The Promise :
In its 2013 election manifesto, Pakistan Muslim League-Nawaz had promised to increase the Tax-to-GDP ratio to 15 percent by the end of its tenure in 2018.
According to the Economic Survey of Pakistan 2015/16, the tax-to-GDP ratio in Pakistan varied between 9.1 and 11.0 percent. The survey further argues that the government had failed to develop a tax system that protects the interest of the common taxpayers and generate sufficient revenue. According to the report, Pakistan’s tax structure is heavily dependent on indirect taxes that form 60 percent of the total tax collection. In Pakistan, income tax return filers are almost 0.5 percent as compared to 5 percent in India. The tax compliance fell to 21.32 percent in 2016 from as high as 65 percent in 2010-11.
The official of the International Monetary Fund, when winding down its loan programme in Pakistan in the later part of last year, had said, “Sustaining progress with tax administration reforms, with a view to widening the tax base, is needed to increase tax revenues and create needed fiscal space for priority infrastructure and to reinforce social expenditures.” The Fund reiterated that for sustainable economic development, Pakistan needed to reform its tax system.
The Government of Pakistan has been using tax amnesty schemes to incentivise the tax evaders to pay taxes. Tax amnesty is defined as an opportunity given to tax evaders to pay a certain amount related to previous tax liabilities without facing criminal prosecution or penalties. Pakistan’s weak tax collection system has tried over the period of seven decades, at least eight times, to bring tax evaders to the tax paying crowd, albeit temporarily. The PML-N government had in the last four years floated four tax amnesty schemes. Following is the history of tax amnesty schemes
|NO.||Year||Tax declared (Rupees)|
|Source: Federal Board of Revenue|
The record on the amnesty schemes offered to stock exchange investors in 2012, and to industrialists of specified sectors in 2013 does not exist with the FBR. The FBR personnel (who does not want to be named) contacted for this detail by Truth Tracker confirmed the mysterious disappearance of the record. “The record may have been destroyed either because the government wants to protect the tax evaders’ identity or to simply camouflage the government’s own corrupt deeds,” said the officer.
The tax amnesty scheme announced in February 2016 was rolled back due to the indifference showed by the trader community. This scheme was aimed at documenting the informal retailer. Hardly 9020 traders complied with the scheme bringing in a meagre contribution of RS 850 million.
Advisor to Prime Minister on Revenue, Haroon Akhtar, said that the tax-to-GDP ratio is actually at 12.4 percent. He said we have arrived at this calculation by realistically assessing the contribution of different sources of taxed revenue in the system.
While talking about amnesty schemes he said, “We had been very generous in incorporating the recommendations given by the non-filers.” Although he did lament the fact that tax evaders wanted complete immunity. On the question as to what the government had done to increase the tax base, Akhtar gave the run of the mill answer; notices had been served to people running big businesses, using credit cards, and whose children are studying abroad.
He agreed that tax evasion is extremely high in Pakistan. “Enforcement,” he said, “is the only way to tackle tax evasion.”
He said that currently, the government is collecting tax on 70 Percent of GDP.
“The agricultural sector, that comprises approximately 22 percent of the GDP is tax exempted. This is a constitutional provision granted to the agriculture sector.” He further explained: “This had been another reason that hampers the growth of the Tax-to-GDP ratio to a decent level.”
Elaborating on the reason for the government’s failure to take the Tax-to-GDP ratio to 15 percent, he said: “For the past six months, the government has maintained the prices of petroleum products. Had we been increasing the prices, we could have managed to add another two percent to the Tax-to-GDP ratio.”
Asad Omer, a member of National Assembly and the leader of Pakistan Tahreek-e-Insaaf, told Truth Tracker that the government’s reliance on indirect taxes is giving rise to disparity in the country. “The burden is on the lower and middle-class salaried people. They pay taxes at every step of their lives, while their purchasing power hardly improves proportionally.” He said that the amnesty scheme was the worst mechanism to net nontaxpayers, “It simply,” he argued, “encouraged tax evaders in the system.”
Omer was of the view that the government’s reliance on tax amnesty reflects its non-seriousness to reform the tax machinery, which has become too cumbersome due to administrative issues. “People do not want to enter the tax net due to various reasons, the foremost being the fear of corrupt tax collecting officers on their backs.”
Regarding these officers, he says, “Not only do these officers teach their clients different ways to avoid taxes but they also blackmail them to get a better price in order to avoid making a real effort.”
Abdul Basit, President Lahore Chamber of Commerce, said that it is shameful that out 3.8 million NTN holders, only 800,000 pay taxes. He said, “Around 4.8 million people use commercial meters, which collects sufficient data to bring non-filers into the tax net.” He said that contact between the tax collector and the taxpayers should be abolished as the first step towards tax reforms. “In the existing system, it is the tax collector who is the most feared person and he feeds on the rampant corruption,” said Basit.
Critics dub the practice of legalising the untaxed money through amnesty schemes as government’s lethargy and complacency. Lethargy, because rather than reforming the tax system, the government has been reliant on such short-lived schemes, and complacency, because these schemes translate into the electoral support that the PML-N government derives from the business community.
Dr Shahid Hassan Siddiqui, Chairman Research Institute of Islamic Banking and Finance, Karachi, told Truth Tracker that the PML-N had made three promises in its 2013 manifestos. First, that all income will be taxed without exception. Second, the economy will be documented. Third, the ‘whitening’ of black money will be discouraged. Siddiqui believes that the government has done the exact opposite of all three. “The government has increased the ratio of withholding tax, which means more indirect taxes without bringing in more people into the tax net,” said Siddiqui. He referred to the amnesty schemes that had, in fact, according to Siddiqui, “Helped people ‘whiten’ their black money. Similarly, he pointed out that no mechanism had been developed to document the informal economy, other than introducing the withholding tax that had been rejected by the traders.
With 11.5 percent rise in Tax-to-GDP ratio, the PML-N government has failed to meet its promise of meeting the 15 percent target by 2018