All roads run through tax reform
We need a new elite consensus around taxation.
The IMF chief and your Mazdoor Kisan Party friend are finally in agreement—Pakistan needs to tax the rich. Lal Salam, Comrade Kristalina.
The rot starts at the very top. Despite FBR’s forlorn SMS pleas about paying taxes as a civic duty, the tax authority cannot even get our rulers to pay up, with 93 parliamentarians not bothering to file tax returns at all in 2019. We know this because the law permits the disclosure of assets held by all public office holders and civil servants, except of course the armed forces.
This is reflective of wider issues in our political economy, where the rich want to have their cake and eat it too. Take agriculture, which contributes nearly 25% to our GDP. But thanks to our feudal-dominated legislature, the sector only pays an effective tax rate of 0.02%.
How about real estate? The sector that is favoured by our elites due to its ability to absorb opaque wealth, contributes property taxes worth a massive 0.4% of our total revenues. When the former FBR chairperson tried to change this, he was allegedly called into a meeting by the Chief of Army Staff and told to back off, as “DHAs are the business of our people”.
The aforementioned entity has also secured income tax exemptions for its Army Welfare Trust and Fauji Foundation, meaning that the conglomerate that controls your fertilizers, banking services and breakfast cereal is actually not even required to file an income tax return.
Other big businesses in Pakistan seek to avoid tax in more subtle ways such as lobbying for tax concessions and zero-ratings. The export sector for instance, earned $28 billion in gross receipts over the past year, but paid taxes totalling a mere $0.25 billion on that income. Simply removing all sales tax exemptions and concessions would double the revenue collected from that stream, not to mention remove all kinds of adverse economic incentives that are generated by such policies.
There’s no such subtlety involved when it comes to our retailers and wholesalers though. Any attempts to document this sector are met with vociferous street resistance and shutter-down strikes. And there’s a reason for that. Despite comprising a fifth of our GDP, at present they contribute only 0.4% of all income taxes. And if they consider their annual turnover to be less than 5 million rupees, they’re not required to pay or even register for the sales tax at all.
All of this leaves the salaried classes to pick up the tab, paying up to 35% of their income in direct taxes, mainly because they don’t have a choice. And the rest the state tries to collect through indirect taxes on items such as electricity, cell phones and petroleum—all of which are regressive, i.e., disproportionately affect the poor.
Pakistan has always been able to muddle through this way, but what’s changed now is the desperation of our situation. For the first time in our lifetimes, Pakistan’s interest payments (to service its debt) make up more than 50% of its annual revenue. Unless we’re able to equitably expand the size of our revenue pie, this figure will only rise, contributing to a further decline in living standards.
But hey, at least we’re #1 in something!
Good news memo: Yes, we’re bad at collecting taxes. But we’re actually not too far behind our peers. Even within the context of our perversely designed political economy, a recent World Bank report details some modest steps that we can take to improve the situation, such as digitising and funding the FBR, standardising the application of sales taxes, simplifying our corporate income tax system, and exempting tax filers from withholding taxes as an incentive to register in the system. Government behen, pls report parh lo.
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Great read! Pakistan's taxation system is one that works against its payers. Unfortunately, the working class bear the brunt of the poor and the elite.
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