In recent years the words “narratives’ and “narrative building” have come to occupy a prominent place in political, social and strategic discourses. Narratives were previously a concept confined to literature and was an equivalent of story, but has evolved beyond literature and branched out into social sciences. To a considerable extent retaining the original meaning of being a story that has to be told effectively, having varying degrees of fiction as opposed to reality or truth. Vikram Sood a former chief of India’s Research and Analysis Wing (R&AW) in his Book “The Ultimate Goal” explained how during most of the twentieth century, intelligence agencies helped shape narratives favorable to their countries' agendas through literature, history, drama, art, music and cinema. He asserts that a “narrative” may not necessarily be based on truth, but it does need to be plausible, have a meaning and create a desired perception. According to Sood, “Real power comes not from the barrel of a gun, but from those who control the narrative. Building narratives and sustaining them is part of the effort to control storylines, which in turn help control the world. Narratives are not the truth, rather they nudge you to understand the truth in a particular way. They are never neutral or innocent, they are always strategic."
Narrative building and shaping of perceptions have been an important part of national strategy at the domestic and international levels. Powerful and influential nations have managed to, camouflage the truth and harsh realities assiduously with narrative building by invoking selected information, propaganda, disinformation or manipulation of facts. Realizing the effectiveness of narratives, powerful interest groups also started using narratives to protect and advance their interests by building public opinion for swaying policy makers to take actions having ostensibly praiseworthy objectives but actually strengthening the domination of national resources by the powerful. Policymakers are now much more concerned with the general mood of the public than what ground reality demands. Selective and tactical use of information can influence the decision-making of the target. The target can make decisions or policies against the interests of a state even without realizing it.
Neo-liberal narratives of self-correcting markets, ‘harmful’ effects of government regulations, importance of eliminating price controls, deregulating capital markets, increase of productivity through minimizing tax burden on the affluent etc. are almost treated as self-evident truths throughout the world due to powerful narratives built by the influential lobbies with the support of willing partners from the academia. Pakistan is no exception to these global trends. However, instead of having a broader canvas involving all economic and industrial policies we will focus on and critically examine the narratives relating to the field of taxation. There are multiple(and to a great extent mutually reinforcing) narratives that attempt to shape tax policy and administration in Pakistan, but in this article we will focus on only one such narrative, namely that the chronic shortfall of revenues in Pakistan is due to the fact that the tax net is not wide enough and that increasing the number of taxpayers (read tax filers) is the elixir that will make all the problems go away. This narrative has become so strong over the years that according to grapevine, under the previous government top policymakers were made to believe that if FBR is collecting say Rs.5,000 billion with 3 million taxpayers or tax filers, the tax revenue will be automatically enhanced to Rs.10,000 billion if the number of tax filers grows to 6 million.
Before critically examining the importance or otherwise of casting the tax net wider, it would be appropriate to explain why the emphasis on this objective is being termed as a narrative in the context of the connotations of the term “narrative” as discussed above. It is being labelled as a narrative because it helps divert attention from failures to adequately tax more privileged taxpayers and larger enterprises already in the tax net. It conveniently and deliberately suppresses the fact that there is massive underreporting of incomes and taxable turnovers by existing taxpayers. It also obscures the fact that the persons who are earning large taxable incomes are mostly already in the tax net but are paying miniscule percentage of the due taxes and thus are primarily responsible for the less than optimal collection of revenues in Pakistan. The informal and untaxed sector narrative locates the apparent cause of revenue scarcity in the alleged non-taxation of small enterprises and poorer people. Despite already having large chunks of unproductive taxpayers, these narratives compel the tax administration to suffer from what some studies have termed as the “registration obsession” or a tendency to devote considerable resources to registering even more taxpayers who similarly will provide little additional revenue. Tax administrations waste precious resources by maintaining large number of unproductive taxpayers and continually seek to expand these numbers through new registrations because this fits the narrative about the under taxation or non-taxation of the so-called “informal sector.” This tendency and the narrative collectively work to the advantage of more privileged groups. They help the people who run the tax machinery and their political superiors to appear to be working harder than they actually are, to raise more revenue. The undertaxed rich and wealthy benefit from this narrative and actions that logically flow from this narrative.
In the last few years FBR has boasted of enhancing the number of tax filers significantly but conveniently omits to quantify the additional revenue from these new taxpayers. Recalling some news reports on the subject,the additional revenue is on an average less than Rs.1 billion for every two hundred or three hundred thousand new taxpayers. Whereas, proper attention devoted to a single case of a medium to large enterprise can result in multiples of this amount in additional revenue. To support this assertion one can easily refer to the work of Tax Justice Network (TJN), which is a coalition of researchers and activists with a shared concern about tax avoidance, tax competition, and tax havens. In its 2019 report TJN estimated the annual tax loss to Pakistan due to tax avoidance by multinationals, through profit shifting and transfer pricing, at upward of 10 billion US dollars. Even if the estimate is treated as exaggerated, the dividend from focusing on this single element would be far more rewarding for a perpetually revenue constrained Pakistan, but the false narratives and misplaced priorities obliterate the focus of FBR. Irrespective of the actual quantum of revenues lost due to the tax avoidance strategies carefully crafted by the multinationals, the absence of this important source of tax revenues from the public discourse about FBR’s performance is intriguing and tells a lot about how narratives are built to cushion the powerful lobbies. Here it needs to be realized that Pakistan is the signatory to the OECD’s initiatives to act against Base Erosion and Profit Shifting. All the necessary legislation was done by 2018 and Pakistan also made agreements with OECD’s Tax Inspectors without Borders (TIWB), with the specific aim of building capacity for busting the tax avoidance schemes by multinationals. The initiative fizzled out thereafter and not a single case was assigned to the audit panels including foreign auditors. Instead an ill-conceived and poorly implemented new organization was created to handle the cases of transfer pricing and other aspects of cross-border transactions. Just as quantum physicists that believes that sub-atomic particles have a dual nature, behaving at times like energy, and at other times like particles, similarly, the new field organization is in some aspects a part of the respective large taxpayers office and at other times is part of a Directorate General. But subatomic particles have learnt to exist in this twin state, whereas officers manning these Zones/Directorates find it challenging, to say the least. Resultantly, not only no meaningful transfer pricing audits have been conducted but also all hopes of realizing any worthwhile revenue from the information received from more than 50 countries from the automatic exchange of information under the OECD have been laid to rest.
