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Pakistan’s tax regime: new grief for the US funding machine? August 2, 2010

Posted by southasiamasala in : Pakistan, Weigold, Auriol , trackback

Auriol Weigold

ABC Radio National’s Saturday Extra on 24 July featured a fascinating interview with Akbar Zaidi, a visiting scholar in the Carnegie Endowment’s South Asia Program and a visiting professor at Johns Hopkins University’s School of Advanced International Studies.  He spoke about Pakistan’s tax regime that allows the rich, owners of the country’s wealth, to avoid or evade paying tax.

Speaking from Karachi he said that of the 170 million Pakistani’s, only some 20 per cent pay tax, leaving a major burden to be borne by the poor.

The nature of the tax system where the rich make policy leaves loopholes in a largely undocumented economy with a complicit bureaucracy.  Politicians, landowners and business people own the wealth of the country and simply do not pay tax, nor is tax collection enforced.

The rationale is that there is no merit in being honest, that tax paid feeds corruption and money collected is misspent.  There is apparently no impetus to “fix” the system and collect the massive backlog of tax due, as “friends of Pakistan” – from Ausaid to the World Bank – will support the nation.

There is an expectation that donations from developed nations will continue to subsidise Pakistan, removing any motivation to stiffen up the tax system.

As Professor Zaidi, said Pakistan is getting a free lunch.

Exposure of the rorts in Pakistan appeared in the New York Times on 18 July.  The article, entitled “Pakistan’s Elite Pay Few Taxes, Widening Gap”, was posted on “Goatmilk: An intellectual playground edited by Wajahat Ali”.

The articles expands on the “Saturday Extra” interview, crediting a Mr Zaidi (perhaps not the same man as interviewed), with asserting that he blames the United States and its “perpetual bailouts”, and suggests that America should say “Enough.  Sort it out yourselves”.

Much of the tax avoidance, he goes on to say, is actually legal.  A 1990s law prevents authorities from questioning money sent from overseas, thus in some way legalising undocumented money made in Pakistan, channeled through Dubai, for example, and back to Pakistan. “In this country no one asks ‘How did you get that flat in Mayfair’”.

Without the political will to collect income tax, Pakistan uses easier measures like sales tax that penalise the poor – the example given is a chauffeur in Karachi, who with a salary of US$123.00 per month pays the same sales tax as a National Assembly Member who makes US$1400.00 over the same period – with benefits.

Earnings from real estate and land, for example, are rarely declared and in an effort to find taxable income, collectors use electricity bills to find rich tax evaders on an assumption that high bills indicate high use of air-conditioning, which means wealth.

There is much more, spread across articles such as “The poor subsidise the rich in Pakistan” (The News, published in Islamabad on 20 July), and another New York Times special report on 22 July, “Pakistan – where the poor subsidise the rich”.

Such reports suggest Pakistan’s fiscal performance is very poor, especially for a country that is amongst the largest recipients of American aid.  This aid is intended to help Pakistan’s leaders fight the insurgency, but in reality it props up the country’s finances and covers for its failure to collect tax from the rich. Only a week ago Secretary of State Hillary Clinton visited Pakistan and read the riot act there. (Sandy Gordon, Inside Story, 29 July.

Amongst the problems are the fact that the ISI continues to deal with theTaliban while the government in Islamabad is purportedly aiding the American war effort.

Nonetheless Clinton announced hundreds of millions of dollars in development funding.  One would think that a rigorous tax regime in Pakistan could go some way to meeting the country’s development and military needs.

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