A tug-of-war between the government and the business communities, which started with imposition of 0.3 percent withholding tax on bank transactions, has been continuing since the start of the new financial year and the both sides are still not ready to budge from their respective positions. The finance ministry has made it clear that deduction is an attempt to bring non-tax filers into the tax net and the deducted money will be returned to the businessmen who will file their tax returns. This is very simple method before the policymakers to collect tax without realizing that not all the bank accountholders are businessmen. However, the fact also remains that Pakistan is one of the countries where only 0.3 percent of the total population pays direct taxes, recording one of the lowest tax to GDP ratio in the region — only 9.45 percent.
It is unfortunate that most of the individuals from the affluent classes avoid paying taxes, but the government reduces its revenue losses by imposing indirect taxes which count for 55 percent of its total tax collections. At least 45 percent revenue is collected through direct taxes in which the share of withholding tax is 70 percent. It is to be noted that indirect taxes are applied on all and sundry but only rich and middle classes are liable to pay direct taxes. The revenue collected through direct taxes is used on general welfare and development projects. However, inadequate tax collection forces the government to take loans from the World Bank and the International Monetary Fund to launch development projects in the country. This starts a vicious circle of debt servicing and the country further plunges into financial crisis as the government has to take more loans on heavy interest rates to pay back the already consumed loans.
Acquiring loans also open floodgates of foreign interference in the country’s affairs. In a recent report, the IMF has expressed dissatisfaction on tax collection policies of the government, asking it to increase tax net to collect more revenues. The donor agency has also called for capacity building of the tax collection officials to meet the revenue targets. It says that low tax ratio is hampering economic development of the country. There are two things to concentrate if the government is really serious in enhancing the tax revenues. First, every individual, who is doing business even at a small scale, should have a tax number and the second a foolproof mechanism should have to be evolved not only to plug loopholes in tax evasion, but also close the doors of corruption. A taxpayer also needs respect and protection from highhandedness of the government officials.
