Pakistan is probably one of those few countries where not a single principle of good taxation system is followed. Those who make tons of money remain out of tax net whereas burden of tax is invariably on the poor segments of the society. The rich are thriving on the tax contribution of the poor. Two third of the total taxes is collected through indirect taxes. Tax on economic resources of the rich is just one-third of the total collection. Nearly a month ago, a warning was sounded that Pakistan’s unjust taxation system alone can trigger public revolt. Please read: This system alone can trigger a public revolt….
The present taxation system is also partly responsible for inflation and price hike for which the poor of the country have to bear the brunt. It is also responsible for discouraging economic activities. The rich are becoming richer and thriving on the regressive system of taxation. On the other hand, Pakistan has to beg for its relief activities of the flood victims. The amount required for this purpose can easily be generated at home. Pakistani government was conveniently indifferent to this potential but its plea for billions of dollars to recover from this summer’s floods has sparked pressure on the country to reform its dysfunctional tax system, which collects very little money, even from the rich.
The country’s biggest donor, the United States, has issued one of the strongest warnings, saying the world will only be able to fund a quarter of the tens of billions of dollars it will take to rebuild — and it will be difficult to get American taxpayers to help if Pakistanis aren’t footing their share of the bill. Businessweek has reported that this threat is not being taken seriously because the nuclear-armed country is so important in the war against al-Qaida and the Taliban. The fact of the matter is that American taxpayers could be expected to sacrifice only when Pakistani fat cats shed fraction of their (ill-gotten) wealth. And this fraction will be enough to fund the entire development program.
Despite years of international pressure, Pakistan has one of the lowest effective tax rates in the world, equal to about 9 percent of the value of the country’s economy, according to the Carnegie report. In contrast, the U.S. equivalent is more than three times as high at about 28 percent. Even India’s tax-to-GDP ratio is twice as much as that of Pakistan. One of the reasons Pakistan’s rate is so low is because many people avoid paying taxes. Fewer than 2 percent of the country’s 175 million citizens pay any income tax, according to the report. Also, some sectors of the economy like agriculture — a major money-maker for the elite — are totally exempt from tax, and the rich have pushed to keep it that way.
Ishrat Hussain, former head of the Pakistan central bank, estimated that better enforcement of current tax policies and the elimination of key exemptions should produce an effective tax rate of 15 percent — generating nearly $10 billion in additional revenue per year. That money would go a long way toward repairing devastation from the floods, which affected more than 18 million people and damaged and destroyed over 1.8 million homes. It would also provide the money necessary to begin fixing Pakistan’s crumbling school system and health infrastructure.
“This is a time we have to tell people that we have to all pitch in and mobilize our own resources,” said Hussain. “Why should the international community come to your rescue if you are not doing your part of the bargain?”
He said donors should keep up the pressure on Pakistan, but advised against directly linking reconstruction money to tax reform, predicting the move could backfire in a country where animosity toward the West, and the U.S. in particular, is extremely high. “It wouldn’t be a very smart move because people here would consider this as an intrusion on their sovereignty, and the debate would then be muddied,” said Hussain.
The U.S. and other countries have donated around $1 billion for emergency relief, and international financial institutions have provided about $2.5 billion in emergency loans. Donors are scheduled to meet in New York this weekend to discuss raising additional aid. Washington has promised more money for reconstruction, but the U.S. special envoy to Pakistan, Richard Holbrooke, warned during a visit to the country this week that the international community could only fund about 25 percent of the bill. He said the U.S. would not condition reconstruction money on tax reform, but cautioned that American generosity has its limits.
If Pakistan does not reform its tax system and the donors fail to bail the country out, it is unclear how the nation would come up with the money necessary for reconstruction. The government has proposed a one-time tax on urban property and agricultural land not affected by the floods, but it is uncertain whether it will be implemented and how much money it would produce. Hussain, the former central bank chief, said that even if the one-time tax was implemented, he was worried the elite would simply use their influence to avoid paying anything as they have done in the past. “The system has given power to the thieves to monitor themselves,” he said.