HISTORICALLY, tax policies in many countries, including Pakistan, have been instrumental in shaping the economic landscape. However, poorly designed and implemented tax systems can stifle economic growth and development. In the context of Pakistan, tax policies have often been short-sighted, focusing primarily on immediate revenue generation rather than fostering a conducive environment for sustainable economic growth. The lack of a solid legal foundation and comprehensive planning has led to a series of ad-hoc tax measures, which have not only been ineffective but have also had detrimental effects on the economy. One of the critical issues with these tax policies is the over-reliance on withholding taxes. This form of taxation, initially intended as a temporary measure to ensure tax compliance, has become a pervasive aspect of the tax system. It is applied broadly to various transactions, such as utility bills, school fees, bank transactions, and telephone bills. The overuse of withholding taxes has effectively turned businesses, utilities, banks, and educational institutions into tax collection entities, adding an additional layer of operational costs and complexities. Withholding taxes, while seemingly a convenient method for the government to collect taxes, have significant downsides. The primary issue is that they shift the burden of tax collection from the government to businesses and other entities. This shift not only increases the operational costs for these entities but also disrupts their core functions. For instance, schools are meant to focus on education, not tax collection. Similarly, banks and utility companies have to divert resources to manage tax collection and compliance, which could otherwise be used to improve their services.
Moreover, withholding taxes are often regressive, disproportionately affecting lower-income individuals who may not have the means to absorb these additional costs. This regressive nature exacerbates the economic divide, as wealthier individuals and corporations can often find ways to mitigate their tax liabilities through various loopholes or tax planning strategies. Consequently, the tax burden falls disproportionately on the middle and lower-income segments of society.
Additionally, the oppressive nature of the tax system has also discouraged investment. Both domestic and foreign investors are wary of investing in an environment where tax policies are unpredictable and potentially punitive. This uncertainty, coupled with a high tax burden, makes Pakistan a less attractive destination for investment compared to other countries in the region with more stable and business-friendly tax regimes.
Importantly, One of the most significant issues with the tax system in Pakistan is its inequitable nature. Successive governments have used taxation as a means to extract as much revenue as possible, often at the expense of the broader populace. This approach has led to the imposition of oppressive tax laws that disproportionately impact the poor and middle class, while the wealthy often find ways to minimize their tax obligations. The inequitable nature of the tax system is evident in the way taxes are levied and collected. Indirect taxes, such as sales tax and excise duties, form a significant portion of the government’s revenue. These taxes are inherently regressive, as they constitute a larger proportion of the income of lower-income individuals. On the other hand, direct taxes, such as income tax, which are more progressive, are often evaded or avoided by the wealthy through various means. The gap between the rich and poor has widened as a result of these inequitable tax policies. The poor are burdened with higher relative tax rates, while the wealthy can leverage their resources to reduce their tax liabilities. This disparity not only hampers social mobility but also perpetuates inequality in the society. It creates a cycle where the rich get richer, and the poor get poorer, with limited opportunities for upward mobility.
The complex and cumbersome nature of the tax system has also made business transactions more complicated. The numerous regulations and procedures that businesses must comply with can be overwhelming, especially for SMEs. These businesses often lack the resources to hire specialized tax consultants or legal advisors, making it challenging for them to navigate the tax system.
The complications in the tax system also lead to a high level of tax evasion and avoidance. When the cost of compliance is too high, businesses may resort to informal means to reduce their tax burden. This evasion and avoidance not only reduce the government’s revenue but also create an uneven playing field. Businesses that comply with the tax laws are at a competitive disadvantage compared to those that do not, leading to unfair competition. There is an urgent need for comprehensive tax reform in Pakistan. The current system is not only inefficient but also inequitable. Reform should aim to broaden the tax base, reduce the reliance on indirect taxes, and ensure that the tax burden is shared more fairly. A more progressive tax system, where the wealthy pay a fair share of taxes, is essential for reducing inequality and promoting social justice.Furthermore, the tax administration needs to be streamlined and made more efficient.
This includes reducing the complexity of tax regulations, improving the capacity of tax authorities, and leveraging technology to simplify tax compliance. A more efficient tax administration would reduce the cost of compliance for businesses and individuals, thereby encouraging greater compliance and increasing revenue.
—The writer is contributing columnist based in Turbat, Balochistan.
