Taxation – Who pays, who doesn’t?

[00:00:00] Junaid Iqbal: In the previous video, we discussed the budget overview and it emerged that if we imagine the fiscal year 2023 budget as ₹1,000,000,
[00:00:01] Junaid Iqbal: then our core income, which is called taxation, is very low, only ₹ out of 100.
[00:00:03] Junaid Iqbal: Why is taxation so low? Who is paying the taxes and who is not? Today we will discuss this matter with six crucial points.
[00:00:07] Junaid Iqbal: The first point is to make it very clear that we collect very little tax,
[00:00:10] Junaid Iqbal: and there are two ways to prove this. First, let’s look at our tax-to-GDP ratio.
[00:00:13] Junaid Iqbal: Pakistan’s tax-to-GDP ratio is 9.3. Our total GDP is approximately 341 billion dollars, so we only collect about 31.79 billion dollars in taxes.
[00:00:16] Junaid Iqbal: If we compare this to India, their tax-to-GDP ratio is 16, which is much better.
[00:00:18] Junaid Iqbal: And if we take examples of developed countries, like France, France’s tax-to-GDP ratio is around 30%.
[00:00:20] Junaid Iqbal: This means that if the economy’s size is ₹1, the government collects ₹0.30 in taxes.
[00:00:23] Junaid Iqbal: According to various studies by the IMF and the World Bank, if a country’s tax-to-GDP is less than 12%, it does not have enough resources to properly develop or focus on the welfare of its people.
[00:00:25] Junaid Iqbal: Thus, Pakistan’s tax-to-GDP ratio is very low. The second point to enhance this discussion about our low tax collection is proven by our filers.
[00:00:28] Junaid Iqbal: Looking at our population of around 203.9 million, about 2 million are employed in various segments,
[00:00:30] Junaid Iqbal: and roughly 70 million Pakistanis are employed or earning income in formal or informal sectors.
[00:00:33] Junaid Iqbal: Out of these 70 million, only about 4 million are known to the government in terms of their economic activities, meaning they are filers.
[00:00:37] Junaid Iqbal: What does it mean to be a filer? Tax filers are those who file their tax declaration or tax return every year,
[00:00:40] Junaid Iqbal: declaring their annual income, expenses, and last year’s assets, and whether their assets have increased or decreased.
[00:00:43] Junaid Iqbal: In any developed country, having a formal relationship with your state in this manner is a normal thing when you enter the formal tax network of the state.
[00:00:45] Junaid Iqbal: So in Pakistan, only 1.4% of the population are tax filers. In India,
[00:00:47] Junaid Iqbal: because they have worked on this over the past few years, now 4.8%
[00:00:49] Junaid Iqbal: of the population are filers. If we take Malaysia as an example,
[00:00:51] Junaid Iqbal: about 12.5% of the population are tax filers. This means a majority
[00:00:53] Junaid Iqbal: of the working or earning population is somewhat captured in it.
[00:00:55] Junaid Iqbal: Now, contrast this with Pakistan, where there is the concept of non-filers
[00:00:57] Junaid Iqbal: who are facilitated everywhere. If you do not submit your tax declaration,
[00:00:59] Junaid Iqbal: then when you make bank transactions or buy a vehicle or engage in property transactions,
[00:01:01] Junaid Iqbal: everywhere a rate has been established by the state that says, ‘This is the rate for filers and this for non-filers.’
[00:01:03] Junaid Iqbal: So, of course, even if non-filers pay the withholding taxes deducted at transaction time,
[00:01:05] Junaid Iqbal: the taxes they pay are much less compared to filers. Thus, if non-filing is facilitated,
[00:01:07] Junaid Iqbal: it is clear that less tax will be collected. So again, the first point is established that we collect very little tax.
