Pakistan’s taxation system: a farce in the favor of riches

Source :    Date : 13-Aug-2017


Pakistan has a tax oppressive system that only benefits the elites and the rich rather than poor and deprived. The evasion of tax is one of the much distorted factors in the taxation system of Pakistan. It often involves taxpayers deliberately misrepresent the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.

 

Pakistan Muslim League-Nawaz (PML-N) has only managed to ensure recovery in 39pc of cases worth billions of rupees.

 

The Directorate of Intel­ligence and Investigation-Inland Revenue was created on March 25, 2011 to uncover the astounding level of evasion and tax fraud in the economy. The department has seven directorate-level offices in Islamabad, Lahore, Faisalabad, Multan, Karachi, Hyderabad and Peshawar.

 

Official data shows that the directorate has unearthed more than 2,300 high-potential cases, involving an amount of Rs930bn. These cases were identified and investigated between 2013 and 2017.

 

All case reports were referred to FBR’s regional tax offices (RTOs) and large taxpayers units (LTUs) for implementation and recovery. But the Chief Commissioners’ Conference was informed that only 900, or 39pc of cases, were pursued.

 

Separately, the directorate also identified 2,785 cases of gift schemes, involving potential Rs102bn revenue from tax returns of just one year. These cases are not part of the 2,300 mentioned earlier.

 

But, according to a tax official, the directorate was silent on data regarding tax evasion cases unearthed between 2011 and 2013. “It is not clear whether the record is missing or if it was deliberately left out,” the official added.

 

The government also has tasked the directorate to probe the cases of those named in the Panama Papers. After initial investigation and dispatching of notices to 344 persons, reports were compiled on the basis of information received from all these individuals and all the cases were transferred to the concerned RTOs and LTUs for further action. More than 100 cases were transferred to Karachi and 85 cases were sent to Lahore.

 

The tax evasion is one of the great hindrances for progressive Pakistan.

 

As there is the increase in the tax evasion, it results in the increase of the country’s tax gap. Hence, it vividly shows that the magnitude of the country’s tax gap is proportionate to the extent of tax evasion in the country. From other effects of tax evasion one of them is, it adversely affects the performance of the country’s tax system. The possible effects of tax evasion on the performance of country’s tax system in terms of revenue yield, economic efficiency and interpersonal equity are rampant.

 

Due to the incidences of tax evasion, the government nastily uses higher tax rates to achieve a given revenue target, and high tax rates cause the increase of the surplus burden of taxation on account of the law of the square rate. There is another cause of the surplus tax burden that is the cost to government of administering the tax system. Besides, the evasion of tax increases the administrative costs of taxation; as a result, it further aggregates the excess burden of taxation.

 

High-income individuals are often less tax compliant because they have greater scope to evade taxation and avoid detection than low and middle income individuals. If this is indeed the case, tax evasion compromises not only the intended horizontal equity of a tax system but its intended vertical equity as well.

 

There are also many other causes of the tax evasion in Pakistan such as illiteracy of tax calculation, lack of adequate tax incentives, common public do not have knowledge about it, we have very poor relationship of tax payers and the authority, proliferation of taxes, non-existence of an equitable efficient tax system,  absence of tax morality and etc.

 

High seriousness is needed to encounter with this increasing challenge for the economy of Pakistan, to relieve the general public from excessive burden of indirect taxes.