Taxing times

The major question the government needs to ask is why people evade taxes. Are they naturally stingy or crooks? If Pakistanis rank in the top five charity givers in the world, then the answer is that it is not the tax deficit that needs to be worked upon but the trust deficit

“The bill will promote tax evasion and further decrease the tax to GDP ratio.” This is not a statement by the leader of the opposition or parties against the proposed tax amnesty scheme but by Ishaq Dar himself in 2012. Is it selective amnesia syndrome where politicians conveniently forget their own past claims and promises? Is it a scheme that is radically different from the one he opposed last time? Is it that the tax culture has changed sufficiently enough to induce people to fall for this net? Or is it just desperation to accommodate an insistent IMF that tax targets are being missed out too consistently? The answer may be a bit of all this but the question remains that if tax collection has been a system ailing this economy for decades, will this tested tried and failed scheme make much of a difference? Even if we are the optimist economist, the best answer may be “Well, not really.”

That Pakistan’s economy needs additional revenue collection is something we all know. That less than one percent people pay taxes is a constant erosion in the national kitty. That we need to broaden our tax net is something we all agree upon. The debate is only on strategy. The debate stems from the fact that Statutory Regulatory Order (SRO) addiction, and indirect and regressive taxes have created a tax culture that has sowed the seeds of suspicion and distrust leading to tax evasion and tax default on a massive scale, so massive that it has become a norm. When a behaviour becomes a norm or a value it creates an acceptance that by majority conduct becomes almost a law. That is why we see this almost aghast, disturbed and resentful attitude every time a segment of the economy is asked to come under the tax net. The reaction is how unjust, how ridiculous and what a joke! And then they go on strikes against this unethical act of being asked to pay taxes. Thus, introducing schemes and giving packages is literally going to have marginal impact if at all.

In recent history, four such schemes have been introduced and though the government’s claim is that this one is different, its context is the same. Yes it has a different brand name and a specific target segment yet its content and ingredients are almost the same. This one is known as the Voluntary Tax Compliance Scheme (VTCS) and will allow non-convicted traders the benefit of whitening their money earned in the last decade by paying one percent tax on their declared wealth, which on five million rupees declaration may amount to Rs 50,000. This they say will bring two million new taxpayers under the tax net. If, in three years, according to the Federal Board of Revenue’s (FBR’s) data, only 33,000 have been brought under the tax net, it will be miraculous if this number is achieved. Also, history shows that the last four such schemes could not even attract five percent of targeted evaders to become payers.

Expecting a scheme to change tax fortunes is like fertilising a few trees and expecting the forest to change its total habitat. Just as a forest change requires an environmental ecosystem balancing, similarly, tax reform requires a whole tax cultural reformation. The major question the government needs to ask is why people evade taxes. Are they naturally stingy or crooks? Well, if Pakistanis rank in the top five charity givers in the world, then the answer is that it is not the tax deficit that needs to be worked upon but the trust deficit. That is the biggest barrier in inducing people to come forward and pay taxes. The next question is: why do people not trust the government with their money? The answer is that instead of seeing public benefits in the form of service delivery and betterment in their lives, they have seen their money being abused for the sake of living in princely style by the rulers while for those who pay taxes the provision of basic amenities like water, gas and electricity is almost impossible. So, the question is not why do they not pay taxes, the question is why should they pay taxes.

The justification that the government is giving is that this is a successful scheme in 32 countries, including the US and Italy. This justification is ridiculous as the tax systems in these countries are so equitable and stringent that from top to bottom and all across industries tax evasion is dealt with on equal terms. If 70 percent of parliamentarians are hiding their assets and hardly paying any wealth or income tax how do you expect people to be ‘inspired’ by these examples to pay tax. Perhaps the biggest flaw will be the disincentive to all those who pay taxes. Professionals who have to pay 30 percent as tax are already enraged at this token one percent to be paid by traders. Thus, this inequity will create a huge incentive for even more trust deficit and will make it almost impossible for total tax revenues to increase by a substantial amount.

The negative impact of this scheme to reverse taxpayers is already being felt. Despite three extensions in filing tax the number of filers has declined by eight percent as they now want to pay much less tax by availing the scheme. Another evidence of the response is that the government had sent around 233,000 notices to which only 33,000 have responded. Schemes and packages are warranted failure when institutions and sectors have undergone zero reforms. This scheme is confirmation of the failure of the FBR whose main purpose is revenue collection. The FBR has become an institution to give tax exemptions to the powerful. According to the ex-FBR head, Ali Arshad Hakeem, almost 84 percent of tariffs and duties have been slashed to benefit influentials by issuing government SROs amounting to almost Rs 600 billion. The government has not been able to do any tax reforms, policy reforms, FBR reforms etc. In the absence of these reforms, these schemes are just old wine in a new bottle. The sad part is that as these tax deficits will multiply and the IMF will insist on their money the tax axe will fall on the ‘un-influentials’ i.e. the poor, the professionals and the honest.