Tax season

Tax season, now just a couple of months away, is one of the most contradictory and unfair times of the year in a country notorious for being both. Those who actually have more than enough to pay for the running of the Pakistani state are, for the most part, left alone while the salaried classes, with little left to give after forking out for bills, tariffs and the regressive General Sales Tax (GST), are squeezed even more. What do they get for being the only ones to step up for this country? Next to nothing. Those who comply are forced to go through all the tedium of listing out their income, expenditure and assets and forced to give over a chunk of what little they have for naught in return. Those large retailers and property owners who go into hibernation during the season are rewarded with subsidies. It is an absurd system that punishes those who comply and is now being widely recognised as such. The World Bank seems to agree. Earlier this month, it called the country’s tax system highly unfair and absurd, with the Bank’s lead country economist pointing out how just five million people were filing tax returns in a country of around 240 million. With such few people filing returns, he argued that the system will remain unstable, urging for digitalisation and broadening the tax base to include all income streams. The lead country economist also called the tax system inequitable, pointing to the heavy reliance on the GST, which disproportionately impacts the salaried classes.

While the World Bank has praised the passage of the Agriculture Income Tax (AIT) by the provinces, it believes property must now also be included in the tax net, while ensuring it is accurately recorded and taxed, and that the tariff structure must be rationalised as it is causing long-term losses to the country’s revenue streams. Digitising, expanding and rationalising the country’s tax system are all worthy suggestions, but the distribution of taxes and the manner of their collection are not the only problems the country’s fiscal framework faces. The other side of the coin – how taxes are spent – also leaves much to be desired. Experts argue that almost 40 per cent of development spending is siphoned off in the form of commissions, which is likely a big part of the reason why those who pay their taxes rarely ever see any benefits from doing so. All in all, the country’s entire fiscal system seems to be in need of an urgent rebuild and there is no better time to work towards this goal than the upcoming budget, now just a little over a month away.

But the need for fiscal reform has been obvious to those who have studied the Pakistani economy for decades now. Why has there been so little progress in this direction and what can be done to ensure that the next budget does not result in the same? The former problem may well be down to the country’s almost innate resistance to progressive change. For example, when it comes to the issue of tax digitisation, experts claim Pakistan has the tools needed to do so but political resistance, outdated legal frameworks, institutional disconnects and lack of administrative motivation hold the country back. These hurdles are not unique to tax digitisation. It has become part of the country’s DNA to resist and/or fail to implement necessary changes until there is simply no other choice. This is basically what happened with agriculture taxes, which should have been on the books years ago. It also does not help that there are many who benefit far too much from keeping things the way they are. If the next budget is to take the country towards a fair, transparent and rational tax framework, the government will have to overcome this chronic resistance to change.