Taxes for nation-building

The Punjab government celebrated April 10 as the ‘Tax Day’. The idea was to highlight the importance of tax payment as an instrument of nation-building and social cohesion.

At the national level, we have a weak tax base. In the developed world, the tax-to-GDP ratio is 40 percent on average, whereas it ranges between nine percent and 17 percent in the developing countries. In the case of Pakistan, it is perhaps the lowest among countries of the same level of per capita income and development.

What are the factors for low tax compliance? People generally come up with various justifications to evade taxes. These include familiar refrains like, “My neighbour is not paying taxes, so why should I?”, “When I pay for the deployment of basic services, why should I pay taxes to the government?” and “Taxes are illegal in Islam”.

It is not easy to dismiss such arguments. We need to dig deep and understand the factors that are hampering tax collection. A sustained engagement between the citizens and the relevant state institutions is needed to address their reservations and reassure them of the fact that their taxes are used for the purposes that they are collected for.

Taxes are essentially a result and manifestation of the social contract between the state and the citizenry. If the state does not provide the services and goods in return for taxes it collects, the citizens will start evading taxes.

Likewise, if the citizens do not consider the payment of taxes as one of the fundamental obligations, how can a state deliver services when it does not have the resources to do so? As a result, a relationship of unwavering trust and confidence between the state and its inhabitants is a sine qua non for effective tax compliance.

Four factors can be put forward to explain the low tax collection. First, the state is weak and public service delivery is poor. Second, there exists no clear social contract for revenue generation between the state and its elite. Third, there is a rampant perception that the value for tax money will not be returned due to corruption and leakages. Fourth, there are perceptions of unfairness about the taxation system on account of inequalities and the lack of equity.

It is important to understand that the building of a society – which is based on the principles of social and economic justice – is directly proportional to the people’s willingness to pay taxes. As a part of the ambitious growth and development agenda, the government needs to invest in the socio-economic capital of the country. In doing so, the aim should be to attain a growth trajectory that brings a qualitative change in the lives of the people.

I firmly believe that if we are able to capitalise on our endowments – which we are blessed with – the objectives of balanced and inclusive growth will be achieved. To achieve these cherished goals, the highest standards of transparency, economy and efficiency in public spending need to be adhered to. Winning public trust and working for the public welfare remain crucial.

When nations, particularly in the developing world, cannot generate enough resources, they have to rely on foreign aid to meet their financial deficits – a phenomenon which, if persistently relied upon, leads them to fall into the debt trap. As a result, national decision-making becomes conditional on terms and conditions of the lenders.

When people start paying taxes, they actually become stakeholders in the system. The civic engagement that is created helps strengthen democracy and promotes the cause of accountability. Through voting and other channels, they keep an eye on how the government utilised the taxpayers’ money.  

It is commendable that the Punjab government, through its Revenue Authority, has strived to promote the voluntary tax compliance and has thereby established a healthy tradition of competition with other provinces. The measures announced by the government to facilitate taxpayers – including e-registration, e-filing and e-payment – will be essential in bridging the trust gap between them and the public functionaries and the taxpayers.

These measures will set the stage for a modern, progressive and equitable taxation system. We need an equitable and progressive tax structure that emphasises the need to broaden the tax net rather than taxing those who are already paying their dues.

Once equity and fairness in the tax system has been ensured by the state, enforcement as well as compliance will improve. A tax system that is judicious and fair has greater chances of being owned.

Different stakeholders, such as development partners, taxpayers, economists, tax bar associations, businesses, academics, civil society representatives and the media need to work together to create the necessary momentum for a win-win outcome. These stakeholders are vital in highlighting the significance of taxation as an instrument of social cohesion and sustainable development.

While celebrating such occasions as ‘Tax Day’, it is equally important that we publicly commend and appreciate all those who perform their national duty by paying taxes and leading others by personal example. Our nation is in great need of role models who can motivate others through action rather than mere words.

Email: amanatchpk@gmail.com