[00:01:09] Junaid Iqbal: Now moving to the second point about our low tax revenue, it’s important to understand the impact of indirect taxes,
[00:01:11] Junaid Iqbal: which significantly burden the poor disproportionately. For example, when you buy petrol,
[00:01:13] Junaid Iqbal: the tax levied on it is an indirect tax. Nowadays, the price of petrol at the time of recording this video is ₹ per liter,
[00:01:15] Junaid Iqbal: and for simplicity, let’s say ₹ is taxed per liter. So if an average person fills up ₹1,000 worth of petrol, approximately 3 liters,
[00:01:17] Junaid Iqbal: they pay ₹30 in taxes. And if a poorer person also spends ₹1,000 on petrol, they too pay ₹30 in taxes,
[00:01:19] Junaid Iqbal: which is a much higher percentage of their income compared to the richer person, illustrating why indirect taxes are considered regressive.
[00:01:21] Junaid Iqbal: This regressive nature of taxation puts a heavier burden on the poor. Thus, in Pakistan,
[00:01:23] Junaid Iqbal: the majority of our tax collection is through these regressive means. Now, let’s talk about direct taxes,
[00:01:25] Junaid Iqbal: which are crucial but inequitably collected. For example, the salaried class last year contributed 24 billion in taxes,
[00:01:27] Junaid Iqbal: and the tax slabs on salaried individuals are quite high. So, if you’re a salaried individual earning ₹600,000 annually,
[00:01:29] Junaid Iqbal: you fall into a higher tax bracket if you earn over this amount. For instance, if your income is ₹1 million a year,
[00:01:31] Junaid Iqbal: or ₹100,000 a month, you would have to pay about ₹85,000 in taxes annually, which is about 8.5% of your income.
[00:01:33] Junaid Iqbal: And if your salary or income is ₹10 million, you would have to pay about ₹3 million in taxes,
[00:01:35] Junaid Iqbal: which means your effective tax rate is about 30%. Now, there’s no issue with this system because
[00:01:37] Junaid Iqbal: the more money you earn, the higher the tax rate applied—this is called progressive taxation.
[00:01:39] Junaid Iqbal: All developed countries focus on progressive taxation so that the poor pay less and the richer pay more,
[00:01:41] Junaid Iqbal: both in percentage and absolute terms. So this covers the salaried class,
[00:01:43] Junaid Iqbal: but this system is not uniformly applied. For example, let’s look at the agricultural sector,
[00:01:45] Junaid Iqbal: where there is no federal income tax on agriculture because it’s a provincial subject.
[00:01:47] Junaid Iqbal: In the provinces, if you own up to 12.5 acres, there is no tax, and if you own more than 125 acres,
[00:01:49] Junaid Iqbal: various provincial taxes apply. However, if you combine all the taxes collected across the provinces last year,
[00:01:51] Junaid Iqbal: the entire agricultural sector only paid ₹1 billion in taxes. This is a significant issue and one we will explore further in upcoming videos.
[00:01:53] Junaid Iqbal: It’s also important to note that the majority of parliament belongs to the agricultural sector,
[00:01:55] Junaid Iqbal: and we will discuss this in a dedicated video. Now, let’s look at the services sector,
[00:01:57] Junaid Iqbal: particularly the formalized service sector, such as banks. Banks have to pay about 40-45% of their operating profits in taxes.
[00:01:59] Junaid Iqbal: If we take the example of Bank Alfalah, last year alone, Bank Alfalah paid 18 billion in taxes,
[00:02:01] Junaid Iqbal: and similar tax rates apply to other banks. Moving on to the industry sector,
[00:02:03] Junaid Iqbal: which is considered a growth engine of any economy. Pakistan’s industry faces numerous pressures:
[00:02:05] Junaid Iqbal: expensive electricity, a shortage of trained workforce, rising land prices, and the difficulty of expanding industry due to a weak currency,
[00:02:07] Junaid Iqbal: which makes importing machinery challenging. Yet, the industry is under tremendous pressure from taxes.
[00:02:09] Junaid Iqbal: If we consider the cement sector, for example, many cement companies are listed, and their accounts are easily available.
