The chairman of the Federal Board of Revenue (FBR) has admitted that at least 15 million potential taxpayers are not paying taxes. This statement only reinforces the public's negative perception of the FBR and the Pakistani tax system.
The FBR chairman also said that the tax deficit could be significantly reduced if all high-income individuals paid their taxes. However, with only 2% of the population filing tax returns, and most of these filers being salaried employees, it is clear that the FBR cannot rely on people's sense of duty to pay taxes.
Tax avoidance and evasion are common in many countries, but an efficient tax agency can still force people to comply with the law and pay their taxes. Unfortunately, the FBR is not known for being an effective tax enforcer. The FBR chairman did not say what is being done to improve the FBR's performance or tax administration.
The FBR chairman's testimony also highlighted the anomalies in Pakistan's tax system. For example, the distinction between tax filers and non-filers, which was introduced by former finance minister Ishaq Dar, allows non-filers to get away with paying a fraction of what they owe in taxes. This has created a major incentive for people to stay out of the tax net.
The enormous tax deficit cannot be bridged by appealing to citizens' good sense or creating incentives for them to stay out of the system. Instead, a deep overhaul of the tax system is required. All income, regardless of its source, should be taxed fairly.
