Undocumented economy and propositions

Tanvir Hussain Raza

Pakistan has a system of direct and indirect taxation to raise revenue with the majority of contribution coming from indirect taxes. Indirect taxes are inculcating in nature as they usually target consumption. In contrary, direct taxes are levied on profits, salaries, dividends and are progressive in nature.

Indirect taxes have 60% of the share in the tax system of Pakistan which directly affects the last consumer which raises inequality.

According to the constitution of Pakistan, the tax collection is outlined between the federal and the provincial governments. The provinces oversee charges on the complicated regions for example, property, agriculture, services and so on. The contribution of provinces is scarcely 4 – 7pc of the aggregate incomes. Despite what might be expected, they get 35pc from the government to meet their own expenses.

This vividly shows the gap in poor collection by the provincial governments. Due to this, the burden is shifted to the federal government which is compelled to increase in indirect taxes. The examples of provincial taxes are excise duties, stamp duties, property tax, motor tax etc.

Besides this, none has ever paid any heed to the undocumented economy as same is major dent in the tax system and collection of Pakistan as the same is neither auditable nor noticeable.

According to a research, at present the size of the undocumented economy is 70-80 per cent to the GDP. Meaning thereby that that amount goes unnoticed from the regulatory authorities i.e. FBR or provincial tax authorities leading to deteriorating tax collection.

The reasons of undocumented economy are manual revenue records, cash transactions, smuggling, lack of invoice or receipt culture, small unregulated businesses, and most certainly illiteracy.

Another main cause of undocumented economy is the fear of citizen to come on the FBR tax net. The basic perception in a common individual of Pakistan is once he comes under the ambit of the FBR he will be victim of unnecessary harassment, notices and demands of under table money from officials (corruption). Due to this common citizen finds easy way which is to remain undocumented.

Moreover, the tax rules are so complicated that a common person who is under tax net and having earning which makes him liable to file return but have less education, fears the technicalities of the tax law especially when same is in English language. Then they become prey to un professional tax advisors who are nothing but quacks in tax field which are more dangerous than a person who tries to files his own return.

In conclusion, in order to broaden the tax base regressive strategy of indirect taxation should be reduced and mechanism should be made to attract the undocumented individual to voluntarily come on tax bases the benefits given nowadays is still not attractive for a person who is out of tax net he still feels safe from unnecessary harassment and notices.

In conclusion as Arthur Vanderbilt said: “Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.”

 (The writer is tax practitioner and spokesman for RS Mavens Tax Firm, Karachi).