Tax Evasion; Implications and Cure In View of Humayun Akhtar Khan

Overview

Tax collection proves to be the basic edifice of any country’s GDP. Welfare states arguably collect more revenue from their taxation mechanism than others. According to a latest research, out of 180 million people only two percent are registered and only one forth of the people pay taxes. Out of 446 parliamentarians 300 members have not even submitted tax returns this year. According to NADRA 2.38 million people eligible for tax submission do not even have a tax number till date. Many known names holding office in the current government are also evading taxes. This situation is badly influencing Pakistan’s economy and now the country is even burdened by foreign debt.

Tax collection from 1987 has decreased from 13.8% to 9.10%, what do you think is the reason, weakness of parliament or faulty laws or implementation errors?

There are a number of very obvious reasons; one of course in decreasing tax GDP ratio is changing base structure of the prevalent GDP. Although our economy has grown immensely but the areas that have grown have no tax applicable. The actual issue here is of those sectors as well that are growing but are not contributing tax revenues accordingly. Agriculture in Pakistan GDP is 24 to 25% but tax contribution from that sector is only 1%. Industrial is 20% of the total GDP and is contributing 65% through taxation. Services sector covers 50% and their contribution is 16 to 17%. This low direct tax collection increases the reliance on indirect taxes like Sales tax and Petroleum Levy, which affect the poor more. This anomaly needs to be removed. In Pakistan people who earn above a certain threshold should pay taxes, regardless of the sector. Direct taxes should be raised so that the rich contribute more and the poor are relieved.

Do you agree that most of our politicians are also a part of this tax evasion problem that we have or do you feel NAB’s report is false?

I have not read the report so it would be not fair to pass any solid comment about the ones being accused on media. One thing I understand is the fact that most of politicians in the assembly have agricultural background; which means most of them are not taxed. A more appropriate approach would be to address the problem by redoing Tax payment structure sector wise so that all of them contribute according to their growth and earning.

Why do you think tax evaders have never been held accountable although many times they have been identified?

A few years back Finance Minister announced that 7 million people have been identified, who were sustaining good lifestyle but were paying nominal taxes. So far I have not heard if any one of them have been brought in the tax net. The reason is the collusion of the tax collector with the tax payer. In our time, till 2007 we had decreased discretionary powers of tax collectors. In these previous 4/5 years we have seen that these powers have been increased, I believe that tax evasion is on two fronts; tax payers and tax collectors. When notices to these 70 million people were sent many of the tax collectors were paid off so I see two basic problems, first tax collection policies for sectors and then tax administration improvements. These can be sorted by decreasing discretionary powers of tax collectors.

How in your opinion can the taxation system be improved?

Our provincial taxes are very less, almost 0.5 % of the GDP. In India these are almost 6%. Now that provinces have more autonomy general expectation and rationality suggests that they should contribute more to the GDP.

Source: Policy Matters – Dunya News – 14 December 2012

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