Ombudsman of Tax Evaders

If his party is elected, Nawaz Sharif has a plan for the economy – reduced taxes for the rich. No, I’m not joking. This is what he actually told Hamid Mir. Listen as two of the most privileged in our society discuss how they think the rich should do even less to support our country.

According to Nawaz Sharif, the problem is that the rich are being to asked to contribute too much to their country, and so instead they contribute nothing. The solution is to ask them to contribute less to society in the hopes that they will be willing to do so. In other words, keep cutting taxes on the rich until you find their limit. But the rich have already set the limit on what they’re willing to pay, haven’t they? And it’s not 10 percent, or even 5 percent – it’s zero percent. Nothing.

NADRA recently announced the results of its latest study on tax evasion: over 2 million of the richest people in the country pay exactly zero in income taxes.

Even more interesting is the fact that there are 1.611 million people who frequently embark on international tours but do not pay a single penny as income tax.

About 584,730 Pakistanis have multiple accounts in domestic and multinational banks, but do not possess NTNs.

The FBR has bound banks to deduct a meagre amount of less than one per cent at source less tax on cash withdrawals of more than Rs50,000 in a day, but it doesn’t issue notices to bring them under the tax net.

Over 56,000 people live in posh areas and more than 20,000 people own luxury cars, but pay no income tax.

The solution to this crime – because that’s what tax evasion really is, isn’t it? Stealing from the national treasury? – is not to ask the thief what he is willing to pay, it is to make improvements in enforcement and collection so that the thief learns that stealing is not profitable.

It is these reforms that have finally started to improve tax collection in the country. Tax authorities increased revenue generation 28 per cent in the first five months of fiscal year 2011, and earlier this year, improvements in enforcement of the tax laws netted an additional Rs1 billion every month. That doesn’t mean that more doesn’t need to be done, obviously it does. But it means that the current efforts to reforming the systems of tax collection and improving enforcement of tax laws are making an actual difference. They should be allowed – and encouraged – to continue.

Giving a tax policy of begging the rich to pay whatever they feel like is a blatant expression of the feudalistic thinking that has dragged the country down and kept us from achieving our full economic potential. Federal Tax Ombudsman (FTO) Dr Shoaib Suddle told the media, “I am the ombudsman of taxpayers and not of tax evaders.” So what does that make Nawaz Sharif?

Load Shedding and Responsibility Shedding

Stealing power in KarachiNext time the lights go out, think about the fact that state agencies owe Rs70 BILLION in payments for electricity. Before we go making the usual complaints about corrupt politicians ruining everything, take a look at the list of defaulters

Supreme Court: Rs3.5 million
ISI: Rs8.2 million
IB: Rs2.7 million
FIA: Rs8.3 million
Punjab police department: Rs140 million
Islamabad police: Rs20 million
Rangers (Punjab): Rs52.25 million
Rangers (Sindh): Rs75 million

Of course the usual suspects are present also, Pakistan Railways, Senate, etc etc etc.

The point is that nobody is innocent. We all want electricity, but no one wants to pay for it. Dawn says that “the onus is on the government, which regularly raises power tariffs, to show the way and desist from its profligate use of electricity.”

Which is convenient, obviously. We’ll pay our share as soon as the government pays its share.

But we’re a democracy now.

Which means the government is us.

Time to pay the bill.

Beggars, Dacoits and Jalsas

In a curious attempt to appeal to national sentiments, Shahbaz Sharif claims that PML-N’s jalsa is a “war to save the country” from the present government which has made Pakistan into a beggar state “despite having nuclear weapons”. This begs the question, how do nuclear weapons make money?

I suppose one answer would be to use nuclear weapons as a threat to extort payments from other countries. But extortion is the work of dacoits, not beggars. Surely Shahbaz is not suggesting that we sink to the depths of global armed robbery. So, then, how does he propose that nuclear weapons solve our financial woes?

The fact is, nuclear weapons don’t make money, they cost money. And lots of it. Shahbaz has his complaint backwards. We’re not a beggar state despite having nuclear weapons. If we’re a beggar state (and I hate that insult), it’s because we have nuclear weapons. It was ZAB who famously said that “If India builds the bomb, we will eat grass or leaves, even go hungry, but we will get one of our own”. Perhaps that made sense when we felt that we could not allow India to hold nuclear weapons over our heads. But we now have over 100 nuclear weapons. And according to the UNDP Human Development Report 2011, we rank 125th for population in poverty. We got our own nukes. For how much longer must we continue eating grass?

I would actually take Punjab CM’s complaint and rephrase it.

Despite being one of only four polio endemic countries globally, we continue spending money on nuclear weapons.

Despite having literacy rate of 57 per cent, we continue spending money on nuclear weapons.

Rather than holding street rallies, why doesn’t PML-N provide some leadership on the issue? Why not ask how many nuclear weapons we need to feel safe so that we know when we can stop spending on devices to kill our enemies and start spending on programmes for loving our children. Instead of protesting against increased power tariff, why not protest against continued resistance to reporting and paying taxes by the privileged elites.

Pakistan is not a ‘beggar state’, but we are a state with severely misplaced priorities. We would rather be number one in nuclear weapons than number one in literacy. We would rather sit in the dark than pay taxes. We would rather complain in the streets than make difficult decisions in Majlis-e-Shoora. Being a nuclear state means that we have the resources and the intellect to get rid of things like polio and illiteracy. What we lack is political will.

