Government of Pakistan collect taxes from its people in order to spend the collection on the welfare of its people which includes national defense, debt servicing and other welfare related issues. While designing the tax policy a country should account the equity and justice for its people because a system is most effective when it is designed on the bases of equal and fair treatment of each tax-payer. But in case of Pakistan the situation is bit different, as a nation we are in debt by the foreign and domestic lenders which is due to our extra expenses incurred due to recent war on terror, our habit of corruption at national and international level and we are also tax averse society in which we don’t feel ourselves responsible to pay taxes. After analyzing the height of corruption, special favor given to government officials or their friends,(Their Detail of Corruption will be discussed later on with their names). Our undocumented economy and failure to increase tax net it has become necessary for any lender to set the target in order to continue the money lending and to make sure that their borrowed money can be repaid by the borrower.
Initially the foreign lenders did not set any targets for us because they somehow believed in our commitments and also felt that we will pay them back their money as per the signed agreement but after the several failures of debt servicing, lenders started to analyze the root cause of this issue in which they found our tax collection system complied with old methodology of taxation i.e. General Sales Tax (GST) in which all the tax collected at the last stage which makes them aware of the fact that as a corrupt nation and low tax net economy it will become more difficult for them to collect their lent amount from us which lead IMF to set targets for us.
There are several reasons why we are unable to collect the tax. Corruption is one of the important aspects which are casting great hindrance in taxation system. Other important reason is low literacy rate, which is very low as compared to many countries in the world. Demography of a country also play an important role in the tax to GDP ratio. Pakistan has about 36.7% population which is 14 years of age or below. Hence working class is not growing to generate taxes. Terrorism, law and order situation, poverty and unemployment are also playing important role in low tax collection. Tax base in Pakistan is stable at 1%, on the other hand tax base in USA is about 24% and it is 20% in Malaysia. Tax policy is also not suitable in order to generate taxes and to extend the tax net. Another problem that we are facing is documentation of economy; nearly 52% of our economy is undocumented. Audit and enforcement is so weak in Pakistan that the audit agencies themselves are involved in corruption. Looking at different sectors, we can see agriculture has above 20% share in GDP but tax collected from this sector are only 1% of total tax collection. In this way contribution of different sectors is not properly distributed. Political influence is also a big hurdle in the taxation system. (According to sec 38) departments are molesting the respect of the person which are paying taxes.