In the social democracies of Europe, people file tax returns on time and pay the correct amount of taxes voluntarily because they are eligible, in return, for palpable benefits.

For good governance and positive outcomes, rights must be linked with responsibilities. In Pakistan, the situation is altogether different. “Prime facie,” notes an analyst, “the government is defaulting on all aspects of the relationship between the state and citizens.”

Finance Minister Muhammad Aurangzeb says that the social contract between the taxpayers and the state needs to be corrected, in which the taxpayers trust the system and get rewards and services for the tax paid.

But this was not possible, he explained, until the fiscal space was available and therefore the allocation for social sectors would remain sub-optimal.

Many fear that arbitrary tax measures may force more people to engage in cash transactions

Speaking at a press conference in Kamalia this past Tuesday, June 18, Mr Aurangzeb explained that people were hesitant to enter into the tax net due to “harassment and frivolous notices” by the Federal Board of Revenue (FBR), adding he was “also on the receiving end” since he had been in the private sector for six years.

“The legitimacy of taxation is not solely based on legal authority,’’ says Farhat Ali, former president of the Overseas Chamber of Commerce and Industry. He argues that, “Citizens are more likely to accept their tax obligations when they believe the system is fair, the tax burden is equitably distributed and the government uses the collected revenues responsibly.”

Many fear that arbitrary tax measures proposed in the budget FY25 may force more people to engage in cash transactions and thus increase tax evasion. To quote the finance minister, over Rs2.1 trillion in tax revenue was lost through sales tax revenue. And the currency in circulation exceeding Rs9tr, he says, was one of the main reasons for inflation. The general expectation is that budgetary measures will further fuel inflation.

On June 14, two days after the budget was announced, FBR Chairman Amjad Zubair Tiwana warned that those refusing to accept credit or debit cards would face strict actions including the sealing of their offices. He was informed by a senate member about the difficulties faced by consumers owing to failures of the Point of Sales system.

Critics say the current trend towards growth of the informal sector may receive further impetus from budgetary measures. Quoting examples of how countries have incentivised investment and stimulated economic activity with low corporate taxes — economic growth yielding higher tax revenues — analyst Farrukh Saleem says, “We must focus on growth, not taxes.”

In a written statement submitted to the parliament on June 16, the country’s finance team acknowledged that lower GDP rates lead to a decrease in federal revenues due to subdued economic activity.

In a significant move to boost local production and exports, Prime Minister Shehbaz Sharif approved a substantial reduction of Rs10.7 per unit in electricity tariff for the industrial sector on June 14.

As Pakistan marked the first 100 days of this National Assembly tenure, a report by the Free and Fair Election Network (Fafen) revealed a mix of significant shortcomings as well as commendable efforts. The slow legislative progress remained a concern.

An interaction with the man on the street, says a news report, revealed that 40 per cent of people living below the poverty line had a feeling that the government had left them to fend for themselves. The budget, it is felt, made no mention of the 11 million citizens living below the poverty line.

PM Shehbaz says 300,000 Pakistani students would be trained by China in information technology every year and the sector would be further promoted in the country. However, not only the vulnerable but the highly qualified professionals and skilled workforce do not see a bright future for themselves in the current dismal economic situation.

The number of ‘highly skilled’ individuals securing jobs abroad surged 119pc from 20,865 in 2022 to 45,687 in 2023, according to Economic Survey 2023-24. Similarly, the report also noted a 26.6pc rise in ‘highly qualified’ individuals leaving the country in the same period.

The tax burden on the middle classes has been increased in the budget FY25; the brain drain needs to be discouraged by opening up opportunities for jobs with decent wages and a clear career path.

The government needs to incentivise community outfits with a track record to work for socioeconomic development at the grassroots. An analyst notes that communities have stepped in to fill the state’s failure to provide economic and social security to its citizens, but current efforts are insufficient.

Published in Dawn, The Business and Finance Weekly, June 24th, 2024