In today’s world eight men possess as much wealth as 3.6bn of the poorest people in the world. The rising global inequality is affecting developing countries because income and wealth are being concentrated in the hands of a few instead of trickling down to benefit the poor.

The main cause of this inequality is the globalisation agenda based on the neo-liberal ideology. This agenda advocates economic growth through lower direct taxes and free market economies with the argument that the poor will benefit from the resulting growth. What has actually happened is that the rich get richer while the rest get poorer.

There is a need to take urgent steps to remedy this situation. A fair tax system that ensures equitable taxation and redistribution of wealth can play an important role in this regard.

The existing taxation system of Pakistan is based on the Income Tax Ordinance 2001. While it aims to be a progressive and fair tax system, unfortunately, various factors such as the political and institutional capture by elites have made it the opposite. Indirect taxes — like the ‘general sales tax’ on goods and services — have become the main source of revenue for the state.

Indirect taxes — like the ‘general sales tax’ on goods and services — have become the main source of revenue for the state

This has resulted in an increase in poverty and rising inequality as the poorest 10pc of the country ends up contributing 16pc of its income due to indirect taxes while the richest 10pc contribute only 10pc.

This uneven distribution is exacerbated by the extensive exemptions and privileges that the wealthy have the ability to get, often at the cost of the less privileged.

This situation is illustrated by the following examples:

On an income of Rs45,000 the tax is Rs7,000 while a Rs100 mobile card is only worth Rs75 after tax reductions.

A widow who invests Rs100,000 in a government scheme — which she may have received against her husband’s provident fund or gratuity — is compelled to pay a 10pc tax. A point to note is that the tax liability on an income exceeding Rs10bn is also only 10pc.

Consequently, the concentration of wealth in the hands of a few leads to them gaining an undue amount of political influence. In many cases this robs citizens of natural resource revenues, supports unfair tax policies, strengthens unethical and corrupt practices, and challenges the regulatory powers of the government.

There are 10m people who qualify as tax payers but of them only 2.5m are actually registered to pay tax.

From Pakistani parliamentarians — known to have assets worth an average of $900,000 — only a small number pay tax. According to a review conducted in 2010, 61pc of the 15 parliament and provincial assembly lawmakers did not pay income tax during the year they contested the elections.

The same trend can be seen in private companies: only 100 companies (out of an estimated 64,000) paid 80pc of the total taxes collected by the Federal Board of Revenue.

Just and fair taxation policies need to be devised as envisaged in Article 3 of the constitution: “The State shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, from each according to his ability to each according to his work”.

In addition, the government should modernise the whole tax system — use taxation as a tool for social and economic development rather than spending on personally motivated, misplaced priorities.

Also, the government ought to implement a progressive income and corporate tax regime — a system in which the tax rate should be determined as per income rather than any other factor.

It is the obligation of the government to eliminate the general sales tax because it is a discriminatory indirect tax which is a burden for those who already fall in the lower income bracket.

The writer works as a research officer with Indus Consortium, in the OxfamNovib funded project ‘Finance for Development’

Published in Dawn, Business & Finance weekly, February 20th, 2017