Politicians love slogans about how it’s time for Pakistan to take responsibility for itself and stand on its own feet. Okay. But responsibility requires more than slogans, and standing on your own feet means having the courage to get off of your arse. So why, despite having the opportunity to help build support for spending reform and tax reform, PML-N is sitting in the streets chanting slogans again?

Fixing the economy requires shared pain

While many economic indicators have shown that the national economy contains significant potential for improvement, progress is slower than necessary to keep pace with the growing population and needs of the country’s poor. Shahid Javed Burki examines the economic stress in the country and notes that one of the largest obstacles to improvement is political parties protecting their base from the possibility of tax increases.

There is no other way out of this quandary than for the government to increase its resource base. But the tax system is proving hard to reform. The various constituencies that support different political parties are not prepared to see an erosion of the incomes of their base that would inevitably result in the short term with higher taxes. The ruling Pakistan Peoples Party has a strong base of support in rural Sindh and does not want agricultural incomes to be taxed. The Karachi-based Muttahida Quami Movement does not want urban services to be taxed. The Pakistan Muslim League (Nawaz), which governs Punjab and is the largest opposition party, does not want the documentation of the merchant class, which has successfully resisted it. Without documentation, it cannot be brought into the tax net. Politics, in other words, is pulling down the economy. And it is only politics that will bring about an improvement in the economy.

The solution to this impasse will not be easy, but taken together there is a possibility. To succeed, each of the political parties must put the good of the nation above their own drive for power and political gain. This means that every constituency must be asked to share the sacrifice of taxes so that the economy can be improved and programs funded to alleviate the suffering of the poor and hopeless.

Paying Taxes: A Patriotic Duty

Distractions come and go, but one thing is constant: The need to seriously address the nation’s economy. It’s easy to blame feudal politicians and they very rich for state of the economy. But as 700,000 individuals are opening their notifications from FBR instructing them to start paying taxes, we should be asking, “what of the other 99.7 per cent of citizens?”

The economy is a constant source of political battles, and as we approach the 2013 elections it will become even more so. Increased petrol prices, the fear of inflation, debt financing, and the price of food are constants in the political discourse. As the party currently in power, PPP takes a lot of complaints for the state of the struggling economy. But even PPP critics recognize that the problem is one that is not so easily solved as simply as replacing the present leaders.

Dr Pervez Tahir, former chief economist of the Planning Commission, criticises the government’s lack of focus on the economy, “despite [PPP’s] edge over the other parties in its concern for real economic issues”. Dr Maleeha Lodhi, also a regular critic of the present government, admits that the government is probably doing the best that it can given the political circumstances.

The new taxes have been imposed through presidential ordinances while the removal of the GST exemptions has been effected through SROs (statutory regulatory orders). This may have been the only course available to the government after the collapse of its talks with the PML-N and resistance from its coalition partners.

The good news is that many economic indicators are showing positive signs. Services exports surged almost 56 per cent since seven months, recording $3.424 Billions during July-January period, and foreign exchange reserves reached an all time high of $17.38 Billions.

The bad news is that economic growth is being held back by a culture of tax evasion in the country. Huzaima Bukhari and Dr Ikramul Haq suggest that the solution is to follow the model of Nigeria and Philippines and institute forced repatriation of funds from countries like Switzerland where money is being hidden. While repatriation of hidden funds is not a bad idea, it’s not enough. This would only provide a temporary economic boost and not change the regular practise.

The fact is that sustainable solutions to the economic situation require sacrifice and a shift in the popular thinking. We need to change the culture of tax evasion in the country.

The culture of tax evasion is not unique to Pakistan. The same problem exists in many developing countries including Bangladesh where tax-GDP ratio is only 9 per cent. And, despite the popularity of blaming tax evasion on the rich, tax evasion is a problem that is also widespread in the middle class. Again, this is not unique to Pakistan, but has been found in India also.

The point is not that the rich should not have to pay their fair share of taxes, but that we all should. No more excuses.

FBR collected Rs1 Trillino in the first three quarters of Fiscal Year 2011 – a 12.8 per cent increase since one year. This is still below targets, but it’s a step in the right direction.

Now, as the nation faces petrol price hikes, we need to be willing to face the music and pay our fair share. Certainly the price hikes will be felt, but we must examine it in context of the greater economy and not the immediate circumstance. Consider the statement of PM Gilani today.

On Friday Gilani told lawmakers the latest price increase was necessary because the government could not control rises on the international market.

“We have given 35 billion rupees (411 million dollars) subsidy on petroleum prices so far and our taxes on petroleum products are the lowest in the world,” Gilani said.

He urged the public to conserve electricity, gas and petrol “in the national interest.”

I have written before that loosing our country from the conditionalities and obligations that come with foreign aid requires “making the sometimes uncomfortable decisions required to solve” the nation’s problems. We can strengthen our nation and our security not by blaming others for our problems, but by investing in ourselves. There is a saying that “taxes are what we pay to live in a civilized society”. If we want to see Pakistan rise to its potential, we should not avoid paying taxes, but pay them willingly. That is the true sign of patriotism. Of course, there’s another saying which is “you get what you pay for”. Keep that in mind the next time you’re complaining.