Imagine a family of five people in which the head of the household seeks contributions from all the earning members to run day-to-day affairs. This person spares the younger lot so that it can study and build a career before they can start making contributions. Now, if the rest of the household doesn’t contribute as much, the head would look to increase the rates of those who do—since the house needs to be run anyway. He or she might look to tap other avenues like say, a rich uncle, the bank across the street. Or else, he or she would just look to cut costs. Subsequently, spending on education, health and maintaining the house would take a hit.
Conversely, visualise this scenario. Members contribute towards the household income, but the head of the household is a lush, a lout and a drug user who spends most of the money on feeding his habit. Spending on the family is kept at a minimum as finances are used to repay his debts or spend on areas that do not trickle down to benefit the family.
In a way, Pakistan stands at a crossroad between these two scenarios.
Governments have historically been unable to nurture the citizens into responsible adults, by denying them quality education, healthcare or even proper housing. It has been every man for himself in the past seven decades and very few individuals actually feel there is anything they owe the government. Resultantly, the tax-to-GDP ratio remains one of the lowest in the region, hovering at around the 11-12% mark, and effectively causing the informal economy, which has no contribution towards official and documented GDP, to become several times bigger.
It has been every man for himself in the past seven decades and very few individuals actually feel there is anything they owe the government. Resultantly, the tax-to-GDP ratio remains one of the lowest in the region, hovering at around the 11-12% mark, and effectively causing the informal economy, which has no contribution towards official and documented GDP, to become several times bigger
The PML-N government recently made public the tax directory for the year 2015, which showed every filer of tax returns and the contribution made to the national exchequer. The document was over 17,000 pages long but featured only 1.064 million people, an increase of 10,745 over the previous year. The net addition came on the back of individuals who felt the cost of non-compliance, which the government had purposely increased over the last few years, had gone too high.
Since 2013, the PML-N-led government has introduced a host of measures to draw a clearer distinction between filers and non-filers of income tax returns. It has increased the rate of vehicle registration for non-filers, enhanced withholding tax collection on purchase of vehicles, property and dividend income. Last year, it introduced a withholding tax on every single banking transaction valued at over Rs50,000—even including those transfers that were made through payorders or banking cheques. However, filers of income tax returns were spared, barring when they withdrew cash over Rs50,000 in a single day.
Without going into the nitty-gritty details, the aim was to entice people to come into the tax net. Conversations I have had with people, however, revealed that some do not know that filing income tax returns is mandatory for every single individual (although conditions apply) who has an annual income of over Rs400,000 or has a government-issued national tax number. In some cases, their argument revolved around the difficulty in filing tax returns, using the choice Urdu language word that I would substitute with ‘hassle’.
This hassle may save them some time, but it also means an increase to their non-compliance cost that varies for every individual. Even if one were to negate the extra charges, filing tax returns is mandatory and not a choice. Any individual earning money in Pakistan does not have the luxury to get out of filing returns. But they do. In fact, most exercise that luxury. Why? Because the Federal Board of Revenue (FBR), despite its 22,000-strong workforce, has been unable to enforce tax laws, which is its primary job.
Instead, its role has evolved into one of a guardian of tax evaders and facilitator of tax avoidance.
Paying taxes should be a simple step. It’s not. In fact, it is a complex web of transactions in which every institution and business—on behalf of the government—collects so much indirect tax that the public remains buried under a stockpile of dues and charges. Filing tax returns means hiring an expert who would first understand your expenses and submit details on your behalf, increasing the cost for a taxpayer who is already on edge about the entire procedure in the first place.
Pakistan has become a complex state. It’s a country where governments complain of a fiscal deficit, increase tax rates citing the same reason, yet have enough money to spend on lavish outings and building property. When it comes to spending on the public, governments, especially the provinces, lament low revenue. Ironically, these are the governments who have had surplus budgets and enjoyed a greater share from the centre as a reward. Development, however, is nowhere to be seen. Rural areas remain the most neglected. They are left on the sidelines as the rulers are biased in favour of urban centres.
In such a scenario, when the FBR places advertisements that say ‘duty calls’ for people to file their tax returns, the public turns around and throws it back at them: Is the government also rising to the call of duty?
Bilal Ahmad is a business journalist in Karachi