Pakistan: Taxes and politicians

The tax returns filed by those intending to contest the 2013 election have once again highlighted the fact that the ruling elite, engaged in conspicuous consumption, nonetheless pays income taxes that are simply not proportionate to their wealth. Much has been said in the media about the appallingly low taxes paid by several prominent senior politicians notably former prime ministers Gilani and Ashraf as well as the heads of various parties including PML (N), the Pakistan Tehrik-i-Insaaf, the MQM, the Jamiat-e-Ulema-e-Islam (F) and Awami National Party. The general perception supported by recent research does indicate that the majority of Pakistani politicians in both the provincial and national assemblies, hailing mainly from the rich farm sector, exempt from the payment of income tax to the Federal Board of Revenue (FBR) as the constitution stipulates that farm income tax is a provincial subject, pay a very small percentage to the provincial kitty. The reason is the option allowed by provincial governments to the farm sector: either pay provincial farm income tax which has a tax code similar to the federal tax code or else pay taxes on farm income computed on the basis of acreage under cultivation. The rich farmers in all provinces, almost exclusively, opt to pay tax on the basis of acreage under cultivation which is a much smaller amount relative to the tax on income payable to the provincial kitty. This is supported by the fact that total tax collections under this head for all provinces have been very low. The provincial governments did achieve enhanced financial autonomy after the agreement on the 7th National Finance Commission award which envisaged 56 percent to be assigned to the provinces in 2010-11 and fifty-seven and a half percent from 2011-12 onwards. In addition, the 18th Constitutional Amendment devolved several ministries notably education and health to the provinces which, it was argued, could be funded from the provincial exchequer with the rise in their financial resources from the divisible pool. Be that as it may, the onus of increasing their own revenues to enable them to implement projects in the devolved social sectors with a view to ensuring access to all in the province now falls on provincial governments, which has led many to argue that provinces must also seek to further supplement their income. That unfortunately has not happened. One way to increase provincial revenue would be for the provincial governments to withdraw the two options available to rich farmers and compel them to pay income tax at the same rate as that levied by the FBR on incomes of the salaried class. Poor tax collections in Pakistan with an appallingly low tax to Gross Domestic Product ratio has received much attention not only from the local media but several major donor governments have expressed anger against the continued failure of the government to compel the 'elite' to pay taxes. Hillary Clinton as the then Secretary of State consistently and legitimately maintained that the government of Pakistan must not rely on the US taxpayers to provide support for the economy when Pakistani elite were not paying taxes. This view was also expressed by the German Foreign Minister - Germany is one of the top four countries providing assistance to Pakistan - with the most recent such argument presented by a British select committee of parliament. Given the global recession and the need for Western governments to implement politically challenging austerity measures on their own people not only has overall development assistance declined world-wide but the West has also begun to link aid to performance. Pakistan would therefore have to implement reforms in the tax and power sectors before we can hope to access external assistance. Levy of a farm income tax by provincial governments at the same rate as dictated by the FBR would be a positive step in this direction.