Pakistan’s history, struggles over revenue have been at

Pakistan’s
Taxation Crises: Whose fault?  Citizens
or Government.

An
Empirical Investigation

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Table of Contents
Abstract
1
Introduction
1
Literature Review…………………………………………………………………………………………………………………………………….3                                                                                                                                             

Government Weaknesses
……………………………………………………………………………………………………………………….5                   
Citizen’s Weaknesses
6
Methodology
8
Findings
9
Conclusion and Recommendations
10

 

 

 

 

 

 

 

 

 

 

 

 

Abstract:

Tax is a financial
charge that every state imposes on its citizens as their living cost. Tax has
three different forms like direct
tax paid directly by individuals, indirect tax collected by intermediaries and
deposited to Government like sales tax. Taxation plays a very important role in
generating revenue and to run various activities in economy. Pakistan has one
of the lowest tax to GDP ratios in the world as only 0.9 percent of country’s
population pays income tax. Pakistan is under severe taxation crises for
decades. This situation is quite terrible for whole country. Government blames
that citizens are highly irresponsible in terms of paying taxes. While
Pakistani people hold quite opposite view. They believe that their government
is highly inefficient and corrupt. Government does not provide required services
in turn of their taxes. Moreover government levies taxes more on poor and
middle class while the elite and upper class easily exempt themselves from this
national duty. This paper empirically investigates the burning
question of the day: behind this taxation crises who is actually responsible
for this crisis. A questionnaire is developed to collect responses from
different FBR (Federal Board of Revenue) -a federal government body of tax
collection in Pakistan- officials and the citizens. The results indicates that
corrupt practices, excessive political interferences in FBR, high tax rates,
inadequate taxation policy, lack of strict tax regulation are the real time
causes of Pakistan’s taxation crises. People who have potential to pay taxes
are willing to pay but due to the greater possibility of misusing their taxes
they avoid to perform their national obligation. It is easy to conclude that
Government is more and actually responsible for taxation crises in Pakistan.

Key
words: Pakistan,
FBR,
corrupt government, taxation policy, public trust

Introduction:

In any government tax
is the major source of government income. Amount of taxes is crucial in every
economy for development Regardless of country size; tax is a dominant factor in
a country robust growth, either from direct or indirect taxes. From the revue
view, (Wang, 2007), (Padovano & Galli, 2002), (Brown, 2002) argued that tax has significant
impact on economic growth. Throughout the world history, struggles over revenue
have been at the heart of state power. Better taxation fosters good governance
and stable economy. Pakistan has been in grip of severe taxation crises since
its inception. In Pakistan federal taxes are divided into following categories:

Direct
taxes: it consists of the following;

a)     
Income Tax

b)     
Wealth Tax

Indirect Taxes: include
following types

a)     
Customs

b)     
Sales tax

c)     
Federal excise duty

It is estimated that
around 7 million Pakistanis have a worth to pay income tax but less than 5
million do. A big part of revenue is collected only through indirect and sale
taxes. But collecting direct taxes is the real issue. Only 0.9 percent of total
population pays direct tax which makes Pakistan’s tax rate lowest in the entire
region. As a result of low tax collection, country has to fund development and
infrastructure projects through debt financing. Consequently, a large part of
state revenue is spent on paying these debts back with high interests.

This present the
scenario that Pakistani people lack the morality of paying taxes. The country
lacks tax culture. Tax evasion and tax avoidance is quite common. People are
regarded as highly irresponsible citizens in terms of paying their taxes.
Surprisingly, People share the quite opposite view. They believe that their
government is corrupt and inefficient. They impose taxes only the poor and
underprivileged class. Elite class is free from this obligation. Others hold
view that misuse of public money by the government is another cause of people
not paying taxes. People are willing to give large amount of money as a charity
but are reluctant to pay tax. There are large variations in views. There is a
continuous blame game between the government and the citizens. This paper
attempts to find the real guilt party whether the government or citizens. This
paper can provide significant information to government and tax authority to
take some meaningful steps in order to overcome this crisis.  

