.
The total outlay of the latest budget is 4451.3 billion rupees. Provisional estimates put GDP growth at 4.24 per cent, marginally higher than the 4.03 per cent of two years previously.
Although there is an apparent decline from 64.4 per cent to 62.9 per cent of GDP, in real terms over Rs.1000 billion have been added to debt burden this year alone, the IPS review reveals.
“The burden of debt has increased by around three trillion rupees since this government took over two years ago,” the IPS review stated.
The government should tap new potential sources, sectors, and even commodities, according to Rashid.
“There is need to plug the leakages with effective mechanism to increase tax to GDP ratio,” he said.
“Low tax revenue is one of the reasons behind dependence on foreign debt.”
A broader tax base would help reduce the country’s foreign debt dependency.
A senior official at the Income Tax Department blamed the failure to achieve tax targets on understaffed revenue department and a flawed audit policy under which only those taxpayers who actually file tax returns are audited.
“It means if you want to avoid a tax audit, don’t file a tax return. Thus the audit process discourages filing of tax returns,” the official, who requested anonymity as he is not authorised to speak publicly, told News Lens Pakistan.
He suggested conducting a survey to register new taxpayers as a step towards widening the tax base.
The total registered taxpayers who are on the tax roll (having NTNs) are around 3.7 million while they should be around 12 million.
Dr. Anwar Shah, Assistant Professor of Economics at Quaid-e-Azam University Islamabad, suggested documenting all types of transactions would automatically broaden the country’s tax net.
Due to weak governance and institutions, it is almost impossible to bring well-off people, politicians and their immediate relatives into tax net, he said.
Analyzing the budgetary proposal and measures, the IPS review stated: “A clear strategy to deal with the once again burgeoning circular debt – a key challenge in overall energy crisis – is totally missing from the budget.”
Umar Nasir, member of a traders association in Rawalpindi, said rulers prefer to levy taxes on small traders in the shape of mini-budget to meet budget deficit, rather than taxing the well-off.
“Every time the government imposes mini-budget, the poor segment of society tends to bear the brunt,” Nasir told News Lens Pakistan.
According to a draft 2013 study by the Sustainable Development Policy Institute (SDPI), “Reforming Tax System in Pakistan”, considerable efforts are needed to improve the tax system.
“Pakistan’s tax system cannot be termed as fair as there are wide exemptions and preferential treatments available to certain segments of society, while negligible amounts are collected through taxes on agriculture, capital gains, and immovable property,” the SDPI report stated.
Rashid said the collection of maximum taxes would “provide more space to the government to spend on education, health and other sectors.”
“Better revenue means strong pocket of the government, thus spending on public welfare projects will lead to overall growth,” he concluded.
The Federal Board of Revenue (FBR) stated on its website that it has been taking several measures to simplify procedures for paying taxes and to minimize contact between taxpayers and tax collectors.
A spokesman for the FBR could not be reached for comment.