Do we pay enough taxes?

  • Looking at the right stats

A lot has been written about tax. Most writers have focused on the low tax base of Pakistan and concluded that we do not pay enough tax. It is said that the ratio of total tax collected to GDP is only 13pc, which is one of the lowest in the world. It is also pointed out that the registered tax payers in a country of 200 million are only around 1.7 million. Are these parameters good measures of whether the people pay enough tax?

The per capita GDP of our country is only Rs118,200 which is somewhere around 150th in the world. Total taxes collected, both direct & indirect, were around Rs2,500 billion, which is Rs13,900 per capita. The ratio of per capita tax to per capita GDP is over 10pc. In a country in which more than 40 million (according to World Bank) people live close to the poverty line, is that really too low?

Agriculture contributes around 35pc to our GDP. For one reason or another, we have chosen not to tax agricultural income. To compensate for this we have taken a deliberate decision to collect most of our tax revenue through indirect taxes. That is why 60pc of our total tax revenue is collected from indirect taxes. Why should we then ignore indirect taxes when trying to measure how much tax we pay?

The largest component of indirect taxes by far is General Sales Tax (GST) which is currently 17pc. It is difficult to calculate how many people pay GST because GST is levied on hundreds of everyday products. We can get some idea by looking at a few items of everyday use. There are many millions of consumers of gas in the country and GST on gas is 17pc. But there are many more millions of consumers of electricity in the country and the total of all indirect taxes levied on electricity is a whopping 36pc! It is doubtful if there is any other country in the world which taxes electricity as heavily as we do. Since electricity is a significant expense for both domestic and industrial concerns, it affects cost of production of hundreds of products. It is no wonder that our exports are becoming less competitive in the world.

The argument about how many people pay tax in the country distracts attention from the more important issue of how to make the tax system more efficient and fair

If one looks closely at income tax (direct tax) we find that 62pc of income tax is collected as withholding tax (WHT). This tax, which is usually 5pc, is charged on nearly all imports and on many other services such as banking transactions etc. It is difficult to calculate how many people pay WHT but it is obviously tens of millions. For instance, 120 million mobile phone subscribers pay WHT as do 18 million bank account holders.

Consequently, as can be seen from the above many tens of millions of people pay tax, directly or indirectly in Pakistan. The argument about how many people pay tax in the country distracts attention from the more important issue of how to make the tax system more efficient and fair.

To make it more efficient the government could try to make tax compliance easier. It is an alarming fact that in Pakistan tax compliance takes an average 560 hours. As a comparison, in India, it takes only 243 hours. Since it is universally recognised that time is money, we can try to put a value to this. The average salary of an accountant in the country is, say, around Rs50,000 per month (this average is based on the number of registered tax payers which includes corporations). The time of someone who is doing his taxes by himself (not using an accountant) may be even more expensive. Taking an average of 192 working hours per month that comes to Rs260 per hour. That means on average tax compliance costs each person Rs67,600.

We have already seen that many millions of people in Pakistan pay tax, but if we count only the 1.7 million registered direct tax payers, the total cost of tax compliance in the country comes to nothing less than Rs.115 billion. If there was less hassle (and less harassment) in our tax system we could perhaps save at least 50pc of this amount. Hassle and harassment can both be reduced by having better trained professional tax officers who are free from our archaic civil bureaucracy.

When Shaukat Aziz first became finance minister of Pakistan he remarked that tax collection was difficult because there is a big credibility gap between the government (FBR) and the people. There are many ways, as yet not adopted, to bridge this credibility gap. For a start the Federal Tax Ombudsman (FTO) could be given more teeth and the Alternative Dispute Resolution Committee could be made binding on FBR. This would also make the system fairer.