Pakistan is defying mounting Western pressure to end a giant tax dodge with fewer and fewer people contributing to government coffers, spelling dire consequences for a sagging economy.
Tax is taboo in Pakistan. Barely 1 percent of the population pays at all, as a corrupt bureaucracy safeguards entrenched interests and guards private wealth, but starves energy, health and education of desperately needed funds.
Less than 10 percent of GDP comes from tax revenue — one of the lowest global rates and worse than in much of Africa, economists say.
Federal Board of Revenue (FBR) spokesman Asrar Rauf said 1.9 million people paid tax last year, less than the year before, despite 3.2 million being registered to pay — itself a drop in the ocean of a population of 180 million.
As a result, Pakistan’s fiscal deficit widened from 5.3 percent to 6.3 percent of GDP last year, the Asian Development Bank said this month, knocking this year’s growth figures to 2.5 percent and predictions for next year to 3.2 percent.
In the wake of catastrophic floods last year that cost the economy US$10 billion, Washington donated hundreds of millions of dollars and demanded that Pakistan’s rich, whose lifestyles outstrip many in the West, step up to the plate.
This month visiting British Prime Minister David Cameron pressed the point home, saying aid increases were a hard sell when: “Too many of your richest people are getting away without paying much tax at all and that’s not fair.”
Tax reform has come to nothing, not least because of political stalemate in the hamstrung parliament and a government coalition threatened with collapse by walk-outs.
The IMF last May halted an US$11.3 billion assistance package over a lack of progress on reforms, principally on tax.
And despite a flurry of meetings, no new loan has been agreed in the run-up to the IMF and World Bank’s spring meetings.
An IMF review mission is due to visit next Sunday.
“Consensus is building, we have almost reached agreement [on reform],” one government official said, but gave no details.
Under pressure, Pakistani President Asif Ali Zardari pushed through a short-term 15 percent flood surcharge on income tax and a 2.5 percent special excise duty last month, but it is uncertain whether they will survive the next budget in June.
Government suggestions of raising revenue by reforming a general sales tax ran into walk-outs from politicians who said it unfairly hits the poor.
What would really work, analysts say, would be scrapping exemptions that serve entrenched interests, such as a 50 percent tax discount on sugar and a gate on taxing agricultural income that largely exempts wealthy feudal landowners.
However, stalemate and vested interests have made that impossible.
“There’s talk of early elections. One has a brittle coalition. A lot of the reform areas that need to be dealt with have very well entrenched and powerful lobbies that are making the case against it,” a finance ministry official said.
As it is, the tiny minority who contribute say they carry a disproportionate tax burden, for which they get nothing in return.
Pakistan suffers from an awful energy crisis, yet government spending on electricity subsidies last year reached just under 1 percent of GDP, health spending 0.5 percent and education 2 percent, the finance ministry said.