Taxation in Pakistan: A Conversation We Need to Have
It’s that time of year again when millions of salaried individuals in Pakistan scramble to file their tax returns. Alongside this annual obligation, an interesting debate is unfolding on social media: just how much of Pakistan’s tax revenue truly comes from the salaried class? While the discussion might seem emotional at times, it’s a healthy sign that people are becoming more aware of their fiscal responsibilities.
But let’s dig deeper. Shouldn’t this conversation prompt our policymakers to think seriously about whether our tax system is fair? With wages in Pakistan being some of the lowest globally, this is particularly pressing. The prevailing situation isn’t about lack of skill; it’s driven by a surplus of labor against limited demand. On top of that, since 2017, the rupee has depreciated significantly, eroding real incomes year after year. When people’s incomes shrink while tax demands grow, it feels like a double whammy for those striving to stay compliant.
The Strain on the Middle Class
What’s striking is that the effective tax rate for Pakistan’s middle class is now higher than in many of our regional counterparts. Meanwhile, the burden is compounded by new taxes like the super tax, and the removal of legitimate tax credits that once offered some relief. Instead of expanding the tax base, the government seems to be leaning heavily on the same small pool of corporates and salaried employees.
Across the country, many small traders and service providers remain outside the tax net, thriving on cash transactions and under-reporting. While a select few carry the weight of tax contributions, the vast informal economy operates unchecked.
The Honest Few vs. The Informal Economy
This isn’t a mere oversight; it’s a systematic issue. With roughly 2-3 million active tax filers in a country of 250 million, the salaried class lacks political clout. Politicians find it easier to cater to larger vote banks through subsidies rather than offer genuine tax relief to compliant taxpayers. This approach might bring short-term benefits, but it perpetuates a cycle that doesn’t build a strong economy.
A well-educated segment knows the sacrifice that goes into their careers; they pay hefty taxes that could otherwise fund business ventures, homes, or education. Keeping the economically marginalized poor might secure votes, but it does little to foster national growth.
The Balance of Taxation
High taxes not only discourage skilled professionals but also make them more likely to seek opportunities abroad. Regional competitors have achieved better corporate tax rates, making Pakistan less appealing for business and innovation. While we boast about our qualified professionals, their remittances cannot replace the economic vitality they could foster locally.
And let’s face it—high tax rates are distorting the job market. We see a trend where professionals are increasingly turning to freelancing or smaller informal roles, which only reduces the formal economy’s capacity to generate jobs. For fresh university graduates, the dream of upward mobility feels more elusive than ever.
A Call for Reform
A stagnant GDP growth rate of 3-4% is not a sign of stability; it’s an indicator of economic stagnation, placing Pakistan in a cycle reliant on remittances rather than productivity. This needs to change, starting with comprehensive tax reforms.
Imagine reducing taxes for salaries and corporations over the next decade while also digitizing our tax collection methods. This could broaden the tax base and create a fairer system, pushing our tax-to-GDP ratio from roughly 11% to a more sustainable 15%. This isn’t just wishful thinking; it’s entirely feasible if we focus on inclusive participation rather than squeezing those who are already paying.
Conclusion: A Sustainable Path Forward
It’s time to shift the paradigm. Conditions from international financial institutions shouldn’t deter us from pursuing fiscal fairness. With modernized practices in tax collection and transparent data-sharing, we can provide an environment that rewards compliance instead of penalizing honesty.
As we engage in these critical discussions about taxation, let’s not forget the need for resources and support in navigating these financial waters. At Pro21st, we advocate for informed discussions and collaborative efforts to build a better economic future for everyone in Pakistan. Let’s keep the conversation going!
