Even the poorest indirectly pay taxes in Pakistan

There have been many attempts in the past to lure the taxpayers to whiten their money. One of the biggest attempts was made by Dr Mahbubul Haq by introducing the ‘whitener bond’, which had very little success. I am reminded of the meeting held by Dr Haq with Karachi’s businessmen at the State Bank building to convince them that this is their last chance to declare all their black money. One of the courageous and outspoken businessmen told him point blank not to expect the industrialists to declare all their black money assets in response to his scheme. This businessman pointed out that they have to dish out bribes and ‘wheel money’ (file moving money) at every stage when they have to interact with government officials – starting from the tax department itself to the civil defence inspector who calls on the gate of their businesses – which cannot be shown in the books.

Two important features of the 2018-19 budget may remain controversial even if the finance bill is passed by the National Assembly.

These two features are, the scheme for whitening the foreign exchange accounts held by Pakistanis, whether held in the country or abroad after paying a minimum tax on them; and a drastic relief given to the middle class as the exemption level of annual income has been raised from Rs400, 000 to Rs1.2 million.

As an afterthought, the FBR introduced a minimum flat tax on the income from above Rs400, 000. This was done to keep the taxpayers, who fall into the category earning more than Rs400,000 on the tax return filer list.

The tax relief given to the middle classes is a welcome move although it is going to cost Rs90 to Rs100 billion to the exchequer.

Here I am reminded of another instance of the 90s when erstwhile VA Jaffery was the adviser to the Prime Minister on Finance during the Pakistan People’s Party’s (PPP) government. He held the pre-budget briefing with selected economic writers at the time to convince us to accept the additional taxes he wanted to propose in the budget. He gave examples of countries like Canada and the Scandinavian countries where the tax incidence was much higher than in Pakistan. At this stage, I said that you cannot expect the people to accept this because every day a Pakistani, who can afford, is trying to buy insurance for their children’s education, their retirement, their health expenses and their period of unemployment. Mr Jaffery didn’t catch my drift and said, “But the insurance inclusion in Pakistan is only 1%.”

I explained to him that I am not talking about the real insurance policies but that the people have to save for all the above-mentioned expenses if they can, because the government schools cannot provide a good education and government hospitals do not provide decent healthcare facilities. In any case, the government facilities are not adequate to cover all citizens. And the government does not provide for a pension for old age or any unemployment allowance.

When we talk about people paying their taxes honestly, the government should also ensure that the taxes collected by them are used prudently and thriftily for the social welfare of the people. People living in social democracies do not grudge high taxes because their above-mentioned needs are met by the state and the utility bills are also kept low. In case they cannot afford housing, they are provided council houses.

When we talk about people paying their taxes honestly, the government should also ensure that the taxes collected by them are used prudently and for the social welfare of the people

On the contrary, in Pakistan, people have to buy even an amenity as basic as water in the posh and poor localities. Power breakdowns are frequent so alternative means have to be arranged. Security is poor so private guards have to be employed. The public transportation system is almost non-existent; however, some progress has been made in this regard in Punjab. On the other hand, the taxpayers see expensive cars given to government servants and the so-called VIPs. For example, the lavish expenditure made on the Prime Minister House and President House can easily be curtailed to perhaps less than half to convince the taxpayers that the government itself is tightening its belt.

I remember when Prime Minister Mohammad Khan Junejo tried to implement some austerity measures to curtail the government’s expenses. He said that the government officials, including the military generals, should only get the Suzuki 800 and not the expensive cars. This move was resented by the civil and military bureaucracy and ministers across the board.

In Karachi, when the Mehran Air Base was attacked by terrorists, people saw the Naval chief come to the site after the incident in the flashy Seven Series BMW. On the other hand, I have seen the Indian naval and air chief officials’ cars, which were equivalent to the Suzuki Liana.

Senior police officials are seen going to work in expensive SUV’s like Land Cruisers, etc. In the days of auditing the extravaganza of the government by the judiciary, they should firstly cut their own expenses and perks.

There is a misnomer when it is said that only 1.2 million people pay their taxes in Pakistan. This is actually the figure that includes the people who pay direct income tax. Moreover, 68% is collected through advance income tax regime. Under this category, taxpayers are told to deduct and deposit the advance income tax collected from their employees or vendors. This adds to the cost of the businesses which pay taxes as they have to employ separate staff, depending on their outflows, to serve the FBR tax collection drive. The budget-makers expect to collect 1.7 trillion.

At the same time, almost everybody is paying the general sales tax on the goods and services used by them, which is the second-largest source of revenue for the exchequer. Now, this is basically a user tax and is paid by even the people who are making minimum incomes. For the mobile services which are now used by low-income groups as well, if they put in a credit of Rs500 per month, they have to pay 25% tax out of that amount, which comes to Rs1,500 paid in taxes annually. This is the minimum.

The taxes on petroleum products are 35%-37%. Again, this is a user tax where one pays it in accordance with consumption. The poor pay it in the form of higher fares of public transport and the rich when buying fuel for their expensive SUVs.

So it would be fair to say that the ratio of indirect taxes in the total tax collection is almost 55% of the tax revenue collected by the FBR. What does it prove? That people are more willing to pay taxes when they are indirect and final and they do not come in direct contact with the FBR as they fear harassments by the tax officials.

The writer is the author of ‘What’s Wrong with Pakistan’ and can be reached at ayazbabar@gmail.com

Published in Daily Times, May 19th 2018.

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