Low Tax Generation And Pakistan’s Economy
Haider Waseem Anwar
Eamaan Azhar Arain
Pakistan is currently facing critical tax revenue generation issues. The low tax to GDP ratio has been a major problem that affects the overall economy of Pakistan. The current tax to GDP ratio is under 10 % according to the latest FBR report (Where developing countries have a tax to GDP ratio of around 20 %, and developed countries having around 35- 40 %). The low value of tax generation prevents economic growth and development by affecting the real GDP, external and internal debt and even other forms of revenue generation. The real question still remains what causes the tax generation volume to have such a low value, and what could be, or is being done to solve this problem. Reasons for the low tax to GDP ratio
One of the reasons of low tax revenue is the low tax base. Observing the history of Pakistani economy we can see how the tax generation is low not due to the slow growth in tax base, but due to the decrease in the existing tax bases. Over the time we have seen various examples of such policies that reduce the tax base. Some examples can be observed during the period of 2000- 2008; the high influx of cash and delay in debt repayment motivated the government to cut back on many forms of tax. Corporate financial tax on people was reduced by 15 % and on banks by 23 %. The income tax on salary of government employees was reduced by 15 % and on self-employed people by 10 %. There was also exemption on sales tax in agriculture and industrial sector, while the import tariffs were also reduced. The abolishment of wealth tax also helped aggravate the problem of low tax base, as much of the rich people with high percentage of contribution towards tax revenue had no obligation to give tax on their accumulated wealth. The capital gain tax on shares was exempted which further reduced the revenue from tax (Pasha). Through misusage of political power, such abolishment of taxes on, a few industries and business operations, in the name to promote certain field has created many problems for Pakistan’s economy. The low tax base was not increased with the same pace it was increased, and this has created an overall low tax base in Pakistan with the passage of time. Another issue is the flawed system and half-heartedness of implementation of tax law. The low amount of tax payers of around 2 Million is registered as tax payer (Pasha). The highly unregistered amount of tax payers can be seen as a flaw in the administration of tax collection. Only around 18,000 corporate entities have been filed for being taxed. The tax gap (The difference between the amount decided to be collected as tax, and the amount that actually is collected) is also around 79 %; according to a report of 2009 by World Bank, the evaded tax was around 786 Billion compared to a 1.1 collection of tax revenue (Sindhu). This means that from the low amounted of people counted to be recorded for taxation; the number is further reduced by the lack of efficiency in administration. Corruption also plays an important role to make the tragic situation of low tax revenue generation, egregious. The TIP (Transparency International Pakistan) indicated a embezzlement of around 300 Billion Rupees in the Federal Government department in 2010. The Agp( Auditor National Pakistan) also concluded a corruption case of around 116 Billion Rs. in the account of FBR. Corruption being like plague, has made the job of honestly collecting the tax generation revenue in Pakistan more difficult. Furthermore, an investigation by the FBR has revealed that some of the leading celebrities of the entertainment industry have been paying very little or no taxes at all as compared to their earnings. Actors such as Faisal Qureshi, Humayun Saeed, Nauman Ejaz, singer Hadiqa Kiyani and writer Umera Ahmed are reported for hiding their...