The narrative highlighting the importance of enhancing the number of tax filers also fails to take into account the tax policy that was fashioned to address the particular nature of Pakistan’s economy and the capacity of the tax administration. Leaving aside the share of total tax revenues from indirect taxes such as Sales Tax, Federal Excise Duty and Import duty, at least 70 percent of the collection of Income tax comes from taxes withheld on various economic transactions. The net of adjustable withholding taxes was spread to cover all significant transactions at points where the persons out of the tax net have to interact with the formal economy and to collect withholding taxes on these transactions. These withholding taxes nudge the non-filers to enroll in the tax system to get credit of the tax collected from them by filing tax returns. The nudge factor was also given a strong boost by progressively enhancing the rates of withholding taxes applicable on non-filers. These higher rates for non-filers was an innovative feature to tailor tax policies to the ground realities and had these been properly studied by the academia and correctly projected by the government, the measure would have been a singular contribution of Pakistan’s tax policy for all developing countries with similar economic set ups. Instead, the subsequent government and FBR leadership without comprehending the significance of these measures, became easy preys of the false narratives, such as the absurd allegations that higher rates for non-filers amount to legitimizing non-filing and that the large number of withholding taxes is an adverse reflection on the performance of FBR etc. No one from FBR was able to present the actual picture and the rationale of these measures. On the contrary, from 2019 to 2022 a considerable number of withholding taxes were withdrawn with a promise to enhance revenues through enhancing the number of tax filers. Understandably the “success” of this shift in tax policy has never been documented or made publicly available.
A few sane voices have also questioned the focus on registering new taxpayers by pointing out the number of potential taxpayers on the basis of statistics such Pakistan having close to 80 million unemployed women,60 percent of the population subsisting below poverty line, more than 130million Pakistanis being below the age of 30 and how much do the youth below the age of 30 years make in Pakistan? 77 million Pakistanis who are food insecure and whether we should expect to collect income tax from food insecure Pakistanis (‘The Tax Net’ by Dr. Farrukh Saleem, The NEWS July 21stJuly, 2019)
The myth regarding effectiveness of campaigns to increase the number of tax filers has also been debunked by academicians who refuse to remain hostage to classical economic ideas. International Center for Tax & Development (ICTD) which is an independent research center focused on improving tax policy and administration in lower-income countries, has in July 2023 published a Policy Brief titled “Why Mass Tax Registration Campaigns do not work”, a collaborative work by eight experts. The authors note that, policy makers and donors have become increasingly interested in the use of mass registration campaigns as a tool to expand the tax nets in lower-income countries. They also examined the commonly held beliefs that there is substantial revenue potential in registering new taxpayers, that expanding registration decreases informality and unfair competition between informal and formal businesses and enhances the fairness of the tax system. Interestingly, they specifically mention the leveraging of third-party data, such as that from national identification authorities or utility providers which may sound greatly familiar to the followers of Pakistan’s aspirations in this regard. However, according to the study there are serious deficiencies in all these narratives. In practice, the revenue outcomes of mass tax registration exercises have been unsatisfactory at best. According to the authors there is evidence that mass tax registration campaigns can have awkward effects that have not yet been realized. They can have a negative equity impacts, as they end up unduly targeting lower income earners and smaller firms. The administrative costs of such campaigns are often high, both for taxpayers and revenue administrations. Registering smaller taxpayers can be highly time and resource consuming, in most cases costing more than the potential revenues at stake. Mass registration campaigns often lead to tax registers that are stuffed with inactive taxpayers, those that either are not economically active or not compliant or both. The study concludes that both government policies and donor programmes are still shaped by an unrealistic view of their potential outcomes and a rethinking of tax registration is therefore needed. They recommend that revenue authorities should do away with mass tax registration campaigns, but of course do not imply that revenue authorities should give up on registration altogether. This should be done through a natural and evolutionary process leading to voluntary registrations based on facilitated compliance and fair treatment of the taxpayers rather than by target setting and adopting coercion.
The findings of the report are probably applicable more incase of Pakistan than any other developing country. We have witnessed many such campaigns and their spectacular failure, since at least 1990s, but the narrative in support of such maneuvers gets stronger and stronger due to its vigorous peddling by the interested parties and the absence of empirical studies to evaluate the results of each successive campaign in terms of revenue dividends. Here, it needs to be clarified that it is not being advocated that those who are legally liable to file their returns should not be doing so. What is being disputed is the misplaced priorities. Pakistan being a chronically resource constrained country with a tax-to-GDP ratio that is pathetic even in comparison with similarly placed countries, should be focusing on improving its revenue performance by adopting tailor-made policies rather than following donor driven strategies that may have worked in entirely different environments or making efforts to appease the powerful lobbies who are not themselves paying their due taxes.
