Getting people to pay their taxes is a problem as old as taxes themselves. Even Jesus caused controversy by having dinner with Zacchaeus the tax collector – a hated man in his community. So it should probably come as no real surprise that Pakistan, like all nations, has a sizeable tax gap – the difference between taxes owed and taxes paid.
New York Times reporter Sabrina Tavernise puts the blame squarely on the politicians, saying that the nation’s dysfunctional tax system is “mostly because the politicians who make the rules are also the country’s richest citizens, and are skilled at finding ways to exempt themselves.”
That is an incorrect characterization.
Pakistan’s tax-avoidance culture long pre-dates the democratic government. In fact, it was fairly well established under the military dictators that ruled the nation for decades. The present democratically-elected government has only been in office for about two years. Expecting them to magically change such a deeply ingrained culture of tax avoidance is both unrealistic and unfair.
While it’s certainly troubling that Nawaz Sharif, the head of the nation’s largest opposition party (Pakistan Muslim League – Nawaz), paid no income tax between 2005-2007, the fact that Jahangir Tareen, a parliamentarian from the Pakistan Muslim League – Quaid party, paid over $225,000 in income taxes for 2009 suggests that attitudes are changing.
And while some politicians may avoid paying taxes, they are by no means the only – nor the largest group of – tax avoiders. Ms. Tavernise herself describes the resistance of Pakistan’s legal community.
When Mr. Naqvi headed the tax authority, he tried to conduct a broad audit, prompting howls of protest. Lawyers from the Lahore High Court Bar Association — also evaders — even issued a ruling against him.
And a recent report from Pakistan’s Enforcement and Collection Division lists billions of Rupees in unpaid taxes by the nation’s major media corporations.
In fact, one can’t help but wonder if the problem is really a tax system held hostage by avaricious politicians, or a parliament held hostage by avaricious lawyers and journalists.
Considering the constant and ongoing attacks on the government by the legal community as well as the domestic media, one might understand why the government is not prioritizing tax enforcement at this time.
The largest group of tax avoiders, however, is probably found in the retail sector – which has aggressively resisted the implementation of a Value Added Tax (VAT) for almost 20 years. Also according to Ms. Tavernise:
Merchants — the most vociferous opponents of a value-added tax, a tax the International Monetary Fund has pressed Pakistan to adopt largely because it would require documentation — make up a fifth of the economy, but carry 6 percent of its tax burden. Out of millions of shops in Pakistan, just 160,000 are now registered for a general sales tax, Mr. Majeed said.
None of this is to say that Pakistan’s tax gap is not problematic. But even our own IRS is struggling to find ways to encourage our wealthiest citizens to contribute their fair share of taxes.
Pakistan’s government is presently focused on defending itself against a two-pronged attack from terrorist militants on one side, and the civil “Establishment” (e.g. right-wing judges, merchants, and media corporations) on the other. Despite being authorized to implement and collect taxes, Pakistan’s parliamentarians must still live in the country they govern. Putting the onus for the nation’s tax gap on them, as Ms. Tavernise does, misreads the issue and, sadly, misses an opportunity to shed light on the real problem.