Reasons for tax evasion in Pakistan

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By Ahmed Bilal Mehboob

In the face of a widening gap between revenue and expenditure, Pakistan is rightly concerned about increasing its money flow. The national debt has already reached a level where almost half of national revenue is consumed in paying interest on loans, so borrowing is not an easy option. 

As exports are stagnant, next year’s budget now relies on increased taxes to generate greater revenue. An unprecedented revenue target of Rs. 5.5 trillion – almost 20 % higher than last year – has been set for the year 2019-20. The income tax rate has also been increased from 25% to 35% for the salaried class. 

The State Minister for Revenue, Hammad Azhar, stated while winding up the budget debate in the National Assembly that Pakistan should be collecting Rs. 8 trillion in revenue every year but could actually manage to collect only Rs. 4 trillion – half of what the minister considers the revenue potential of the country. This wide gap between potential and actual revenue collected by the state is obviously one of the greatest worries of our economy managers. The minister echoed this worry when he asked in the assembly, ‘Where has the remaining Rs. 4 trillion gone?’ 

The obvious implication of the question is that a sizeable chunk of those who are liable to pay taxes are just not doing so. While everybody in the country is paying one tax or the other, the reference here is obviously made to direct taxes and most notably, income tax. This leads us to the inevitable question: Why are so many people not paying their taxes?

While some degree of tax evasion is experienced even in countries where tax consciousness and tax collection capacity is very high, Pakistan’s rate of almost 50% tax evasion is both alarming and unacceptable. There are three key reasons for this high degree of evasion in Pakistan’s context. The following are obvious explanations but despite them being so, successive governments have failed to take corrective steps, with a weak political will being the greatest reason behind the lethargy.

Lack of tax-payers’ trust in the state’s ability to honestly and professionally handle and spend their money is probably the most important reason Pakistanis evade taxes. 

Prime Minister Imran Khan has repeatedly stated that Pakistanis are one of the most generous givers of charity and since he has been personally raising funds for charities like his cancer hospital and a university, his assessment is important.

He believes people are willing to go beyond their capacity to give money, provided they are confident that the person or entity on the receiving end will put it to good use. So, there exists an imperative need to build public trust in the state and state institutions in general and institutions handling tax collection in particular. 

Sadly, the Federal Board of Revenue (FBR) in particular enjoys a most unenviable reputation in this regard and as long as the government does not undertake serious reforms to repair public mistrust in this institution (among others), a major turn-around in tax collection will not be possible. Mere coercive measures and threats of harsh measures against potential tax-payers will not work. 

Poor communication by the government is another reason potential tax-payers are not motivated to pay up. In no way is it easy to part with one’s hard-earned money, and the government must clearly and coherently come forward and explain what high rates of taxes will do for the country and how the lives of ordinary citizens will get better. In addition, the government must practically demonstrate that tax-payers’ money is responsibly spent at the right place. A start has been made, and one must commend Prime Minister Imran Khan for not only coming forward to repeatedly appeal to the public for taxes but for committing to personally get involved in meeting the revenue target.

Lastly, a fair tax system is necessary. Salaried people are generally thought to be easy targets for tax collection and the state has thus, failed to widen the tax net. Several categories of businesses get away without paying their due share of taxes because of their political clout while ordinary people bringing home a monthly salary are overly burdened.

Reforming the tax system and building public trust in it is going to be an uphill climb. But Pakistan’s political leadership now has no alternative but to focus on this as top priority if it is to meet its ambitious revenue goals.   

(The writer is the president of Pakistan-based think tank, PILDAT.)