OUTLINE
1. Introduction
2. Currency of the Issue
3. Challenges in the Way of the Growth of a Vibrant Tax Culture in Pakistan
i. Lack of awareness of tax laws among the masses
ii. Informal and undocumented economy
iii. Absence of tax culture in political elite
iv. Trust deficit between the rulers and the masses
v. Increasingly complex nature of tax system vi. Uncontrolled corruption in the taxation machinery
vii. Harassment of the tax-payers
viii. Lack of punishment for non-payers and corrupt officials ix. Badly carried out amnesty scheme
xi. Lack of professionals in the system
4. Wide-ranging Effects of Dysfunctional Tax System
i. Low tax to-GDP ratio
ii. Abysmal conditions in public service sector
iii. Widespread illiteracy iv. Entrenched poverty
V. Accelerated institutional decay
vi. Increased burden of indirect taxation
vii. Over-reliance on foreign aid and loans
viii. Poor painting of national image
5. How to Improve Prospects with Respect to Tax Collection
i. Educating the nation ii. Simplification of the tax system and codes
iii. Friendly environment for the tax-payers
iv. Punishing the culprits
V. Rulers leading by example
vi. Reviving trust of the common people on the government
vii. Awareness campaigns through print and electronic media
6. Conclusion
ESSAY
I is an undeniable fact that a vibrant and efficient tax culture is a prerequisite for economic prosperity, political stability and democratic maturity Unfortunately, this has not been the case with Pakistan Pakistan's tax collection system is in highly dilapidated condition, calling for massive reforms on large scale. In other words, the country is afflicted with largely dysfunctional tax collection system. The very fact that less than 10% of Pakistan's population pays income tax speaks volumes for the state of the tax collection system The abysmal tax system has unleashed many ramifications on various fronts Economically speaking, due to poor tax collection, the country is not duly plagued by huge gap between the revenues and expenditure, resulting in abysmal reliance on foreign loans, but it is also compelled to increase the burden of taxation on business class, hence reducing their capacity, to engage in new industrial ventures. which is, of course, a predominant reason behind slow economic growth in the country Economic miseries in turn add to social woes of the country Because of crunch in revenues spawned by poor tax collection, the government is faced with the reduced ability to invest in the public sector, thus aggravating the conditions in the sphere of basic services like education, health, security, etc. Needless to say, the state's alarming performance in public services leads to the erosion of public trust in the democratic system, thus adding to the country's political woes. Thus, it becomes quite clear that promising hike in the tax revenues, the country cannot embark on the path to bold an efficient and vibrant tax culture is a strategic imperative for the state. Without reforms in key areas of governance. the country is not the result of any single challenge. Rather, a host of challenges are The prevalence of alarming conditions with respect to promotion of tax culture in involved in spawning a dilapidated tax collection system in the country It would be quit imperative to take these challenges into consideration in order to have a better perspective of the issue.
Pakistan has been in the grip of the taxation crisis since its inception because the country lacks a tax culture. That is why, only less than 1% of the total population pays direct tax in Pakistan, which makes Pakistan's tax-to-GDP ratio only 9 9% - one of the lowest in region The country earns 60% of its tax revenues through indirect taxes, while 40% of it is collected through direct taxes -70% of which is in the form of withholding taxes. This ratio is uneven, given the fact that indirect taxes affect everyone's expenditures, including the poor, while direct taxes are only taken from elite and middle class, and are used for the general welfare and human development projects.
As a result of low tax collection, the state funds its development and infrastructural projects through debt financing Consequently, the major chunk of the state's revenue is spent on paying these debts with costly interests levied by donors.
The tax net in Pakistan is very low, that is why the current government has taken some positive steps to broaden the tax net in Pakistan. The Federal Board of Revenue (FBR) has started campaigns for promoting tax culture in Pakistan. It has announced various incentives for tax payers, which include concessions for people filing income tax returns, at the time of paying registration, transfer, and token fees of motor vehicles In addition, negotiations are also underway between the government and traders with respect to imposing a low tax rate for those traders and industrialists who disclose their hidden income The prevalence of alarming conditions with respect to promotion of tax culture in the country is not the result of any single challenge Rather, a host of challenges are involved in spawning a dilapidated tax collection system in the country It would be quite imperative to take these challenges into consideration in order to have a better perspective of the issue.
The poor development of tax culture if our country is not without reason. If we compare our circumstances with that of the developed countries, we easily know that there are huge differences in our and in their situation. The difference of situation due to some reasons has not allowed our tax culture to flourish The most prominent reason is related with the literacy gap between us and them. In developed countries, more than 90% are well-educated whereas in our country only 62.3 % are educated including those who can only write their names. The prevalence of deep-rooted illiteracy among the masses has given rise to poor awareness of tax laws in the country. Needless to say, such poor awareness is a significant challenge in the way of promotion of tax culture in the country.
