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How Pakistan can increase tax income

By Humzah Haroon

The general consensus amongst many financial analysts and economists is that Pakistan’s tax net is extremely small, which means that the amount of tax that the state should be receiving is very little compared to what it can receive.

Every year, the Pakistani public hears the news of a fiscal deficit. Each year the government revenue is much lower than the government expenditure. Why? This can be attributed to many reasons, for example, a major chunk of the population do not pay taxes, the tax system is overly complicated and dissuades many from filing for tax returns and finally there aren’t enough regulations and polices in place to ensure that the tax collection can be guaranteed for the long-term.

According to Shahbaz Rana, a correspondent for the Tribune, only 1.4 million taxpayers submitted their annual returns for 2018. In a country where the population is above 200 million, not even 10% of the adult population are tax payers, with many being filers and still not paying.

Consistent with Trading Economics, the personal income tax rate in Pakistan stands at 20%, which again, only makes up 1.4 million taxpayers.

So, keeping what we have mentioned above in mind, what are the possible solutions in Pakistan’s case, with regards to helping increase the tax net?

Some solutions

First and foremost, this is the work of the policy makers and the politicians. Pakistan’s systemic crisis in light of taxation will never be solved unless and until those in this position are ready to accept the situation and mold policies towards fiscal betterment.

Political pressures are a very major reason for why some work can never be done on this subject. Many land lords and others in positions of power influence policy makers by supporting them financially, who in turn push the ideologies of these ‘people in power’. As a result, a personal propaganda is what is usually pushed while the actual aspect that requires work is given very little attention.

Implementing strict policies and holding everyone accountable, in terms of taxes, would prove to be beneficial in increasing the tax net. However, this is very difficult to do in a country such as Pakistan as accountability is usually overlooked and substituted for personal gain.

Direct taxes are an efficient way of increasing the direct taxes but doing so, proposes issues of public anger, public unrest and fall in the level of trust within the government. Therefore a solution to that end could be to, perhaps, raise indirect taxes by a small percentage and to impose high indirect taxation on luxury goods. This could also help increase the government revenue. 75% of tax revenue is already collected through indirect taxes.

We all know that income generated from agriculture is not taxed in Pakistan. Why? Is agriculture not a part of the economy? Sure Pakistan is a developing country and its agricultural sector is also developing but why not tax the agricultural income? Even a small percentage would help as 47.03% of land area in Pakistan in agricultural.

Real estate is also holds a major chunk in the Pakistan economy and has boomed over the last decade. Therefore, placing direct taxes on purchasing land would also allow for the improvement in the tax net.

The expression of these points could be juvenile, however, in the current scheme of things these basic solutions are the only viable option.

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