Only 0.3% of Pakistan’s population of about 170 million pays income tax, compared to 3% for India that has a greater percentage of people in poverty, according to a report released on Wednesday.
About 500,000 people in Pakistan are filing income tax returns though the country’s revenue collection has remained flat since 2003-05 and expenditures have continued to grow to tackle challenges such as internal security, natural disasters and a global commodity price shock.
“To put this further in perspective, there are more people flying globally in airplanes at any point in the air than there are direct tax payers in Pakistan,” said a statement from Research and Advocacy for the Advancement of Allied Reforms (RAFTAAR), which released the report.
Pakistan’s tax to GDP ratio is 9.4%, which is close to the bottom of countries worldwide in terms of revenue generation, and its budgetary deficit is filled by debt because it does not collect enough revenues through taxes.
The report highlighted that Pakistan’s debt is expensive because only one-third of it is foreign. Foreign debt has an interest rate of 1.9% while the interest rate for domestic debt is10.7%, it said. Till 2009-10, Pakistan’s foreign and domestic debt were about equal.
“Foreign debt is cheaper, but access to it for Pakistan is harder. The cost of interest on our debt is Rs 1.3 trillion, of which 92% goes to domestic creditors, and 8% to international lenders,” said a statement from RAFTAAR, which is backed by Britain’s Department for International Development.
Referring to the looming and silent debt crisis, RAFTAAR said Pakistan’s public debt has increased three-fold from Rs 6.3 trillion in 2008 to Rs 17 trillion at present.
“This will continue to increase unless the state can increase revenue, otherwise it will continue to finance through debt,” it said.
The debt is also eating into Pakistan’s current revenue, with interest payments alone accounting for 44% of the country’s tax revenue. The interest payment per person is Rs 6.684 while the health expenditure per person is Rs 1009.
The report said Pakistan cannot depend on the international community, whose role is “overstated”. Over the past eight years, foreign project assistance in the development budget has been 15% and overall external assistance has financed just 4% of the budget.
“Pakistan’s ability to persevere through unexpected crises is also dependent upon improving taxation; there is very little flexibility in our budget. Right now, 60% of the federal budget is earmarked to interest payments, wages, pensions and defence,” RAFTAAR said.
While 12% of the budget goes to subsidies and grants, only 28% is adjustable and any unforeseen event gives Pakistan little fiscal room.
Despite only 0.3% of the population paying income tax, people feel they are taxed a lot. The government resorts to indirect taxation, which generates 68% of tax revenues, because it has been unable to collect direct taxes.
“The problem with indirect taxation is that for some items, it penalizes the poorer more than those with higher incomes, for example tax on a loaf of bread will be the same for the rich and the poor. Without improvements in the direct taxation system and more compliance there will be continued pressure to levy indirect taxes on consumption,” the statement said.
Pakistan has not been compelled to develop its tax system because of non-revenue sources of funds such as loans and foreign aid that it has historically generated.
“As a result, there is no tax-culture in Pakistan. There are now significant groups with great political clout who oppose tax reform (traders, businesses seeking exemptions, etc),” RAFTAAR said.