How Pakistan is revving up a fight against tax dodgers

Glad to be here, Darian.

That was a recent low point for sure, and it came just before a bailout from the International Monetary Fund, which is a serial lender to Pakistan. Pakistan's economy has recovered somewhat since then, but there are still some major structural issues, and one of them is seriously low tax collection.

That's definitely how Pakistanis feel. So millions of people here just opt out of paying income taxes entirely. And the country has been trying to change that so it doesn't need to constantly borrow from the imf. Of course, Pakistan has its own version of the irs, which tracks incomes, but it's not that simple or effective.

It may sound gimmicky, but it's meant to send a message to all those tax evaders out there.

Yeah, there are a few major reasons for that. The first one is pretty crucial. Lots of people don't earn much. I spoke with Hamid Atik Sarvar about this. He's at Pakistan's Federal Board of Revenue, the country's tax authority, AKA the fbr.

He believes around 5% of the population should be paying taxes, which is still

But Hamid says the rest probably don't even qualify. The threshold to start paying taxes in Pakistan is around $2,000 per year.

Absolutely. The World bank estimates that about 40% of the population Lives below the poverty line. But there's this small section of the Pakistani public that's extremely wealthy, even by global standards. We're talking multiple luxury cars and real estate in Dubai type of rich. And habit says some of these people still report zero income on their tax returns. And that's where he says this so called lifestyle monitoring cell comes in social media.

Then tax authorities check that person's tax data to see if they're paying what someone who can afford those things should be paying.

And it's not turning up too many people in Pakistan, but Hamid says it's as much about deterrence as anything. The FBR has created ads to basically let people know they're out there and watching.

That still doesn't exactly ensure taxes will get paid since courts are backlogged in Pakistan and cases can drag on for years.

Yeah, we have to remember that more than 40% of Pakistan's population is under 18 years old and the majority of women here aren't formally employed. So that cuts the size of the workforce way down, officially at least. And it takes us to the second big issue with tax collection in Pakistan, which is its massive informal economy.

Akbar Zaidi from the Institute of Business Administration in Karachi says that's the group that gets squeezed because they're firmly on the government's radar year after year.

The tax rate for the salaried class can go up to 35%. So you can understand Akbar's complaints. The issue here is there just aren't enough people in this group.

Oh yes. The limited size of that salaried class gives you an idea of just how big Pakistan's informal economy is. This is made up of anyone from domestic helpers to high end property dealers. And the key here is cash. I spoke to economist Amir Khan about this. He says cash is one big way people avoid paying taxes. He gives the example of the wedding industry, which the government has targeted in the past.

AMR says that it will be impossible to collect more taxes without first reducing the dependence on cash. This is a big effort since a lot of Pakistanis don't even have bank accounts.

Yes, that big C word, corruption. The third fact in Pakistan's struggle to collect taxes. Akbar explains how people think about it.

He says people do this without a second thought. Many are wealthy and powerful.

Then there's the general trust deficit.

We should mention here that Pakistanis do pay taxes on many goods and services. I went out to a shopping mall in Islamabad to ask people if they thought the government should be looking for tax evaders on social media. 23 year old Kamal Mehdi is a crew member for an international airline. They are cheaters, obviously they are, you know, they're earning black money and they don't want to, you know, give taxes and they are cheating with their government. But banker Shahbaz Khan is skeptical in

He thinks people will still find ways to avoid paying taxes.

Yes. Hamid from the FBR says there were around 2 million income tax filers in 2019. So that number has come up, but the situation still isn't where it needs to be. He says tax authorities are even considering a whistleblower system where people can report on family members who aren't paying taxes. They can get cash rewards if they do

My pleasure. Thanks for having me.