[00:02:11] Junaid Iqbal: If you take Maple Leaf as an example, they paid about 50% of their operating profits in taxes,
[00:02:13] Junaid Iqbal: so last year, Maple Leaf Cement alone paid 4.7 billion in taxes, which is more than the entire jewelry sector in Pakistan.
[00:02:15] Junaid Iqbal: And this is just the direct taxes or corporate income taxes I’m talking about.
[00:02:17] Junaid Iqbal: In addition, they also paid about 20 billion in federal excise duty or sales taxes to the government.
[00:02:19] Junaid Iqbal: Now, you know that the retail and real estate sectors are not really in the tax net.
[00:02:21] Junaid Iqbal: When you go to a shop, if you talk about paying with a card, the shopkeeper often says,
[00:02:23] Junaid Iqbal: ‘Give us cash.’ Ideally, retail should also have a system like salaried individuals,
[00:02:25] Junaid Iqbal: where there is a certain income threshold or shop size up to which this exemption applies, but beyond that,
[00:02:27] Junaid Iqbal: as you earn more or the larger your shop, your tax rate and absolute amount should increase.
[00:02:29] Junaid Iqbal: However, various governments have tried to impose taxes on retail and faced severe strikes,
[00:02:31] Junaid Iqbal: political pressure, and because retailers are quite organized, political parties often back down.
[00:02:33] Junaid Iqbal: Recently, the new government tried to collect at least ₹1,000 per month as a fixed tax from every shop,
[00:02:35] Junaid Iqbal: and you’ve seen how much pressure there has been on that. Now, moving on to real estate,
[00:02:37] Junaid Iqbal: everyone in this country knows that most of Pakistan’s undeclared cash ends up in real estate.
[00:02:39] Junaid Iqbal: If there is land worth crore rupees, there’s a significant difference between its collector value and its actual market value.
[00:02:41] Junaid Iqbal: A few years ago, this difference was even more stark: if there was land worth crore rupees,
[00:02:43] Junaid Iqbal: you officially paid only about 30 lakhs, and the rest had to be dealt with in cash.
[00:02:45] Junaid Iqbal: Now, the government has reduced this difference somewhat, imposing a 3% tax on buying and selling transactions to discourage quick flipping,
[00:02:47] Junaid Iqbal: and a system for capital gains tax has also been put in place. But still, if you look at how much value has gone into real estate in this country over the last 50-60 years versus how much it has contributed in taxes, it is a joke,
[00:02:49] Junaid Iqbal: and it also raises another question about the source of income, where most of the money coming from undeclared sources has gone into real estate,
[00:02:51] Junaid Iqbal: and the government has not been able to tax this money, so it hasn’t entered the government’s kitty and hasn’t been used for development work.
[00:02:53] Junaid Iqbal: Similarly, in direct taxation, where I told you that some sectors are under more burden and some are under much less pressure,
[00:02:55] Junaid Iqbal: let’s talk about the export sector and the technology-oriented sectors as an example.
[00:02:57] Junaid Iqbal: Systems Limited or the textile company Interloop
[00:02:59] Junaid Iqbal: These sectors have been somewhat spared, but if you summarize the entire discussion,
[00:03:01] Junaid Iqbal: it is that our entire economy operates in a largely informal manner where the government should be collecting direct taxes,
[00:03:03] Junaid Iqbal: there isn’t a uniform treatment in the system, there isn’t equity, there isn’t fairness, some are under much pressure, and some are under very little.
[00:03:05] Junaid Iqbal: So, the fourth important point is that the tax system is very complicated. First of all, there are 15-20 different types of tax regimes,
[00:03:07] Junaid Iqbal: with withholding regimes, sales tax regimes, income tax, turnover tax, prison taxes, and so forth.
[00:03:09] Junaid Iqbal: Secondly, there are too many entities; first, you have your Federal Board of Revenue, which is a national level entity,
[00:03:11] Junaid Iqbal: then each state’s sales tax collection entities, like the Sindh Revenue Board, Punjab Revenue Board, etc.,
[00:03:13] Junaid Iqbal: then you have the Customs Department, Excise Department, Cantonment, and so on and so forth.
