Trust deficit

LAHORE: Research has shown that lack of trust is a major reason that compels people to stay out of the tax net in Pakistan.

An overwhelming majority of Pakistanis love their country as over 88 percent of people surveyed were prepared to lay down their lives for the country. However, their tax compliance remains very poor.

The tax to GDP ratio in Pakistan has varied from 9-11 percent in the past 15 years and was marginally below 10 percent last year. In comparison, the tax to GDP ratio is 19 percent in India, 17 percent in Sri Lanka, 19 percent in Thailand, 15 percent in Philippines, 32.5 percent in Turkey and 26.8 percent in South Korea. In OECD countries the average tax to GDP ratio is 35 percent.

The results of this survey show that the tax to GDP ratio in those countries is healthy where people trust their government, bureaucracy and judiciary. The confidence level against most parameters varies from 40-85 percent.

In Pakistan only 15 percent of people have confidence in police, 27.5 percent trust courts, 27 percent have confidence in government, 18.9 percent trust bureaucracy, 17.6 percent have confidence in the parliament and only 13 percent trust the political parties.

The survey was conducted in 2017 the results next survey are due this year. We can see that the majority of the electorate distrust the government, its institutions and political parties.

Higher tax to GDP ratio enables the governments to do public good besides running day to day affairs of the states. Various taxation experts have pointed out deficiencies in the tax collection system.

Many have recommended setting up an independent revenue body comprising highly qualified experts and reputable professional auditors. The present Federal Board of Revenue (FBR) and its human resource lack the capability to reform into a buoyant revenue collecting authority. We must think beyond FBR to build a tax culture and compliance in the country.

With little effort, a lot of improvement in revenues is possible in Pakistan. They must be convinced that paying taxes is necessary for the survival of Pakistan.

Of all the countries surveyed, Pakistanis were on top on the question of laying their life for the country. Those that are prepared to die for Pakistan can be convinced to pay their taxes provided their confidence in the institutions is restored through better governance and service delivery. Reforming the FBR would not fully resolve the issue. Reforms are not only needed in bureaucracy but in politics and judiciary as well to ensure better governance and higher tax collection.

We must understand that higher tax collection every year does not match with the increase in the gross domestic product of the country. Our planners and global institutions admit that informality in Pakistan is very high –almost 50 percent of the total economy.

There are tax evaders in the formal sector as well that conceal their actual incomes. There are smugglers and traders all operating under the nose of over 25,000 strong FBR.

The FBR hardly collects 4 percent of the tax revenue through its efforts. The rest comes through indirect taxation.

Pakistan is perhaps a rare country where 80 percent of the income tax is collected indirectly as withholding tax.