The other major challenge appears in the form of the incidence of informal and undocumented economy. Undeniably, documentation of economy is a must for the promotion of tax culture in any country. In Pakistan, the state under successive regimes has failed to bring the economy into the net of documentation Agriculture and service sector constitute major components of the economy. It is a sad fact that these sectors escape the tax net. Agriculture sector is exempted from taxation, whereas service sector (doctors, lawyers, consultants, hotels, restaurants etc) being significantly undocumented is involved in widespread and shameless tax evasion Thus, it goes without saying that undocumented economy is an overwhelming impediment in the way of promotion of tax culture in the country.
There are also other factors behind widespread tax evasion in the country. The most important of them is tax evasion of the political elite. If one observes the figures of tax payments of the politicians, which are available on FBR Website, one is shocked to the bone. It becomes evident that majority of politicians do not pay any taxes on their incomes If political elite being role model for the masses is involved in the tax evasion, how one can expect from other masses to contribute towards tax collection. There is no denying that change comes from the top Unless politicians avoid tax evasion, the promotion of tax culture in the country is bound to falter again and again Thus, bringing political elite into the tax net is another major challenge for the tax collection machinery of the state.
Obviously, the phenomenon of tax evasion of the political elite leads to the deficit of trust between the rulers and the masses. Such trust deficit assumes alarming proportions when common people see the ruling political elite living luxurious lives in the country and abroad and the perks and privileges they enjoy. Needless to say, this extravagant style is brutal waste of taxpayers' money. Thus, such luxurious way of living on the part of political clite makes people hesitant to pay taxes. The majority thinks that these taxes will be wasted on foreign tours or private functions of the officials To be honest, the dire trust deficit among the masses and the rulers is a huge impediment in the way of tax culture in the country.
Inherent complexities in the tax code further add to the tax miseries of the country, hence resulting in the lack of tax payment by the educated class. Most of them do not pay taxes incumbent upon them. The reason for this is the lack of awareness among them and the complex tax codes, which are too difficult to grasp The complexity in the tax code how taxes can prove helpful for their lives. Briefly speaking, the complete system of tax further aggravates people's lack of the awareness about the payment of taxes and that payment coupled with hefty procedures involved while paying taxes is one of the guficant challenges hindering the fostering of tax culture in the country.
administration is also a prominent challenge in nurturing tax culture in Pakistan. Most of the staff members lack the proper training of how to deal with customers in a polite Furthermore, the harassment of the common people at the hands of the marmer and black sheep in the administration instead of motivating them to pay tax, lure them into bribery for personal benefits. This deteriorates the already bad image of Federal Board of Revenue and other institutions dealing with tax collection and further de- motivates the public from paying taxes.
These malpractices are further reinforced when corrupt officials and non-payers not get any sort punishment Most the mafia roams freely with accountability punishment. This triggers an impression among people that non-payment taxes does entail hardships for Besides, punishment for the corrupt elements gives rise corruption in the tax machinery which goes long way in promoting evasion the country. Thus, rooted
The fact successive governments have used unconventional methods instead resorting strict measures such punishment only symptomatic the weak of state, also promotes culture non-payment taxes. One such is tax amnesty schemes governments from time to non-payers pay their taxes To be honest, this them with some sort flexibility in their payment but does not help healthy culture the country. Majority people engage in tax evasion while waiting for announcement amnesty schemes government. can be inferred schemes are temporary relief the government the short run But in the long these schemes become hurdle too.
Apart from tax amnesty schemes, lack professional people in the tax machmery significant challenge in the advancement of tax culture the It is fact that tax not specialized educational background which could help them lot discharging their duties efficient tax men complexity in the tax code debilitates the tax Needless to say, phenomenon proves overwhelming hurdle advancement healthy tax culture.
Without an iota of doubt, the presence of weak and lacklustre tax culture in country has given birth plethora ramifications on different fronts Most among them are the impinging on the economy. This is evident in the growth of our GDP and crunch faced by our country. If one takes look developed countries, one comes to know that tax-to-GDP ratio is quite high reduces the and result, they are living lives with much more facilities people Pakistan. While in case Pakistan, owing low GDP ratio, the country often afflicted with budget which reduces government's capacity to invest sector public disparities.
These economic disparities mainly appear in non-availability of education in public institutes, lack of facilities hospitals and other basic needs. While rich people get these facilities from abroad or from areas where they at higher prices, poor people do have the money pay and result, burden over the poors. gap at very high pace and increasing, when the rich are involved in the evasion of taxes on their incomes, the government is forced to resort to indirect taxes in order to meet its expenditures. This is exactly the case in Pakistan. Each year, the government adds to the burden of indirect taxation on the people. Such burden is affordable for the rich. But as regards the poor, it aggravates the grip of poverty on them. Commodities of daily life become difficult to buy for them. Due to each year's increase in indirect taxation, their purchasing power keeps on decreasing. Subsequently, they are bound to linger in the cycle of poverty with no hope to break it ever. Thus, poverty becomes their ultimate fate. The poor become a miserable tale of dreams unfulfilled, thanks to the shameless tax evasion of the rich.