[00:03:15] Junaid Iqbal: So you can imagine when there are so many different regimes and so many collection entities,
[00:03:17] Junaid Iqbal: how much inefficiency is being created. The fifth important thing is that the process of tax filing is also quite complicated.
[00:03:19] Junaid Iqbal: At the moment, as an individual, you have to collect all the documentation of your income sources, expenses, last year’s wealth, this year’s wealth,
[00:03:21] Junaid Iqbal: and all this information has to be uploaded to the FBR website. This cumbersome process,
[00:03:23] Junaid Iqbal: which could be significantly simplified using basic technology because a lot of data can now be pulled by the FBR in one place.
[00:03:25] Junaid Iqbal: Similarly, when we look at corporates, especially for companies, whether they are sole proprietorship businesses, partnership businesses, or large companies, industries,
[00:03:27] Junaid Iqbal: their tax filing requirements are very complicated. The sixth important point is regarding tax rates,
[00:03:29] Junaid Iqbal: which some may find my comments controversial, but the tax rate is very high. If you compare the tax rates of Pakistan and Singapore,
[00:03:31] Junaid Iqbal: our highest income tax rate applied to individuals goes up to about 35%, while in Singapore, it is 24%.
[00:03:33] Junaid Iqbal: Our sales tax is around 18%, while in Singapore, it is 8%. Our corporate tax is about 29%, while in Singapore, it is 17%.
[00:03:35] Junaid Iqbal: So, the point is that in global economics, the concept is that both capital and labor are mobile and smart,
[00:03:37] Junaid Iqbal: and whenever they find better economic opportunities, they move. So, if you want to start a business in Singapore, there is ease of doing business,
[00:03:39] Junaid Iqbal: there is safety, security, no issues with electricity, water, gas, oil, no issues with theft, no issues with bribery, plus the tax rate is also lower.
[00:03:41] Junaid Iqbal: But in Pakistan, we have all these issues, and then on top of that, the tax rates are also very heavily imposed.
[00:03:43] Junaid Iqbal: So, I think from a realistic perspective, to also attract foreign investment, to make tax filing easier, to increase the number of filers,
[00:03:45] Junaid Iqbal: we may need to reduce our tax rates. So, these six points being said, I’ll summarize by saying that we are collecting very little tax,
[00:03:47] Junaid Iqbal: and when we do collect, we are putting a lot of pressure on some people and no pressure at all on others.
[00:03:49] Junaid Iqbal: For example, the salaried class is under a lot of tax pressure and they aren’t being provided services, they’re leaving the country.
[00:03:51] Junaid Iqbal: And on the other end, the industry is also under so much pressure, taxes are so high, industrial participation as a percentage of GDP is also decreasing.
[00:03:53] Junaid Iqbal: But the important thing is that if we look at our total GDP size, everyone knows it’s actually more than 340 billion dollars,
[00:03:55] Junaid Iqbal: it’s just the number that’s declared. So realistically, if even our GDP is 400 billion and we collect taxes at 12%,
[00:03:57] Junaid Iqbal: then 48 billion dollars a year in taxes could be easily collected, and if we’re collecting that much tax,
[00:03:59] Junaid Iqbal: we wouldn’t need to take more loans and could reduce our existing debts. But unfortunately, we haven’t reached this situation yet,
[00:04:01] Junaid Iqbal: we’re earning much less than our expenses and keep taking loans every year. So now how much has our debt increased,
[00:04:03] Junaid Iqbal: who do we have to pay back, and what issues are we facing because of this debt, we will discuss in the next video.
[00:04:05] Junaid Iqbal: If you liked this video, please subscribe to our channel. The links to all the data sources used in this video are available in the comments.
[00:04:07] Junaid Iqbal: And as we part, one question: should more taxes be imposed on retail and real estate? Please share your answer in the comment section.