Money Matters

The tax cycle conundrum

By Anwar Kashif Mumtaz
Mon, 06, 24

Per World Bank guidelines, maintaining a revenue-to-GDP ratio of at least 15 per cent is key for sustainable development and alleviating poverty.

The tax cycle conundrum

Per World Bank guidelines, maintaining a revenue-to-GDP ratio of at least 15 per cent is key for sustainable development and alleviating poverty.

Currently, we find ourselves at 10.3 per cent, a decline from the 13.2 per cent recorded in 1999, signaling inherent shortcomings in our fiscal strategy. Thus, a fundamental reassessment of our taxation framework is necessary to ensure both fiscal viability and business compliance.

It is heartening to observe the establishment of a high-level reform committee, chaired by the prime minister. However, it is paramount that this committee transcends mere paperwork and actively engages with the revenue dynamics and political landscape of the Federal Board of Revenue (FBR). With the committee poised to initiate discussions, it is time to provoke substantive discourse.

Fiscal policy holds immense significance in driving economic growth, diversification, productivity enhancement, poverty alleviation -- and the overall improvement of living standards and equality, particularly in developing nations. Taxation, public spending, and the management of public enterprises stand as the bedrock of fiscal policy, shaping the trajectory of state-building in such contexts.

In Pakistan, which faces economic challenges such as soaring inflation, depreciating currency, and mounting debt burdens, a robust taxation policy is imperative to steer the country out of these crises. Addressing the root causes demands structural reforms to revamp the economic landscape. It is incumbent upon the government to enact prudent fiscal measures aimed at bolstering revenue generation and operational efficiency, necessitating enhancements in tax collection mechanisms and expenditure oversight.

The International Monetary Fund (IMF) has pressed Pakistan for a restructuring of the FBR and the initiation of reform measures. Consequently, the government has committed to introducing reforms within the revenue board. It is paramount to recognize that any endeavour to reform the revenue system must heed the lessons from past failures. The 2011 World Bank report identifies key causes of failure, including policy ambiguities, inadequate skills, and disproportionate spending on infrastructure projects.

Pakistan's taxation policies use considerable influence over the national business landscape. A significant challenge confronting businesses is the high tax rates prevailing in the country. These rates rank among the highest in the region, impeding the competitiveness of the local enterprises. Hence, there exists a pressing need to rationalize the tax structure, facilitating the growth of local entrepreneurs and injecting the much-needed impetus into our economy.

With the government gearing up to revamp the FBR and with the economy teetering on the brink of collapse, it is necessary to initiate a shift in the mindset of our finance managers. The pervasive perception of compromise and collusion taints all tax proceedings in Pakistan, developing an environment ripe for corruption. This compromise and connivance not only ends in a failure to levy the correct taxes but also perpetuates a culture of tax evasion.

Unfortunately, the government of Pakistan has overlooked a fundamental tenet of taxation: the tax cycle. This cycle begins with tax collection and culminates in the expenditure of such taxes on the populace. Furthermore, the essence of the taxation system lies in direct taxation, where one's tax liability increases with their earnings.

It is crucial to comprehend that the government’s taxation and expenditures serve as primary instruments for conducting fiscal policy. Lowering taxes, for instance, can spur consumer spending and business investments, thereby stimulating economic activity. Conversely, raising taxes to boost revenue may potentially trigger a contraction or recession.

The government levies taxes to collect revenue from the affluent segments and allocate it towards the welfare of the less privileged. The tax cycle is completed when the collected taxes are reinvested in education, healthcare, transportation, and infrastructure for the betterment of society. However, in Pakistan, it remains incomplete. While citizens dutifully pay their taxes, the lack of tangible benefits undermines the process. This discrepancy stems from the mismatch between the tax demographic and the country's population.

It is time for the government to identify shortcomings and precisely outline the allocation of tax revenues towards specific projects. It should also understand that there is no margin for misplaced priorities; what is at stake is not public funds, but taxpayers’ money.

While the government depends on taxes to finance public services and infrastructure projects, the complexity of the tax system poses a considerable challenge to the private sector in Pakistan.

The writer is the president of the Pakistan Tax Bar Association. He can be reached at: