Pakistan has a Tax system of direct and indirect methods of taxation to raise revenue with the majority of contribution from “indirect taxes”. Indirect taxes are inculcating in nature as they usually target consumption. On the contrary, direct taxes are levied on profits, salaries, dividends. Direct taxes are progressive in nature.
Indirect taxes have 60% of the shares in the tax system of Pakistan which directly affects the last consumer which raises inequality. This also leads to oppressing the poor population and affecting the entire social structure of the Country.
According to the constitution of Pakistan, the tax collection is outlined between the Federal and the common governments. The province oversees charges on the complicated regions, for example, property, agriculture, services, and many more. The contribution of the province is scarcely 4-7% of the aggregate incomes. Despite what might be expected, they get 35% from the Government to meet their own expenses. This vividly shows the gap in the poor collection by the provincial government. Due to this, the burden is shifted to Federal Government which leads to an increase in indirect taxes. Examples of provincial taxes are excise duties, stamp duties, property tax, motor tax, etc.
Besides this, no one has ever paid any heed to the undocumented economy as the same is a major dent in the tax system, and collection of Pakistan as same is neither auditable nor noticeable. According to the research, presently the size of the undocumented economy is 70-80 % of the GDP. Meaning thereby same goes unnoticed by the regulatory authorities i.e. FBR or provincial tax authorities leading to deteriorating tax collection. The reasons for the undocumented economy are manual revenue records, cash transactions, smuggling, lack of invoice or receipt culture, small unregulated businesses, and most certainly illiteracy.
Another primary cause of the undocumented economy is the fear of citizens coming on the FBR tax net. The basic perception is a common individual of Pakistan is once he comes under the ambit of the FBR he will be a victim of unnecessary harassment, notices, and demands of under-table money from officials (corruption). Due to this common citizen finds an easy way which is to remain undocumented. Moreover, the tax rules are so complicated that a common person who is under tax net and having earning which makes him liable to file a return but have less education, fears the technicalities of the tax law especially when same is in the English language. At that point, they become prey to unprofessional tax advisors who are nothing but quacks in the tax field which is more dangerous than a person who tries to files his own return.
In conclusion, in order to broaden the tax base; the regressive strategy of indirect taxation should be reduced and a mechanism should be made to grab the undocumented individual to voluntarily come on tax bases. The benefits given nowadays are still not enough to grab the attention of a person who is out of the tax net and still feels safe from unnecessary harassment and notices. In conclusion, as
“Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.”
Arthur Vanderbilt said
The article was written by Shearyar Jessani Senior Partner Tax Practitioner and Partner of RS Mavens Tax Firm.
