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The Failing tax System

The Failing tax System

THE deadline for the annual filing of income tax returns has now been extended till mid-December and unsurprisingly so.

The repeatedly changing deadlines make a mockery of the taxman’s writ — so frequently compromised in recent years with extension after extension of annual tax deadlines.

This pattern has come at the cost of severely weakening a cornerstone of our economic policies.

How should the state react to defiance with existing taxpayers simply not meeting an all-too-important filing deadline? What drives this increasingly lax behaviour on the part of our far too few taxpayers? Above all, what will it take to change attitudes?

The challenge is to reform the tax machinery.

These are pertinent questions central to any plan for fixing one of the world’s worst-performing tax collection systems. That Pakistan’s tax-to-GDP ratio remains one of the lowest among its South Asian peers let alone the rest of the world is hardly a feat. Yet, beyond the repeated failure to prompt more Pakistanis to pay their dues, comes the matter of how to reform the collection machinery.

The taxman remains unpopular across the world, irrespective of where a country stands on the league of tax-compliant nations. In Pakistan, the unpopularity is often equated with challenges related to corruption among present and prospective taxpayers teaming up with officials from the widely dreaded Federal Board of Revenue (FBR). Though the title departed from the old Central Board of Revenue to make it more representative of a well-established federal body, the outfit today is a far cry from the performance of its predecessor.

In brief, the workings of the FBR widely appear to be a departure from the idea of enforcing a clear writ of the state. Compromise after compromise, such as restricting the relatively few honest officials to simply perform their job, stands at the heart of the challenge.

Unless the Pakistani state begins to enforce its writ from extending deadlines to targeting evaders wherever possible, the FBR’s image will continue to make it a laughing stock in the eyes of ordinary Pakistanis. Just up the road from Constitution Avenue where some of our top institutions including the FBR are located, defiance of the state is easily visible. At a range of outlets along the upper class commercial district known as the Blue Area, shopkeepers conveniently sell their products without charging the appropriate indirect tax.

The concept of a kachi receipt as opposed to an official receipt begins right in the taxman’s neighbourhood where various outlets, including some said to be owned by the high and mighty, openly flout the law. Such ‘safe’ havens have flourished across Pakistan in major cities.

A tighter enforcement of the law and a long overdue process of reforming the FBR will not succeed on their own unless pushed in tandem with two other vital initiatives.

First, Pakistan’s existing taxpayers have a valid point when they ask, ‘What do we get in return for joining the tax loop?’ That compelling question will only baffle key policymakers and for good reason. During Nawaz Sharif’s first tenure as prime minister, the government proudly unveiled a package of reforms. The so-called ‘business friendly’ face of that government in the early 1990s promised recognition of the biggest taxpayers with free access to the otherwise restricted departure and arrival areas of Pakistan’s airports. But that facility has hardly made a difference to inspiring scores of others to join the taxpayers’ community.

In reality, beyond facilitating the top taxpayers, Pakistan has a large community of middle-class professionals, many of whom face acute challenges in their daily lives. Faced with requirements ranging from access to hospital care to preferential treatment in reaching out to the police in times of need, taxpayers and dodgers are treated alike. A reform programme must be built upon facilitation in daily lives that highlight tangible returns for those in the loop.

Second, all exemptions to those with incomes must end to make the system appear judicious. One of the widest quoted examples is the continuing immunity to farm owners from paying their tax at rates which are similar to urban dwellers on similar incomes. In the past, tax concessions to institutions such as those established for welfare of the armed forces, have been cited by critics as yet another example of favourable treatment given to some at the cost of others. A more equitable system will be one where any financial support to any individual or community must be extended directly by the state with well-publicised and tangible reasons, rather than tax concessions.

Otherwise, deadlines will repeatedly falter around Pakistan’s widely dilapidated tax collection system with no prospect for reforms in sight.

Dawn

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