 

Scope
of the study:

This study covers the
area of Faisalabad district and surroundings.

Limitations
of study:

As the targeted
population was the residence of Faisalabad city and surroundings. This study
cannot generalize to overall Pakistan. Results may be varying if targeted
population extends outside the selected area.

 

Objectives
of the study:

1.     
To identify who is at fault behind
taxation crises

2.     
To identify real causes of taxation
crises

3.     
To analyze possible ways to overcome
crises

Literature
Review:

Pakistan’s taxation
crisis is deep and cannot be easily resolved. Many studies have observed the
causes and reasons of poor tax collection in Pakistan. Some have declared
government and tax authority responsible for this crisis and some have held
citizens responsible for lacking moral responsibility of declaring income
honestly and paying taxes. It is useful to consider various studies on both
sides.

(Lefebvre, Pestieau, Riedl, &
Villeval, 2011) in Netherland,
France and Germany and examined the behavior people regarding paying taxes. He
observed that people adopt less evaded behavior in tax treatment than in
welfare treatment. (Uadiale, Fagbemi, & Ogunleye,
2010) conducted study in Nigeria and
observed the relationship between personal income tax evasion and cultural
factors like religiosity, trust in government and legal enforcement. He found
positive impact on personal income tax of tax in government and legal
enforcement. There was no significant relationship between tax evasion and
religious factors. (Fisher, Goddeeris, & Young, 1989) also examined the behavior of tax
evaders. He tried to identify the factors that motivate the tax compliance and
characteristics of noncompliant tax payers.

(Richupan, 1984) stated that due to corruption 50
percent of revenue remains uncollected. Tax collection is badly affected by
corruption (Tanzo & Davoodi, 2000). Tanzi stated that in Pakistan,  several factors like
complications in tax structure and fixed corrupt contracts between tax payer
and tax administrator boost corruption (Tanzi, 1998). Indirect imposition of taxes on commodities
creates inflation in the economy which is responsible for the reduction in
purchasing power of the people and also tax collection. Inflation puts inverse
impact on direct as well as on indirect taxes in Pakistan (Aghevli &
Khan, 1980).  (Piracha &
Moore, 2016) found that in low-income countries, the motivations
to grant tax exemptions may be more particular: they can be a means of raising
political contributions and bribes, or of rewarding political allies and
keeping potential political opponents on a short leash. Irigoin and Grafe suggest in their
commentary on Margaret Levi’s work, ‘rulers did and do not maximize revenue,
but rule'(Grafe & Irigoin, 2013)

Government’s
weaknesses:

Taxation plays key role in the
development of every state. Developing countries like Pakistan face daunting
challenges when they attempt to establish efficient tax systems. First, most
workers in these countries are typically employed in agriculture or in small,
informal enterprises. As they are seldom paid a regular, fixed wage, their
earnings fluctuate, and many are paid in cash, “off the books.” The
base for an income tax is therefore impossible to calculate. Nor do workers in
these countries typically spend their earnings in large stores that keep
accurate records of sales and inventories. As a result, modern means of raising
revenue, such as income taxes and consumer taxes, play a diminished role in
these economies, and the possibility that the government will achieve high tax
levels is virtually excluded.

Second, it is difficult to create
an efficient tax administration without a well-educated and well-trained staff,
when money is lacking to pay good wages to tax officials and to computerize the
operation (or even to provide efficient telephone and mail services), and when
taxpayers have limited ability to keep accounts. As a result, governments often
take the path of least resistance, developing tax systems that allow them to
exploit whatever options are available rather than establishing rational,
modern, and efficient tax systems.

Third, because of the informal
structure of the economy in many developing countries and because of financial
limitations, statistical and tax offices have difficulty in generating reliable
statistics. This lack of data prevents policymakers from assessing the
potential impact of major changes to the tax system. As a result, marginal
changes are often preferred over major structural changes, even when the latter
are clearly preferable. This leads to inefficient tax structures.

