Widespread tax evasion behind Pakistan’s economic chaos

Pakistan is one of those countries which is so tormented by political, religious, social, ethnic, economic and security storms that it should not function at all. But for some reason – perhaps sheer obstinacy – Pakistan continues to defy the laws of social gravity and chaotically bumbles, stumbles and tumbles into the future.
Not least of the national characteristics that seem to sentence Pakistan to permanent dysfunctional purgatory is that while the country’s nearly 200 million people are intensely prickly about their sovereignty and national dignity, few are willing to put their shoulders to the wheel and help make the place work.
A series of reports last week points out that this failure to observe even the most basic obligations of citizenship is especially prevalent among Pakistan’s political and economic elite, who are usually the same people.
No one likes paying taxes, but giving revenue to government to provide the services that allow a community to function has been the fundamental building block of civilization since the birth of the first city states.
But a report marking the launch of Pakistan’s Centre for Investigative Reporting and using information gathered by the Federal Board of Revenue (FBR) says that 70 per cent of the country’s members of parliament paid no tax last year on their main incomes.
Those defaulters included 34 of the 55 cabinet ministers and even the vastly wealthy President Asif Ali Zardari, the sources of whose assets remain a matter of debate and legal wrangling.
When he was a minister in the governments of his wife, former prime minister Benazir Bhutto, Zardari was known as Mister Ten Per Cent for the amount he is alleged to have added to government contracts and diverted to the family fortune.
Now, while it is true that income tax is automatically deducted from the parliamentary salaries of the country’s 446 federal politicians, a 2009 study found that the average wealth of these people is equivalent to about $1 million.
So disdainful are Pakistan’s national politicians about this particular duty of citizenship that 78 of the members of the two houses of parliament didn’t even have a personal tax number.
Tax evasion by members of Pakistan’s parliament is, however, just the tip of a vast iceberg.
Pakistanis as a nation are wedded to ignoring taxes to a calamitous degree.
Just two per cent of the country’s population are registered with the tax authorities, but only about a quarter of those take the next step and pay what they owe.
According to the revenue agency, FBR, only 260,000 out of the country’s nearly 200 million citizens have paid taxes consistently for the past three years.
The inevitable result is that government has few resources with which to function.
Taxes account for only nine per cent of Pakistan’s gross domestic product, one of the lowest ratios in the world. (In Canada the same ratio is 39 per cent.) The result is that successive Pakistan governments have struggled to survive on irregular handouts of international aid.
An always unsavoury situation has become even worse since the American-led invasion of Afghanistan in 2001 to oust the Taliban regime.
This conflict has spilled over into Pakistan, reaching from the lawless tribal border regions into the heart of cities such as Quetta, Peshawar, Lahore and Karachi.
The United States has given billions of dollars to Pakistan’s military in an effort to buy a dependable ally.
But the Pakistan military has extensive business holdings and is independently wealthy.
Not so the government which, for example, owes the International Monetary Fund $7.5 billion to be repaid by 2015. The Islamabad government paid June’s instalment of $1.2 billion, but there’s little confidence among rating agencies it can keep this up.
The IMF does not intend to lend Pakistan more money because of the government’s failure to reform its tax system or cut budget deficits.
Pakistan’s tax system has been flawed and chaotic since the country’s founding in 1947. One loophole which speaks volumes not only about the problems of the tax system, but also about Pakistan’s failure to develop much beyond a feudal society is that there is no tax on incomes derived from agriculture.
While this is obviously a boon to peasant farmers, the biggest beneficiaries are the owners of Pakistan’s huge feudal estates. All too often these are also the members of parliament – tenant farmers and their families make dependable voters.
On the recommendation of the revenue agency the cabinet last week approved a 90-day amnesty during which 3.1 million people identified by the FBR will be allowed to pay the equivalent of $413 to clean the slate.
Critics of the amnesty say it will only deter honest taxpayers from continuing to fulfil their citizenship duties and only further embed the culture of evasion.

Courtesy Vancouver Sun