EVEN amongst developing countries Pakistan is in the bottom-ranked nations, with tax revenues less than 10pc of GDP. There’s rampant tax evasion, partly with the official machinery’s collusion. Theoretically, revenues can be raised through broadening bases, improving the tax regime’s equity, incentivising documentation, checking evasion by embracing a zero-tolerance policy, and greater reliance on technology. However, any tax regime can only produce the results we hope for provided it is driven by our experience of what works.

In that spirit, although the outcomes of our income tax systems suggest otherwise, if we still insist on pursuing an income tax system as generally understood then it can only work if:

i) the same level incomes are taxed equally, irrespective of source; ii) legislation renders benami transactions illegal; iii) there’s a clear signal of no-tolerance, subjecting cabinet ministers to detailed scrutiny throughout their period of office, and the tax returns and wealth statements of parliamentarians and key public office holders and their spouses (including secretaries, chief justices, army chiefs, etc.) are public documents during their period of office and a year after; iv) FBR periodically reconciles provincial property tax registers, credit card holders and members of private clubs with those allotted National Tax Numbers; v) tax arbitrage by major shareholder executives is prevented by eliminating the tax differential between the highest individual tax rate and the corporate income tax rate; vi) withholding tax on cash withdrawals is abolished to incentivise the Rs2.2 trillion currency in circulation into the banking system, helping lower debt servicing costs; net tax collection on cash withdrawals is significantly lower than the likely saving on debt servicing costs.

However, if we choose to learn from the implementation of various initiatives to mobilise resources and encourage documentation only presumptive taxes have worked. Going forward this may be the only route but by replacing them with withholding taxes:

i) This rate should be increased by three percentage points to incentivise documentation, penalising those trying to avoid the tax net, with monthly bills in excess of Rs20,000 for domestic and all commercial electricity connections being subjected to a withholding tax of 10pc and 15pc respectively; ii)value-added exports are incentivised by raising the tax rate on the receipts of exports of products like cotton etc to 2pc, retaining the 1pc rate for exports of finished products like cotton, shoes, carpets, etc;

iii) for companies the turnover tax should be raised to 2pc — excluding those treated as special cases or exporters for tax purposes — to be regarded as withholding tax for those adopting this route. The other option is to exempt from audit unlisted companies paying a 20pc higher tax (15pc in the case of listed companies) than that paid in the previous year. Adequate safeguards can be built to check abuse by entrepreneurs — closing existing companies and starting new ones — while subjecting to audit those declaring losses; iv) revisit capital gains tax on profits from stock market trades.

If we wish to continue with GST on domestic transactions (treating imports separately), despite the evidence of failure, then to incentivise formal transactions the rate for registered entities should be 12.5pc with the unregistered paying the current rate.

There are different rates of import duties on the same item depending on the consuming industry, creating opportunities for ‘extracting rent’. The tariff structure should be simplified through ‘one-chapter one-rate’; although ideally we should gradually shift to a single, uniform rate on all imports.

On administrative measures, the focus should be a) on improving the quality of FBR’s data warehouse and IT systems; b) ensuring that taxes collected by ‘withholding agents’ or GST from the end-consumer are eventually deposited in government coffers by initiating a lottery for hotel and restaurant sales tax paid bills furnished by consumers.

However, the bigger problem lies on the expenditure side. It’s a black hole because of poor prioritisation, corruption and waste. Our political, military and bureaucratic leadership treats public money as its own, without ordinary citizens gaining much from such spending. For instance, development programmes are driven by politicians, contractors and corrupt officials, and mostly suffer from poor scheme selection, leakages and lack of transparency in procurement processes with no accountability for unsatisfactory impact.

Project staff, connected to important decision-makers, get hired while cars, mobile phones, laptops, etc; are procured years before the real work starts. These gadgets end up in their homes, with maintenance paid by the project, while those recruited get a job almost for life since the scheme is never completed.

Overstaffing in public-sector agencies and the salaries, perks and privileges of elected representatives and civil, military and judicial officials is a huge drain on scarce resources.

So what reforms are needed?

Following the 18th Amendment the federal government size should be drastically reduced while all VIP privileges such as planes, bullet-proof cars (except for those facing high security risk), Haj/umrah on government expense should be withdrawn and less than five hours’ travel should be in economy class.

Ministers and civil, military and judiciary officials should only get 1,300cc cars, while housing for officials should be eliminated in five years (if it’s to be provided then it should be in the form of apartments only).

Moreover, all producer-related subsidies on wheat, fertiliser, etc. should be in the provincial budgets, based on their respective priorities. The federal government should only fund interprovincial projects (eg national highways) shifting resources to higher priority areas, eg energy and railways, from lower priority programmes eg airports, roads.

No new schemes should be launched and all available resources should be devoted to completion of ongoing projects. Finally, each award of contracts over Rs25 million should be made in media presence with bid evaluations posted on PPRA’s website.

The writer is a former governor of the State Bank of Pakistan.