Fourth, income tends to be highly
unevenly distributed within developing countries. Although raising high tax
revenues in this situation ideally calls for the rich to be taxed more heavily
than the poor, the economic and political power of rich taxpayers often allows
them to prevent fiscal reforms that would increase their tax burdens. This
explains the reason why many developing countries have not fully exploited
personal income and property taxes and why their tax systems rarely achieve
satisfactory progressivity (in other words, where the rich pay proportionately
more taxes).(Tanzi & Zee, 2002)

Citizen’s weaknesses:

It is the national obligation of
every citizen to report his income honestly and pay tax accordingly. Unfortunately
in most part of the world, this has become a common phenomenon where the state
lacks tax culture and citizens feel reluctant to pay taxes. Tax evasion and tax
avoidance has become usual behavior. In Pakistan this problem has become even
more lethal.   

Tax evasion in broad sense may be
defined as any unlawful act aimed at reducing, avoiding, or delaying one’s tax
bill which if detected, may render the evader liable to payment to a criminal
court or an administrative body of penalty such a fine or imprisonment.
(Irrespective of whether or not any penalty actually imposed). The tax evaded
economy- commonly referred to as “Black Economy”- comprises two components:
First, illegal income from production and distribution of goods and services
which are per se illegal (for example in Pakistan, prostitution, bribery,
narcotics, smuggling, gaming and so on) – hereafter illegal income and Second,
legal economic activities upon which tax has been evaded hereafter legal
income.(Levi
& Suddle, 1989)

(Levi
& Suddle, 1989)  found that from the mid-1980, Pakistan has
witnessed the appearance of possible “moral panic” which is tax evasion. Tax
evasion is a more serious crime then theft because it hurts the whole nation.
It has become chronic problem in Pakistan — only about 2 percent of the
country’s wealth in taxes, one of the lowest rates in the world. Most businessmen are
tax evaders. They
are tax dodgers. And those who are paying some amount; it doesn’t match with
their living style. They live like a prince, and they pay like a poor man. A big amount of taxes is only collected through
indirect taxes. It is said that, there are
more people in planes than the tax payers in Pakistan.

 

Methodology:

The main purpose of research is to find out who is at
fault behind the severe tax crises in Pakistan. Whether the government or
citizens.

 

Type of
research:

It is primary and quantitative research.

 

Tool use for
data collection:

For data collection and to investigate the study
questions questionnaires with close ended questions is designed. The 2 separate
questionnaire consisted of 10 questions with 5 point Likert scale is applied
coded as strongly disagree = 1, disagree = 2, neutral = 3, agree = 4, and strongly
agree = 5 is developed, one for general citizens and the other for FBR
officials. Total five questionnaires are distributed among the respondents,
including five FBR officials and the 5 general citizens of Faisalabad district.

 

Targeted
population:

Main targeted population to complete the survey was
the FBR officials of Faisalabad zone and the professional citizens.

 

Findings:

In this question, 96% of population- both from
officials and general citizens- is agree that the government is actually at fault
behind taxation crises in Pakistan. The underlying problem is corruption,
unfairness, high tax rates, political interferences in FBR, lack of public
trust on the government not the absence of social norm and morality. People are
willing to pay if government ensures fair and equitable use of their money.
Those who are not paying can be made liable to pay by strict legal measures
against them.

 Despite the terrifically low
number of tax filers, people feel they are taxed a lot, the survey finds. This
is partly because of the fact that Pakistani government is unable to collect
direct taxes and resorts to indirect taxation, which is 68% of total
tax revenue.

 

Conclusion and recommendations:

After completing all the survey it is easy to conclude
that Government of Pakistan is a real culprit not the citizens behind the
severe taxation crises in Pakistan. Corrupt practices from government
officials, unfair tax policies with high tax rates, political interferences,
lack of transparency and accountability are some key factors behind poor
revenue collection. Due to corruption 50 percent of revenue remains
uncollected.

Tax evasion is common and more chronic in Pakistan but
this attitude of people is due to the mistrust on state institutions. There is also a severe
information deficit where the social contract between citizen and government
and the role of taxation in that regard is not well understood.

