(MENAFN- Khaleej Times) Hardly 0.7 million people pay income tax in Pakistan, a country of an estimated 180 million population. Among this meager number of income tax payers, are 500,000 employees of state-owned departments and corporations. Their taxes are deducted at source, which does not mean necessarily their desire to pay tax.
Currently the country's tax collecting machinery largely roam around 200,000 tax payers. Each year the failure of Federal Board of Revenue (FBR) to meet tax target leaves little option with the government but to turn to international aid and loans and habitually impose excessive indirect taxes.
The government of the day has to resort to heavy indirect taxation given the bitter fact that people are not ready to pay direct taxes on the income they generate. Therefore, the government levies indirect taxes on petroleum products and essential utility bills, etc. Resultantly the indirect taxation has turned out to be the major source of inflation and price hike in Pakistan.
The country's tax-to-GDP ratio (0.9 per cent) is lowest in the world. How to expand tax base in Pakistan is most challenging task for the government of newly elected Prime Minister Nawaz Sharif who is struggling hard to bring the economy back on track by expanding the tax base - something easier said than done.
Pakistan can not get rid of vicious cycle of interest driven loans from the international donor agencies and domestic banks until people start paying tax. That is why, in desperation, country's Finance Minister Ishaq Dar has managed to secure legislation from the parliament to allow the FBR to have direct access to as many as 33.3 million bank account holders who until this Wednesday were shielded through legal cover of confidentiality.
Now tax officials would carry out detailed scrutiny of selected bank account holders, their close family members to ascertain their scale of tax evasion and bring them in the tax net.
In theory, only top officials of FBR would have online access to banking data to secure details of individuals having suspected large deposits and transactions. However, given the gigantic nature of investigation involved in detecting suspected transactions, the authorities will have to assign the investigation to middle ranking officials in FBR, which is notoriously corrupt and is at the heart of controversy for eating up an estimated Rs500 billion ($5 billion) every year.
The fear of drastic cut in large deposits looms large on banking sector.
"The failure of all previous governments to establish a modern tax system that relies on all round documentation and a broad tax base has led to tax evasion and falling tax-to-GDP ratio," says Dr Muhammad Yaqub, former governor, State Bank of Pakistan. And so is the opinion of most of other top bankers.
Therefore, many top banks like Yaqub say that the aggressive plan to detect tax evasion is likely to discourage the use of banking facilities and encourage cash transitions. In fact, scared accountholders have now started relying more on cash transactions and are preferring to retain small deposits fearing that the tax officials would harass them.
The government already deducts withholding tax on cash withdrawals and profits paid on the savings from the bank clients. Therefore, much of banking transactions are already in the knowledge of Federal Board of Revenue.
The government decision is likely to further encourage dollarisation of the economy.
The "Hundi system" - the informal networks for transfer of money, which works as an alternative to banking channels have become now more active to transfer money from the Middle East to Pakistan and vice versa with a reasonable profit since the government announced to have online access to the data of bank accountholders evading taxes.
By an average five per cent additional money is paid to get rupee converted into foreign currency such as dollar from the designations in the Middle East. Therefore, surge in remittances is not entirely free from corrupt money changing hands from one destination to another through conversion of rupees into dollars and from dollar to again into rupees.
This help people not only to whiten the black money but to also evade taxes since any foreign currency channeled through banks from overseas destinations is a tax free money. According to the Asian Development Bank every month $500 million flows out of Pakistan.
The government needs to reverse the law and rather develop an informal mechanism to keep check on suspicious large transactions as the government has every right to keep an eye on the people having a lavish life style and contributing little to help the government to recover the economy in ICU. However, methodology with which the government is operating, is causing ripples among accountholders - something the government needs to address appropriately to contain the flight of capital.
Root cause of tax evasion
The very root cause of people not ready to pay taxes is a very strong perception that tax collecting machinery is thoroughly corrupt and so have been the politicians and military dictators. At least 67 per cent parliamentarians were evading taxes while they wanted every one else to pay taxes through the legislation they made during the era of previous government.
The perception about the Nawaz Sharif government is better than that of the previous government. Nonetheless, common people are not willing to fully trust the new ruling party as well until administration's actions speak louder than words to eliminate corruption from within the ranks and files of government by introducing greater transparency on how and where their tax paid money large collected through heavy indirect taxation, is spent.
Potential of tax base
Pakistan's informal economy is believed to be in the neighbourhood of Rs9.3 trillion against country's total size of formal economy running around in Rs3.5 trillion. The country's parallel economy is ever growing and is estimated to have expanded by 91.4 per cent of gross domestic product (GDP).
Pakistani governments one after the other, are among the highest recipients of international aid while Pakistanis in their individual capacity, are the highest donation giving nation in the world. People pay generously to their fellow beings but even don't pay miserly to the government. Now bigger challenge for the government is how to win over the trust of the majority of the people. And for that to happen, the government needs to be genuinely trustworthy. It would not happen over night but over the years depending how much transparency the government in Islamabad demonstrates in conducting its official business.
The writer is a Islamabad based print and TV journalist. Views expressed by him are his own and do not reflect the newspaper's policy.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.