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Optimising tax collection

I recently found my attention caught by an arresting headline: ‘TI Pakistan claims Rs2,000 billion shortfall in collection by FBR’. The story went on to state that, according to a report commissioned by the Federal Board of Revenue (FBR) and conducted by the International Centre for Public Policy at the University of Georgia, Pakistan suffered from estimated tax evasion of Rs1,800 billion per annum.

Other news reports released just ahead of the annual federal budget 2014-15 further revealed that Pakistan’s tax-to-GDP ratio had fallen even further than before. The tax-to-GDP ratio defines the extent to which taxes are a portion of the GDP of an economy, and is used as a key measure of economic growth.

In most developing countries, this figure hovers around 18 to 20 percent; ideally economists across the world quote it to be around the 30 percent mark. Latest estimates in Pakistan put our tax-to-GDP ratio at around 10.2 percent.

There are currently 2.5 million registered taxpayers in the country; out of a population of 180 million, that’s a mere 1.4 percent that is actually paying all their taxes. Moreover, the majority of these fall within the ‘salaried classes’ where, by law, taxes are mandatorily deducted at source. The need of the hour is not to burden these taxpayers with further or higher taxes, but to bring the 98.6 percent that is not paying taxes into the system and the tax net.

It is only by increasing our base of taxable individuals that we will ever come close to achieving our tax collection target of Rs5 trillion. Indeed, tax collection has been a thorn in the sides of many successive governments in Pakistan, and despite many ‘measures’, Pakistan’s tax-to-GDP ratio remains amongst the lowest in the world.

The issue, when it comes to Pakistan, lies not in the policies, but the actual implementation of them. What is required is not to pile up on the already ineffective policies that critics might refer to as being overly optimistic or far-fetched, but to actually tap into the major chunk of our population that is untaxed. Part of this means capitalising on existing policies; and there is a need for constantly upgrading processes and infrastructure. Most of all, it is essential that we widen the tax net and bring more citizens into the system. So, how do we accomplish this daunting task?

As mentioned earlier, the issue does not lie in the formulation of policies, but in their implementation and enforcement. In order to ensure that the national tax and revenue collection entities are performing efficiently, it is essential that the systems and processes they employ be upgraded to the latest 21st century hardware and software.

It is only by ensuring that our relevant tax collection authorities have all the tools necessary that they will be able to conduct their duties efficiently. While one does not wish to impugn the efforts of any organisation, the fact remains that the proof is in the pudding. And in many cases the pudding is extremely sour.

So let’s take a step back and recap. In order for Pakistan’s economy to grow and flourish, it is essential that we improve our tax-to-GDP ratio; and that we do so by widening the tax net, rather than increasing or raising the existing tax burden. Back in 1999, the World Bank loaned the Pakistan government funds to the tune of $150 million to formulate and enforce tax reforms; as an outcome LTUs (Large Taxpayers Units) came into existence across major cities of Pakistan. The objective was precisely this: to widen the tax net. Yet, as with much else in our country, there has been little or no tangible impact.

The World Bank also made similar loans to countries in Africa, where the implementation was far more successful. So what did they do differently? Their approach was to engage specialist private sector IT companies to successfully create, automate, and run all the relevant revenue and tax collection systems.

Interestingly, much of this necessary expertise came from large Pakistani IT houses with international operations. Most of these companies also implemented similar systems in the Middle East, and elsewhere in the world. These systems brought about cost-effective and efficient benefits within revenue and tax collection and calculation specifically; benefits that these African and Middle Eastern countries are now accruing.

It is ironic that much of the success witnessed by other nations in the implementation of tax and revenue collection systems was brought about by Pakistani expertise. This is expertise that has a demonstrated track record of success in other countries. Given the urgent need to improve national revenues, effective tax collection is the true need of the hour in Pakistan. We have the resources and knowledge to tackle this challenge head-on. All that is needed is for our national and provincial tax and revenue collection authorities to engage the proper experts. The rest of the world is galloping into to the 21st century; it’s high time we joined the race.

The writer is the president and CEO of InfoTech Group and former chairman of P@SHA (Pakistan Software Houses Association).

Naseer Akhtar, "Optimising tax collection," The News. 2014-06-20.
Keywords: Economics , Economic issues , Economic growth , Taxation policy , Public policy , Tax reforms , World Bank , Economy-Pakistan , Government-Pakistan , Taxpayers , Taxes , Pakistan , Africa , FBI , GDP