The prevalent attitude in the tax administration in
many developing countries appears to be that all taxpayers are potential
criminals and that subjecting them to taxation is fundamentally a matter of
identifying and controlling them and catching those who cheat. No modern tax
system can function on fear alone. Problems of tax enforcement cannot be solved
simply by calling in the ‘tax police.’ On the contrary, there is often much to
be gained from viewing taxpayers more as clients than as would-be criminals. A
taxpayer service perspective would emphasis on reducing taxpayer uncertainty by
clarifying some of the present legal ambiguities (for example, with respect to
the treatment of cross-border services), communicating clearly what the law is,
and sticking to it instead of changing it every year (or every month) and
leaving people uncertain as to just what the law is, and taking compliance
costs more clearly into account in designing legal and administrative
procedures. Services to taxpayers that facilitate reporting, filing and paying
taxes may sometimes be a more cost-effective method of securing compliance than
measures designed to counter non-compliance, although little research seems yet
to have been done on such matters.

The job of establishing an environment in which
citizens are induced to comply with tax laws is obviously difficult in
countries with large informal sectors, poor salary structures for public
servants, ineffective and uncertain legal systems, and an entrenched distrust
of government – often somewhat paradoxically combined with a habit of excessive
dependence on that same government. The key to success lies in evolving a
strategy that best utilizes the available resources to minimize the scope for
non-compliance and to maximize the likelihood of detection and punishment of
non-compliance, while simultaneously providing facilities and incentives for
compliance at each stage of the compliance process. (Bird
& de Jantscher, 1992)

 From these
perspectives, Pakistani government urgently need effective, equitable and fair
tax reforms to overcome the incumbent tax crises. It is not the citizens but
the government who is sole responsible for disastrous condition of tax
collection in Pakistan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix:

Questionnaire

I am a student of
Master of Public Administration at Institute of Administrative Science,
University of the Punjab Lahore. I am required to conduct a research study
regarding “Taxation
crises in Pakistan: whose fault? Government or Citizens. An Empirical
Investigation”. Your information will be used in my research work.

 

Name: ______________________________________    Gender: ?Male  ?Female

Organization Name: ___________________________

 

Citizens
response

Sr.#

Questions

Strongly agree
1

Agree
2

Neutral
3

Disagree
4

Strongly Disagree
5

 

 

 

1

Tax rates are higher in Pakistan.
 

 

 

 

 

 

2

High rates discourage to
pay tax.
 

 

 

 

 

 

3

High rate is one of the main causes of tax evasion.
 

 

 

 

 

 

4

There is no benefit for
tax payer from government
 

 

 

 

 

 

5

Corrupt government discourage tax payers to pay tax
 

 

 

 

 

 

6

Corruption of government
encourage tax payer to evade taxes
 

 

 

 

 

 

7

Corrupt government is the reason that people do not
pay taxes

 

 

 

 

 

8

Citizens are responsible
for this crises
 

 

 

 

 

 

9

If government is honest people will pay tax.
 

 

 

 

 

 

10

Government is responsible
for this crises
 

 

 

 

 

 

 

 

FBR
Officials

 

Sr.#

Questions

Strongly agree
1

Agree
2

Neutral
3

Disagree
4

Strongly Disagree
5

11

Taxes are high in Pakistan
 

 

 

 

 

 

12

High rates discourage people to pay tax

 

 

 

 

 

13

High rates one of main
cause of tax evasion.
 

 

 

 

 

 

14

There is no benefit for tax payer from government.
 

 

 

 

 

 

15

There is no strictness
from government on tax evasion.
 

 

 

 

 

 

16

Corrupt government discourage tax payer to evade
taxes.
 

 

 

 

 

 

17

There is political
interference in FBR.
 

 

 

 

 

 

18

Tax policy is unjust.
 

 

 

 

 

 

19

Laws are not based
according to ground realities.
 

 

 

 

 

 

20

Citizens are actual responsible for the crises.

 

 

 

 

 

 

Thank you very much for
your time. Please feel free to give your suggestion any other remarks you may
have. __________________________________________________

_____________________________________________________________________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Brown,
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Fisher,
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