ONLY 2.5 million or 35% of the 7.2 million registered taxpayers or NTN holders filed for tax year 2021. This is very poor compliance with tax laws.
Despite the government’s claims to take action to widen the narrow tax base, the reluctance to file highlights why the share of income tax – the only direct burden on personal income – in total revenue collection of the RBF is less than 35pc. Even the majority of income tax is collected “at source” as withholding tax in “indirect mode”.
Read more: Pakistan’s stagnant tax base
The vast majority of those who should pay their share of taxes on their income and file their returns regularly do not do so because few believe the RBF will take punitive action against them. It’s no wonder then that tax compliance is declining despite laws providing for fines, arrests and jail time for non-filers. Recently, the RBF also gained the power to cut off the electrical and telephone connections of non-filers. But what good are such powers if they are not or cannot be exercised to punish tax evaders?
Read more: Now is the right time to broaden the tax base, according to OICCI
Pakistan’s tax-to-GDP ratio of around 10% is one of the lowest in the region and the world. It is at the heart of the country’s chronic economic and financial difficulties. Successive governments have pledged to increase this ratio to 15% to close the budget deficit, get rid of debt and stimulate economic growth and development. At the last NFC award, the center and the provinces agreed to increase tax revenue.
More than a decade later, taxes as a percentage of the size of the economy are stagnating. Indeed, any effort to increase tax revenues anticipates far-reaching reforms – in particular improving the income tax system and collection – aimed at widening the tax net. Instead of focusing on reforms, successive governments have chosen the easier route of expanding and increasing indirect taxes, which spare the rich and weigh directly on the average person.
Read more: Unfair taxation
The government of the day has not been different from its predecessors. He also struggled to increase the tax-to-GDP ratio through indirect taxation without meeting the difficult challenge of broadening the taxpayer base. This strategy has not worked in the past and is unlikely to be effective in the future. The challenges of tax compliance and mobilization cannot be met without effectively and directly taxing income from all sources, and punishing tax evaders.
Posted in Dawn, le 19 October 2021