PAKISTAN is teetering on the edge of economic collapse due to its persistent struggle to increase the tax-to-GDP ratio, a crucial measure of its fiscal health.
Despite numerous efforts, many potential taxpayers remain outside the formal tax net. Recent policies have unfairly targeted existing taxpayers, driving talent and capital away and pushing the nation towards disaster. The recent passage of the Finance Act exemplifies this flawed strategy, threatening long-term economic stability.
For the past decade, Pakistan has relied heavily on taxing non-filers and compliant taxpayers to boost its revenues. Originally, the aim of collecting taxes from non-filers was twofold: generate immediate revenue and use the gathered data to bring the non-filers into the tax net. Sadly, the state failed to achieve the latter. Instead of leveraging this data, it has merely increased taxes for non-filers, using it as a short-term revenue tool rather than a long-term strategy for fiscal health.
The Finance Act exacerbates this issue, further increasing the rate of tax on non-filers and imposing tax rates as high as about 60 per cent on existing filers’ income.
This approach is flawed. Unlike Scandinavian countries, where high tax rates are balanced by extensive social services and a robust public infrastructure, taxpayers here see little or no return on their contributions. The disparity creates a significant trust deficit, with taxpayers feeling alienated. High taxes on compliant taxpayers have stifled economic activity, reduced investment, and encouraged tax evasion.
This is not a mere policy error; it is an unparalleled disaster.
When individuals and businesses perceive the tax system as punitive and unbalanced, they are more likely to engage in tax evasion and operate within the informal economy, undermining efforts to formalise the economy and broaden the tax base.
This approach of persistently targeting compliant taxpayers has already driven away skilled professionals and entrepreneurs. With the ever-increasing tax burden becoming unbearable, talented individuals have started seeking favourable environments abroad, reducing the domestic talent pool and stifling potential economic growth and innovation. This exodus of human and financial capital severely hampers Pakistan’s long-term economic prospects.
The state’s strategy extends to imposing indirect taxes on essential goods such as milk, baby products, and petrol. This decision is nothing short of economic
butchery. By taxing these basic necessities, the state is placing an unbearableburden on the shoulders of ordinary citizens, particularly those from lower-income households. The cost of living will skyrocket, pushing millions deeper into poverty and triggering widespread discontent.
Imagine a family struggling to buy milk for their children because it has been taxed to the point of unaffordability. Picture parents grappling with the soaring costs of baby products while trying to provide the best care for their newborns. Envision the devastating impact of rising petrol prices on transportation costs, leading to increased prices for all goods and services. This is not a mere policy error; it is a catastrophe in the making, an unparalleled disaster that threatens to unravel the social fabric.
Furthermore, the gains of selected elites from properties have been preserved from taxation. Allowances of the armed forces and judiciary remain untaxed, perpetuating a system of inequality. No concrete measures have been taken to bring agricultural income within the federal tax fold, nor have there been clear directives to provincial governments to collect more taxes on agriculture and eliminate tax leakages. This selective taxation preserves the status quo for the elite, while burdening the average citizen.
To address these issues, it is essential that Pakistan learns from the successful strategies of other countries. Pakistan should focus on bringing informal sectors into the formal economy through targeted policies and robust enforcement.
Leveraging technology to streamline tax compliances and employing data analytics of data collected from non-filers to track economic activities and ensure tax compliance, the tax-to-GDP ratio in Pakistan can grow organically.
Moving forward, the focus needs to shift from overburdening existing taxpayers to broadening the tax base. The state should immediately implement comprehensive reforms to make the tax system more inclusive and transparent to bring the informal economy into the tax net through incentives and effectively using non-filer data to identify with the help of technology and data analytics to bring them into the tax net. Without immediate and decisive reforms, Pakistan will remain on a collision course with catastrophe; it faces a doomsday scenario where our inaction today becomes the tragedy of tomorrow.
The writer is an advocate of the Supreme Court.
Published in Dawn, July 2nd, 2024
