Taxation or taxing

On the sidelines of the Munich Security Conference on February 20, IMF Managing Director Kristalina Georgieva said: “For Pakistan, I want to emphasize two things: one, tax revenue – those who can afford it, those who are making good money. public or private sector should contribute to the economy. Second, for a fair distribution of pressure, subsidies should be given only to those who really need them. The statement actually reflects the underlying theme of ongoing and all future expanded fund forms that Pakistan seems to be stagnating for at least the next 10 years due to our foreign financing needs. However, if you ask an average Pakistani on the road, he always complains about the unbearable tax burden, but if we look at the aggregate numbers, Pakistan’s tax to GDP ratio has been around 10% for the last 20 years (currently) and the ratio will only be 8.5% in 2021 after GDP revaluation. constitutes). In other words, Income Tax, Sales Tax, Federal Excise, Customs Duty and Provincial Taxes of all Pakistan including Service Sales Tax, Property Tax, Provincial Excises, Land Tax, Agricultural Taxes etc. through which the tax contribution is Rs.8. 50 for every 100 rupees of value of goods and services produced in the country. This ratio is about half that of most other economies of similar size and level of development. The situation is even worse when we consider that our current data set may be missing a significant portion of our undocumented economy in the denominator. According to the latest estimates of the World Bank, its volume is 36% of GDP. About 90% of this collection comes from FBR taxes and the contribution of the provinces is 1% of the revenue power despite a fairly good tax base in property, agriculture and sales tax. The failure of federal and provincial leaders to collect and collect fair taxes is largely discussed as a policy failure, but a closer look at the data reveals a very different picture. If we look at the FBR data for the tax year 2021 (which can be easily edited from the tax handbook published by the FBR), it appears that only 0.9% taxpayers pay 66% of the income tax. It also shows that 1.25 million (42%) of the three million filers submit income that is not taxable or auditable. The largest portion of the 1.7 million contributes only one-fifth of the tax. Another important fact is that about 350 billion rupees of withheld taxes were not claimed in the tax returns, so people paying these taxes were able to stay out of the filing process. For more than 40 years, the benchmark economic model of tax evasion has been the Allingham and Sandmo (1972) model, in which self-interested taxpayers choose how much income to report to the tax authority in exchange for tax evasion benefits (lower tax payments). ) versus the costs of avoidance (possibility of being caught and punished). In this model, the main policy parameters affecting tax evasion are the probability of detection and the certainty and severity of punishment associated with detected evasion. Although the model has been widely criticized for its crudeness, it has worked successfully in all countries that have achieved significant tax-to-GDP ratios. Our failure in this regard, both on the part of the FBI and on the part of the provinces, is largely a failure to create in the minds of taxpayers the likelihood of being caught if they do not report or underreport their income. Even if a tax evader is caught, the risk of fines and consequences is almost nil because of the weak and weak prosecution and appeals system. A legally enforceable regime called self-assessment comes into effect, and the courts and the legislature have made it impossible to satisfy the taxpayer’s claims. As a result, our tax to gross domestic product ratio is 8.5 percent of national income. Only three million people file returns and only 1.8 million of them pay taxes. Compare that to 85 million bank accounts, at least 30 million household electricity connections, four million shop connections and over 300,000 high-voltage industrial connections, and you can appreciate the size and scope of under-reporting and non-reporting. Of course, all the blame for this poor show can be put on the FBR, but the loss of 67 paisa per 100 rupees of collection, limited and aging core workforce, reluctance of people and politics to provide CNIC number even in a business-to-business transaction. , with a huge currency in circulation of 6 to 9 trillion rupees and tons of gold and many dollars in circulation, there is no fear in the hearts and minds of people about forcing them to declare their earnings. In fact, everyone advises each other to stay off the radar of the tax authorities with market-based ways and means. FBR’s past efforts have been mostly haphazard, less desirable in number and largely ineffective in terms of impact due to lack of resources. The only silver lining is that ICT tools now provide the government with the unique ability to collect all the data of a person’s transactions on a unique identifier (often CNIC). To do this, the government must overcome opposition from commercial banks that want to protect the privacy of tax evaders, force utility companies to obtain the current user’s CNIC, and enable provincial real-time land, property, transport and agricultural transactions. data into one consolidated database. To allay people’s fears, the database can be hosted in the State Bank and managed by artificial intelligence. It must first inform the potential taxpayer to rectify data discrepancies (eg income of Rs 1 crore in tax returns and Rs 10 billion in bank transactions) and revise his tax returns within 60 days, failing which the information may be forwarded to the FBR. legal action. This is just one of many possible interventions. The current skewed system is unworkable, but change will require a lot of effort and swimming against the tide. However, in current economic conditions, this may be the only sustainable path to fiscal recovery. The writer is Revenue Management, Revenue Mobilization, Investment and Trade Program (REMIT), former FBR Policy and former Additional Secretary, Ministry of Industries and Production. The Express Tribune, published on March 13, 2023. Like Business on Facebook, subscribe. @TribuneBiz on Twitter to stay informed and join the conversation.

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