Tag Archive: tax


Secretary of State Hillary Clinton has put across her message without mincing words, “the Pakistani elite also need to pay up so that the world follows suit”, more or less like that. The issue of paying taxes by the salaried middle-class alone and the unjust taxation system has assumed so much significance and attracted so much attention that some pundits have started foretelling a public revolt, if not a revolution. And if Hillary can see it coming then it is coming, for sure. This elite-based taxation system will have to go away to make space for a just and equitable system in which all pay taxes according to their capacity.

So much has been written on this subject which is dry in nature and which creates bad taste at the end of reading an article on it. However, Saqib Omer Saeed, in his article appearing in the Express Tribune has approached this subject in an interesting manner. In view, the tax is a product which the government has failed to sell. Here are excerpts from the article:

Due to negative media portrayal, people look upon taxation as a monster. I can’t agree with classical economists, nor with the conventional discipline of tax science. To me, taxation is merely a product of the government. I know the objection can be raised that if tax is a product, we can avoid buying it. I think we need to ignore this aspect, however, and try to make one point: everybody has to buy this product. It is a product that works for the well-being of society and helps governments work towards social and infrastructural development. That means by ‘selling’ tax, the government can generate revenue that allows it to fund projects for the public good. As I previously stated, tax is a product; therefore it follows that we, the clients, are the kings.

They need to be careful not to make the “product” (i.e: tax) too expensive. It is actually revenue that is taxed, not businesses or individuals. The government needs to make sure that they take care of their clients’ revenues, for their own good. It is not advisable for them to develop tax in a way that would harm businesses, or make people poor. The focus should be on increasing prosperity, for their own long-term benefit. In order to a good relationship with their “clients” (i.e: citizens), the government needs to help people earn. This means that they have to market effectively by increasing people’s wealth, so that they are able to afford taxes. No government can be efficient if they simply collect tax, rather than investing in it. Investment in taxes means that it is necessary to multiply the number of clients-those with income and earning. The best would be to invest in establishing businesses that can increase tax revenue in the long run.

It is always advisable to diversify the tax portfolio, rather than putting pressure on selling tax to just one strata of the economy. Diversification of taxes would be a great step in reducing the economy’s unrest. In countries like Pakistan, agriculture or capital gains are wholly exempt from taxation and only the salaried classes are taxed. This can lead to a point when people would rather ignore taxes than pay them. Those who are responsible for collecting taxes need to behave like salesmen. They need to discuss the means for increasing people’s revenue, so that they are able to pay more taxes. It is advisable for the government to survey tax-buyers to find out means for improving people’s cash flow. To create a tax culture, it is best to convince people that taxes are not there to harm them, but help create a more prosperous society in the long run.

New client development is another thing that would help promote taxes. The government has to plan a fixed percentage of tax revenue that will be invested in promoting entrepreneurs and small businesses. When businesses grow, it would automatically increase tax revenue as well. As a business, the government has to care for its own costs. They have to use intelligent means for tax collection and need to be cost efficient. During phases where the government is investing in taxation procedures, it must keep its running costs low.

In countries like Pakistan, taxes are becoming a symbol of terror. This is mainly because of the performance record of the government and their reputation for corruption. It would be best if people could pay taxes knowing that the money will be used for their own benefit. Generally, the government is thankful if if people pay the taxes that are imposed on them. Taxation should be a process whereby the taxpayer thanks the government for using his money to improve society. A little change of perspective is always required to cultivate an acceptance of something that is considered bad but may actually be very beneficial. If the reality can’t be changed for the time being, then changing perceptions may help create that change.

I think it is time for tax authorities and governments to rework the concept of taxes in Pakistan. They need to build credibility and educate people about how taxes are the way to a bright future, rather than a monstrous thing to be avoided. This would require a massive endeavor from the government. I know my post of will receive a lot of criticism, but if companies can sell cigarettes that are harmful to consumers, why can’t the government sell tax, which is highly beneficial (if used sincerely). It is a time to design a framework for developing taxes, rather than imposing them by force. The best way is to take the middle path. This will come from brainstorming: our country is unique and therefore needs unique solutions.

 

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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.

Is it true that if we reverted to progressive taxation under Article 3 of the Constitution, this could fetch the Government more than thrice as much as it is collecting through regressive taxation? Read what experts have said on this. Please read In search of a new tax model? by Huzaima Bukhari and Dr Ikramul Haq in the News on Sunday http://www.jang.com.pk/thenews/jun2010-weekly/nos-06-06-2010/pol1.htm#2