Besides, when large segments of population are indulged in the evasion of taxes, the government has to take some steps in order to keep its wheel running. The easiest way is to take loans from foreign agencies like IMF and World Bank etc. resultantly, we see that the whole economic system is gripped under a vicious cycle in which debts keep on increasing and the country becomes poorer and poorer Not surprisingly, most of tax revenues of the state are diverted towards debt-servicing, further exacerbating the fiscal deficit in the country. And this ballooning deficit gives a severe blow to the government's performance in the public service sector. Resultantly, we see the institutions dealing with public services beleaguered by internal as well as external weaknesses, leading to institutional decay, a predominant reason behind the worsening governance in the country.
One of the main manifestations of poor governance appears in the form of the deterioration of law and order situation in the country This law and order situation is not only a problem in itself but has also many other tentacles which need to be considered Bad law and order situation has resulted in the reduction of foreign direct investment and in the number of foreign tourists. Thus, the country not only loses some valuable investment but also results in a bad image of the country abroad, being highly unsafe place for the tourists.
The image of the country is also deteriorated in some other aspects. Owing to constant reliance on foreign aids and loans, in the comity of nations, the country, the land of the pure, is considered as a parasite state always holding a begging bowl and feeding on the money of foreign taxpayers. Needless to say, overreliance on foreign aid is not only a matter of national shame, but also a severe threat to the sovereignty of the state as the donor countries are in a position to interfere the internal affairs of the country.
From the prevalence of alarming conditions with respect to tax culture, it is evident that the whole system of tax culture is in dire need of reforms Vibrant and forceful efforts on behalf of the government are needed to promote tax culture in Pakistan. The Foderal Board of Revenue should be declared as an autonomous entity, free from political clutches The maladministration of FBR should be corrected in order to make it taxpayer friendly. The FBR was known as one of the most corrupt departments in Pakistan by Transparency International That is why a strict accountability mechanism should be enacted to check the corrupt behaviour of officials at the FBR Optimum tax rates should be levied and everyone should be taxed according to their capacity and ability to pay tax The FBR should pay due refunds to taxpayers which are dilly-dallied by its officials One other important demand is the establishment of tax courts in Pakistan because there are no tax courts in Pakistan. The first and second appellant forum for an aggrieved taxpayer is the Commissioner/Collector Appeals, who are also officials of the FBR The second appeal lies before the tribunal whose members are appointed the FBR Hence, the aggrieved taxpayer has to seek relief against FBR through FBR officials. Tax courts, free from the control of the executive, should be established.
More importantly, the public trust on the taxation system of Pakistan should be established Transparency should be an important element to be ensured- something that can only happen if everyone is taxed fauly and justly The public should be guaranteed that their taxes are public money which will be used for their welfare, for establishing a better educational system, better health facilities and for building roads, dams, etc. This development requires money, and money comes from taxes
Another important step to promote the tax culture in the country is to educate the coming youth This will raise a sense of duty among them to pay their taxes. They should be motivated to fulfil their obligations while living in the state. The code tax should be simple and understandable for the common public and there should be proper check and halance on the Federal Board of Revenue administration so that they cannot harass or behave negatively with taxpayers.
Steps should be taken to revive the trust of people in the system. The two major steps in this regard would be the example of rulers. If rulers do not pay taxes then it is not justified to expect that common people will pay taxes: The government should also raise awareness among the society by various print and electronic media campaigns. Social media can also prove to be instrumental in such awareness campaigns are necessary.
From the above discussion, it can be concluded that the taxation system is in such dire condition that it is in need of major overhaul. Despite passing of seven decades, the country has miserably failed to promote a vigorous and efficient tax culture. To be sure. many factors have contributed to such alarming phenomenon. Most prominent of them are poor awareness of tax laws among the masses, the incidence of informal and undocumented economy in the country, shameless tax evasion by the political elite, luxurious style of living of the rulers, trust deficit between the rulers and the masses. increasingly complex nature of tax system, massive corruption in the taxation machinery and lack of punishment for tax evaders and corrupt officials in the tax administration Needless to say, massive reforms are needed in order to ensure due payment of taxes. leading to the emergence of a strong culture in the country. Vigorous tax culture will not only stabilize the economic condition of our country but will also improve the living standard of people. The class gap will reduce significantly amid the improving financial conditions of poor and literacy rate will improve drastically due to a high number and quality of public education institutes. More public hospitals will be built, which means that public will have access to advanced and less-expensive medical facilities. The financial sector will improve significantly, which will result in less or no debt financing on part of the government. The money which the government pays in exchange for the loans they take from donors will be diverted towards poor people. Another major output will be the reduction in indirect taxes and increase in direct taxes The reduction of indirect taxes means that daily life commodities will be less expensive to buy for the poor whereas direct taxes will further help the government in expanding its financial pool. The improvement in financial resources means the improvement in security and safety of the citizens both from internal and external threats This improved security situation will also encourage foreign investors to invest in Pakistan, which will drastically change the lifestyle of the poor, bringing a positive change to their lives through employment opportunities Briefly speaking, a healthy tax culture will make the state treasury stronger.
