Pakistan income tax: House cleaning

Editorial:By Najam Sethi

According to a joint report by two civil society organizations, nearly 70 per cent of parliamentarians, or 300 out of 446 members of the National Assembly and Senate, did not file income tax returns in 2011. The study found that only 20 of 55 cabinet ministers had filed tax returns, while 49 senators out of 104 paid any income tax. Among the leaders who did not file tax returns were President Asif Zardari and Interior Minister Rehman Malik. Among those who did, Senator Mushahid Hussain, paid a tax of only Rs 82 in 2011. Eighty members of parliament had no tax number, despite spending crores on getting elected. The report comes on the heels of another by Transparency International on corruption in Pakistan that shows that Pakistan has slipped to 139th position out of 173 countries, making it the 34th most corrupt country in the world. As if this wasn't enough, the chairman of NAB, ex-navy chief, Admiral Fasih Bukhari, has declared that Rs 7 billion is lost to corrupt practices every day in Pakistan. Understandably, the reports have infuriated parliamentarians in general and cabinet members in particular. They insist it is no big deal to file tax returns because their tax is deducted at source when they are paid their salaries. This is also the stock argument of agriculturists whose incomes from tilling the land are not subject to tax. The income tax department is also not pushed to pursue them as tax dodgers because their tax liabilities have seemingly been fulfilled. But the law is clear on the subject: income and wealth returns must be filed by those who earn Rs 42000 or more per month, failing which they are liable to a penalty of up to 25%. According to the Federal Bureau of Revenue, over 3 million people have National Tax Numbers but less than 1 million pay any tax at all. This is a shocking statistic in a country with a population of nearly 200 million. Similarly, there are nearly 80,000 listed companies with the Securities and Exchange Commission but less than 25% pay any tax. No wonder, Pakistan's tax-GDP ratio is less than 10%, and governments have to print money or borrow to stay afloat. The fiscal deficit is running at over 8% and national debt has more than doubled in the last four years. The size of the underground economy is estimated to be equal to the formal economy. Why can't we collect more taxes? Obviously, the tax collection machinery is both corrupt and inefficient. The customs and tax departments, along with the police, are hot favourites of Pakistanis sitting the superior services exams. Pakistanis are also loath to pay taxes to corrupt governments, preferring instead to fork out to private charities that run hospitals, schools, mosques and madrasahs. The cost of transforming black money into white is also low: for about 1% transaction cost, one can send Pak rupees abroad and bring back US dollars, no questions asked about the source of the inland remittance. And, since the abolition of wealth tax a couple of decades ago, there is no pressure to submit or to scrutinize wealth tax returns for consistency with income tax returns. "The problem starts at the top. Those who make revenue policies, run the government and collect taxes, have not been able to set good examples for others," the report, called Representation without Taxation, said. Various attempts have been made in the past to make people cough up taxes. Tax rates have been lowered and tax amnesty schemes floated from time to time. But lack of reliable data and political will have hampered progress. Documentation of the economy is fiercely resisted by powerful trade and business lobbies affiliated with political parties. But time is catching up with tax dodgers. The country's data base is being fine tuned, thanks to computerization of identity cards, tax numbers, bank accounts and electoral rolls, all of which can be synced. Land records are next in line. It is a good sign too that donors are tying foreign aid and grants to tax reforms, lower fiscal deficits and tight money policies. Media pressure is also building up to highlight corrupt practises and tar tax evaders. House cleaning must start from the top, with public representatives who make laws and are expected to uphold them. Next, the FBR must submit itself to accountability, so that those who are tasked with catching the thieves are not thieves themselves. A dose of privatization might also be injected into the tax collection machinery to make it competitive. It is a good idea to make the head of the FBR a constitutional post with fixed tenure so that political meddling and influence is minimized. Finally, a simple and uniform federal income tax structure must be built in order to cut down bureaucracy and overlapping, starting with a small tax on agricultural incomes and wealth so that everyone is brought into the tax net.