The concept of taxation has deep historical roots, dating back to the governance of Greek city-states, where elected governments were entrusted with managing the welfare of citizens. The Greeks utilized taxes, and the Romans expanded on their use. Successive empires and governments incorporated them as a crucial component of their economies. Islamic finance introduced a distinct approach with the concepts such as ‘zakat’, ‘fai’, ‘jizya’, ‘kharaj’, ‘ushur’, and income from public properties.
Throughout history, taxes have been a source of political controversies: American colonies’ resistance to British taxation and the French Revolution’s opposition to an inequitable tax burden. In contemporary economies, taxes serve as integral instruments for progress, shaping financial health and facilitating a justifiable distribution of opportunities for wealth creation and management. Taxes fund public goods and services, infrastructure, education, healthcare, and defence, and enable the governments to manage economic activity through adjustments in the taxation of specific products or investments.
Taxes contribute to social stability through welfare programmes and encourage investment via incentives. They also influence economic behaviour and complement monetary policy, attracting foreign investment through transparency. Efficient taxation is vital to service government debt and reduce the debt levels for economic stability, encouraging long-term planning when carefully balanced and implemented.
Despite the significance of taxation, Pakistan faces substantial challenges in its tax system. Widespread tax evasion, exacerbated by weak documentation and enforcement, is prevalent. High tax rates, among the world’s highest, hinder compliance, deter foreign investment, and impede economic growth. A complex tax system creates opportunities for corruption and bribery, placing a burden on taxpayers.
Inefficient tax administration, lacking resources and accountability, exacerbates the problem. The limited tax base, heavily reliant on indirect taxes, constrains government revenue and impedes economic growth. Comprehensive reforms in tax policies, administration, and enforcement mechanisms are imperative to foster economic growth and poverty reduction in Pakistan.
Progressive taxation, where higher-income individuals contribute a larger percentage of their income, is proposed to reduce income inequality. However, challenges in achieving true progressivity exist. The global market, marked by inflation and competitiveness, poses risks to stability.
Progressive income taxation, if implemented effectively, can result in a more equitable income distribution, higher revenues, less financial and economic volatility, and faster growth. A fair tax system should redistribute wealth, promote social cohesion, and contribute to a more stable and sustainable economy.
In the realm of taxation, the call for equality resonates, urging a treatment that is uniform for individuals facing similar circumstances. A significant concern arises from the disproportionate burden placed on salaried individuals, who bear a substantial share of the tax load. Advocating fairness proposes a broader distribution of this burden, encompassing various income groups, including landowners and agriculture producers. The imposition of indirect taxes presents a challenge to the principle of equitable taxation. This is evident from the fact that individuals with differing economic conditions are subjected to the same tax rates on goods, fuel and related necessities. The current system prompts a reevaluation of the taxation structure, emphasizing fairness in relation to the benefits derived by citizens from the taxes collected. The resentment among taxpayers escalates when taxes primarily serve debt-servicing purposes.
Addressing economic disparities should be the crux of any exemption concept, tailoring it to an individual’s financial standing rather than the sector in which they operate. This approach aims at avoiding the state’s undue fixation on specific segments, fostering a more balanced tax system. However, the introduction of a distinct category labelled ‘non-filers’ by the state has raised concerns. This classification inadvertently provides tax evaders with an avenue to enjoy a privileged status, allowing them to pay minimal taxes as needed while circumventing audits and compliance. This not only demoralizes the existing tax filers but also erodes the crucial elements of fairness and equity within the taxation framework.
The repeated pledges of the Pakistan government to expand the tax net have been met with scepticism due to a lack of concrete measures. The gap between promises and actions has resulted in regressive taxation, burdening the salaried class and widening the wealth gap. Reliance on indirect taxes like the General Sales Tax (GST) for revenue generation further compounds the challenges.
Considering Pakistan’s agricultural potential, the implementation of tax is proposed to motivate farmers to formalize their operations and enhance transparency and efficiency in the sector. The generated revenue could be reinvested in agriculture to support infrastructure, research and development, irrigation systems, and technology adoption for improved productivity and competitiveness.
Crafting taxation policies to incentivize modern agricultural practices can further enhance efficiency, yield, and overall output. Additionally, introducing an agricultural tax can help address income inequality by shifting the collected revenue towards social welfare programmes for marginalized communities.
The World Bank recommends a roadmap for tax reforms in Pakistan, emphasizing improving federal-provincial coordination, harmonizing tax bases, and expediting digitalization efforts. Proposals include eliminating corporate and personal income tax exemptions, implementing uniform excise duties on harmful goods with automatic inflation adjustments, reviewing Covid-19 exemptions, and reevaluating concessionary rates on fertilizers to reduce fiscal costs.
A well-balanced tax system, combining elements of a free and regulated market, is essential for a mixed economy. Striking the right balance aims at harnessing the benefits of competition and innovation from the free market while addressing the concerns related to inequality and social welfare through targeted regulations.
Pakistan is at a critical juncture where strategic tax reforms can pave the way for economic growth, poverty reduction, and improved social welfare. Successful implementation, transparency, and a commitment to creating an equitable tax system are key to promoting long-term stability and prosperity.
The writer is president of the Pakistan Tax Bar Association. He can be reached at akmpakgmail.com