Wednesday, December 6, 2023
Wednesday, December 6, 2023
HomeNewsWhy people in Pakistan do not pay taxes?

Why people in Pakistan do not pay taxes?

Pakistan is one of the countries where the ratio of taxes to the size of the economy remains quite low, in fact, it is far lower than the spending ambitions and obligations of its federal and provincial governments. Lack of trust in the government, corruption and misuse in expenditure of public money, and tax agencies’ connivance with tax evaders are common reasons given for tax evasion. However, many other countries with worse track records are able to collect much more taxes. Compliance with tax laws and payment of taxes is quite counter-intuitive as taxes are not linked with any exchange or reward in the short, medium, or long term.

The reasons why people avoid paying taxes:

The beneficiaries of tax payments are often sets of people different and remote from those paying the taxes. Additionally, a rational person would always like to minimize their tax payments as the utility of money in possession is far greater than giving it to the government for a largely undetermined purpose (at least not determined by the taxpayer directly). This paradox was elaborated by two economists, Michael G Allingham and Agnar Sandmo in their 1972 seminal paper titled “Income tax evasion: a theoretical analysis.” In this paper, they discuss the choice of a taxpayer who rationally trades off the benefits from evading taxes and the risk of costs from detection and incurring fines. 

Consequences of not paying taxes:

Another reason for low tax compliance in Pakistan is the perception of corruption within the tax system. Tax officials are often seen as corrupt and willing to take bribes to overlook tax evasion or reduce tax liabilities. This perception creates a lack of trust in the system and discourages people from willingly paying taxes.

Additionally, the complexity of the tax system can also contribute to non-compliance. The tax laws and regulations in Pakistan are often confusing and difficult to understand for the average taxpayer. This creates a barrier for people to comply with the tax laws, leading to underreporting or non-reporting of income.

To address the issue of low tax compliance, Pakistan needs to implement reforms aimed at improving the tax system. These reforms could include simplifying the tax laws and regulations, improving tax administration, and increasing the use of technology to make the tax system more efficient and transparent.

Strategies to encourage tax compliance:

The problem of low tax compliance in Pakistan is multifaceted, with several factors contributing to it. The ratio of taxes to the size of the economy in Pakistan is far lower than the spending ambitions and obligations of its federal and provincial governments. The lack of trust in the government, corruption and misuse of public money, and connivance of tax agencies with tax evaders are some of the popular arguments used to explain this situation. The tax administration is not so effective, and the income tax filing population is only 3.5 million, and sales tax payers/depositors are 60,000, which is a perfect picture of an extreme horizontal inequity that forces filers/payers not to declare their revenues and incomes correctly. The horizontal equity can be restored only if their competitors also comply. An elaborate system of withholding taxes and tax collection on formal imports is going to contribute about Rs5.5 trillion this year, and most of the balance amount will be contributed by large corporations in the form of advance income tax and domestic sales tax. This system has evolved as a result of Pakistan’s peculiar political economy and reluctance to allocate reasonable resources to the Federal Board of Revenue (FBR). Although partially effective, the system is not encouraging.

Moreover, the government needs to work on improving public trust in the tax system by ensuring that tax officials are held accountable for their actions and by creating a culture of transparency and accountability within the tax system.

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