Fighting tax evasion5 min read

103
tax
PC: DailyTimes
  • 1
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
    1
    Share

Imran Khan’s maiden address to the nation as the prime minister was interspersed with examples from the state of Madina that was built by the Prophet (peace be upon him) and his companions over fourteen centuries back. He longingly mentioned incidents reflecting how Muslim rulers back then were accountable to public and equal before the law.

However, the PM could have also mused over another defining event of that era, given its relevance for Pakistan’s revenue-starved economy today. Back in 632 AD, when Hazrat Abu Bakr assumed charge as the first Muslim caliph, his government was up against some existential threats. One such challenge surfaced from within and was posed by none other than believers.

Many tribes, composed of otherwise practicing Muslims, refused to pay zakat, a levy partially akin to modern day taxes. Since the zakat evaders were all Muslims, the Majlis-e-Shura, an advisory committee of the caliph, was split over how best to deal with them. Some proposed a lenient approach; particularly notable among those was Hazrat Umer.

Advertisement

However, Caliph Abu Bkar, despite his reputation for a benevolent individual, took a surprisingly stern view, declaring a war against any Muslim withholding zakat. He argued that salat (prayer) and zakat were both obligatory and observing prayers alone was not enough, unlike the view of some of his deputies. He then went on to famously pronounce, “By Allah, I would fight against them, even to secure the cord (for tying a camel) which they used to give to the Prophet (PBUH) but now they have withheld’. And the world witnessed an otherwise unassuming ruler even personally leading the fight against two of the defiant tribes, Bani Abs and Bani Zeiban, until they conceded to pay zakat.

Also Read: Pasha-Kardar proposals on tax reforms: an analysis

That tale of zakat withholders and the uncompromising response of the first Muslim caliph contain some valuable lessons. First, it unequivocally establishes that individual acts of worship like salat can’t exonerate a faithful from his/her duties to the state as a law abiding citizen. This is in sharp contrast to our culture where many a practicing Muslims fail to pay taxes, and without any compunction of conscience.

Second, Hazrat Abu Bakr opted to fight at a time when his government was facing other formidable challenges, not least from the apostates claiming prophet hood. Still, collecting zakat was given a critical priority worthy of a full-scale fight, and that too against the fellow Muslims, not some infidels. Moreover, it was not the amount withheld that was of significance. The caliph’s decision to ‘fight for even a cord withheld’ reveals his determination to establish the writ of his government.

Admittedly, some historians view that fight not on administrative grounds or just a bid to raise revenues but to ensure compliance with a key religious obligation that zakat was. Still, considering the ultimate goal of zakat to support the needy and the vulnerable, that war eventually had a humanitarian objective.

Whether the PTI-led government can exhibit a similarly unflinching resolve for tax collection is yet to be seen. In his inaugural address as the PM, Imran Khan has already implored the public to show compassion towards the less privileged by honouring their obligations as responsible citizens. He has also pledged to ensure that money collected through taxes will not be squandered or siphoned off. But what if all that moral suasion fails in nudging the public to pay taxes? Would he be ready to take up the gauntlet, as the first caliph did?

Here is why he must. At 12.5%, we have an abysmal tax to GDP ratio, lower than the average for the developing world and behind many of our neighbouring countries, including Sri Lanka, Nepal and India. Pakistan is ranked 172nd out of 190 countries for paying taxes. Only 1.2 million (0.57%) in a country of 210 million file tax returns. Inevitably, lower tax collection translates into woefully insufficient expenditures on health (0.7% of GDP) and education (2% of GDP), stifling the country’s growth potential.

Certainly, our taxation problems are not confined to evasion alone. In fact, evasion itself, in part, could be driven by the unfair and regressive nature of our tax regime where a few caught in the net disproportionately shoulder the burden, while the rest manage to get off scot-free. Widespread exemptions coincide with excessive taxes which put Pakistan among the high tax countries in terms of corporate tax rates and the scale & scope of indirect taxes. Agriculture accounts for 19% of the GDP but contributes a paltry 1% in taxes. Contribution of services sector in taxes (39%) is also way out of sync with its share in GDP (60%). Taxing these sectors is now a responsibility of provinces who neither have the institutional capacity nor the political will. And to top it off, our tax administration in general is rife with inefficiencies and corruption.

Indeed, these issues underscore the need for comprehensive tax reforms well beyond the scourge of evasion. Still, the lessons from the tale of zakat evaders are relevant.

The PM, in his closing remarks, envisioned a Pakistan where no one will need zakat, hopefully in the not too distant future. This is precisely what happened during the tenure of Hazart Umer, the second caliph. But that auspicious day would have never arrived, had it not been down to the war that Hazrat Abu Bakr first waged against zakat evaders.

Likewise, the PM’s dream of no zakat-takers will only come true if his government can first fight against tax evasion and ensure better spending. Otherwise, our widening fiscal deficit and soaring debt obligations would continue unabated. And more worryingly, our kids will remain stunted, our young unemployed and our people impoverished.

The writer is a financial sector specialist. Views expressed here are his own. Email: na2236@caa.columbia.edu

(This news/article originally appeared in The Nation on September 18th, 2018)

Facebook Comments