Direct or Indirect Taxation? ……… A Dilemma faced by Pakistan’s State Treasury

To put it simply in all global economies, there is direct taxation and indirect (and their combinations).

In developed countries direct taxation is the dominant part of the tax system as it accrues certain benefits for the economy, the people and the state.

In Pakistan, however there is an ongoing cat and mouse fight between the tax authorities and the taxpayers, with the later believing that it would be a waste to pay off their full tax bills due to the deep pockets of the corrupt officials and keepers of the finances.While the former points out that no state can perform the necessary duties if the state coffers are empty.

The result is that while Pakistanis are considered well-off compared to many developing countries, Pakistan is considered to be lagging behind economically in the league of the nations.

This trust deficit leads to a difficult situation where tax authorities rely on indirect taxation to try to fill-up the treasury  Unfortunately this approach has resulted in some very  negative implications for the state, the people and the overall economy. Let me explain how.

  • In Pakistan, ordinary people are taxed indirectly on  just about everything. Now indirect taxation does happen throughout the world but not as heavily as in Pakistan.
  • Here as much as PKR 30 Plus is taxed on EACH litre of Fuel which accounts upto 50% approximately, added on top of the base price.
  • This leads to inflation as the  increased transportation costs translates into inflation for just about everything.
  • The inflation is actually hyper-inflationary in nature as there is a multiplication element when the indirect taxation leads to rises results  in increased commodities prices.
  • This is because not only the inflation is added on EVERY level of the product life cycle but also there is a multiplicative element in the inflation pass-on rather than an additive one.
  • This hyper-inflation than impacts on the interests rates negative affecting the businesses.
  • Furthermore the pay-rises are NOT adjusted accordingly thereby forcing people to rely on expensive credit to make their ends meet.
  • The above issues than negatively impact upon the currency which in turn results in increased foreign debt burden.
  • As a result the financing costs of the foreign debt increases, leading to a higher proportion of GDP being spent on debt financing.

The above is the summary of the mess created by the financial policies  pursued by Pakistan’s treasury.

What needs to be done is to restore the faith of the people and implement a multi-dimensional tax reforms where:

  • Taxpayers are encouraged and their faith restored by stemming out corruption.
  • Tax Net is constantly widened.
  • More focus is given to direct taxation.
  • Meaningful tax rebates and reliefs are introduced for the less able sections of the society.
  • Tax structure are introduced to encourage foreign/local investments in Key Sectors with tax-breaks for transfer of techology, e.t.c as may be required in a particular sector.
  • Tax rates structure are created so as to tax people according to their means with more affluent contributing more to the treasury.

The above is a summary of the reforms which than  needs to be detailed and worked upon.

Should such reforms be made with reliance on local resources and a will for change, there is no reason, why Pakistan cannot stand on its own feet and become an economic hub not only for the region but the whole world.

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