The current taxation system of Pakistan is based on the Income Tax Ordinance issued in 2001. It depicts a progressive tax system of Pakistan, but unfortunately, we are regressing instead of progressing. That discriminating taxation system has culminated in rising poverty and inequality in Pakistan that 40 per cent people live under the poverty line. The ratio of stunt children in Pakistan is rising approximately with 44 per cent of children stunted and 9.6 million children having experienced chronic nutrition deprivation.
There are four main sources of revenue for the government such as general sales tax (GST), central excise duty (CED), Customs Duty and Income Tax. The structure of these is highly dominated by indirect taxes, which combines over two-third (nearly 70 per cent) of combined federal and provincial tax receipts.
The general public in Pakistan is laboring under the heavy burden of taxes because all the common public necessary commodities are levied with heavy taxes. The poor people in Pakistan are taxed more than rich, with estimates that lowest 10 percent poor people of Pakistan contribute 16 percent of their income to indirect taxes while the rich 10 percent contribute only 10 per cent. Those 10 percent of the poorest households contributes through indirect taxes such as General Sales Tax, Central Excise Duty, and Customs Duty.
The factionalized elites have captured the economy and dominate politics situation of the country. They make decisions that are in their favor and this is one of the giant hurdles toward progressive tax system. Those elites do not pay a due share of their wealth or affluent that contribute to tax revenue. Moreover, the widespread exemptions and privileges are granted to the rich and influential at the heavy costs of poor.
Thus, the concentration of wealth is in the hands of the few that leads to undue political influence, which ultimately robs citizens of natural resource revenues, produces unfair tax policies and encourages corrupt practices, and challenges the regulatory powers of governments. Of 10 million people who qualify to pay tax, only 2.5 million are actually registered to pay tax. Daily expenses of Prime Minister Secretariat are Rs 2.2 million. Pakistan Parliamentarians have on average assets worth $900,000 (with the richest member worth $37m), but only a few Parliamentarians pay tax. In 2010, a review of Parliament and provincial assemblies revealed that 61% of 15 lawmakers paid no income tax during the year they contested elections. The influence of elites continuous in the business world with; only 100 companies (out of an estimated 64,000) paying 80% of total taxes collected by the Federal Board of Revenue.
In Pakistan, there has been a shift from equitable taxes to highly inequitable ones. The dependence on indirect taxes ‐ even in income tax law under the garb of probable income has transferred the burden of taxes from the rich to the poor. The common people are paying an excessive sales tax of 17% (in fact 35%‐40% on finished imported goods after duties, mandatory value addition under sales tax law and income tax at source) on essential commodities while the rich are paying no wealth tax/income tax on their colossal assets/incomes.
Fair and equitable taxation policies should be devised as envisaged in Article 3 of the constitution: “The State shall ensure the elimination of all forms of exploitation and the gradual fulfillment of the fundamental principle, from each according to his ability to each according to his work”. In addition, a government needs to revamp the entire tax system – use taxation as a tool for economic development rather than collecting money for luxuries of the rulers. Besides this, a government should embark upon progressive income and corporation taxes for subsequent enforcement – a system in which the rich are liable to pay higher rates of taxes while everyone else pays tax as per their means. It is the responsibility of government to abolish general sales tax to Zero rate – a discriminatory indirect tax shifting the burden from unaffordable by ending the tax havens.