Burdensome taxation system benefits the rich rather than poor and deprived
The evasion of tax is one of the much perverted factors in the taxation system of Pakistan. Common men are powerless to bear the hardship of sales tax on daily use commodities. Rich tax payers purposely misinterpret the real state of their affairs to the tax authorities. This includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned.
The increase in the tax evasion results in the increase of the country’s tax gap. It negatively 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 and economic efficiency are widespread. Due to the occurrences of tax evasion, the government scornfully uses higher tax rates to achieve a given revenue target. There is another cause of the surplus tax burden that is the cost to government of administering the tax system. The evasion of tax increases the administrative costs of taxation; as a result, it further totals the excess burden of taxation.
High-income individuals are often less tax cooperative because they have greater scope to evade taxation and avoid detection than low and middle income individuals. There are also many other causes of the tax evasion in Pakistan such as illiteracy lack of adequate tax incentives. The evasions of taxes effects on overall revenue of the country because it cannot meet with current expenditures which leads toward troubling situation for the general public of the country. The prime effects of tax evasion fall on common people because government increases the rates of the indirect taxes instead of direct.
In 2015, 675 such cases involving Rs47 billons were detected which depicts growth in the number of investigations as well as the detected loss of revenue. The split shows the number of cases involving high net worth individuals investigated in 2016 was 399 against 101 cases in 2015. The revenue involved in these cases was over Rs10.82 billion compared with only Rs1.22 billion in the preceding year. 502 ‘other important’ cases were investigated in 2016 in contrast to 310 cases a year ago. The revenue involved in these cases was Rs42.47 billion against Rs41.96 billion in 2015.
In sales tax, the number of cases where evasion and concealment were detected in 2016 was 643 compared with 264 cases in 2015. The revenue involved in these cases was Rs22.37 billion compared with Rs3.77 billion in 2015.70 taxpayers chose to voluntarily settle their cases of income and sales tax by depositing more than Rs2 billion with the Federal Board of Revenue (FBR) in 2016. Of these, 22 taxpayers were from Islamabad, 21 from Faisalabad, 11 from Lahore, eight from Karachi, five from Multan and three from Peshawar.
Besides, the tax investigation department carried out 44 searches and raids. Of these, 36 searches and raids were carried out in Karachi. The number of raids in Karachi is high, but these cases are either under scrutiny. The amount of tax recovered was Rs56 million in just seven cases in Karachi. In Islamabad, only two raids were conducted resulting in the recovery of the tax evaded amount. In two cases in Lahore, tax evasion of Rs323.26 million was detected. Over Rs1.2billion was detected in three cases in Peshawar. These cases were transferred to the Peshawar-based regional tax office (RTO) for the recovery of the evaded tax.
For sales tax, searches were carried out in almost 88 cases. Of these, 17 searches were conducted in Islamabad where the detected amount was deposited with the FBR. As many as 19 cases were investigated in Karachi. Most of these cases remain sub judice. Only three of these cases were under scrutiny and an amount of Rs5 million was recovered in only one case.
In Faisalabad, the number of sales tax cases was 24. Of these cases, collection was made in 15 cases while scrutiny was under way in others. Out of the nine cases in Lahore, revenue of Rs46.36 million was recovered in two cases. In Multan, 11 cases of sales tax were investigated in which a tax of Rs37 million was recovered only in three cases.
The focus of the investigations is real estate, property developers, sugar, fertilizer, ghee/vegetable oil, commercial importers, wholesalers and distributors, steel, soap, chemicals, cosmetics, tobacco, educational institutions, hospitals, services, paper and paper board.
Government, with its sincere efforts and commitment can battle with the problem to remove it and bring tax innovative system. The government needs to be accountable to control or eliminate the widespread corruption because it will motivate the taxpayers to pay their due share of taxes.
Our tax system is so complicated for common man to understand it; therefore, it should be made easy and communal for everyone. The rates of the taxes should be low down according to the income and wealth. Those individuals or corporations, who evade the taxes, should highly be castigated or there should be a strict policy against the tax evaders. To benefit general public and overall development of the country’s economy some more steps are needed to curb the incidence of tax evasion.
For instance, there should be tax survey in the country to know the existing number of the taxpayers whether they are individuals, businessmen or corporations so that the tax evasion incidences should be reduced. High amount of seriousness is needed to fight with this increasing challenge for the economy of Pakistan, to relieve the general public from excessive burden of indirect taxes.
Pakistan’s low tax-to-GDP ratio has tax evasion as one of its prime causes. A restrain on tax evasion as an instrument to increase tax revenue is incorporated as one of the many conditions for securing loans. Tax evasion continues to remain unabated in Pakistan. The government needs to focus on more effective and less disruptive measures. One such alternative can be the promotion of electronic payment system in Pakistan.
An ideal tax system is based on the principle of perfect information. The reported income by an individual is accurate and the incidence of tax evasion is zero. Just like any other country in the world, it is not difficult to realize that that’s not the case in Pakistan. Individuals do not provide perfect information on their taxable income. Reasons for such behavior can be traced to avoidance of paying a high tax or difficult administrative procedures.
In the presence of such information barriers, taxmen have to run third-party information trails by studying transactions patterns of an individual to see if he has reported his income correctly and is not evading taxes. Proper incentive structures should be focused by the Government of Pakistan rather than subverting private enterprise through coercion.
According to a recent report by Pakistan Centre for Philanthropy (PCP), individual philanthropy was estimated at Rs240 billion in 2016. The government therefore would do well to accelerate its role in Zakat collection. The government also needs to develop an easily accessible database available to the public for those registered societies and organizations in Pakistan that are entitled to receive Zakat. There is the need to incorporate philanthropy in the governments’ surveys, given its significance in the context of development spending. The government and the private sector also need to sit down to make this sector more organized without compromising on the fact that many people like to keep charity a very personal affair. They would rather give donations to an individual rather than an organization. There is a need to assess the vastness of individual and corporate philanthropy by those who evade taxes. In Pakistan, there is no shortage of individuals and corporations who evade taxes at one end, and pay charity at the other end. Others say that when the state doesn’t provide public goods there is no reason to pay taxes.