x Abu Dhabi, UAEThursday 27 July 2017

Pakistan MPs embroiled in income tax scandal

Almost 70 per cent of Pakistani legislators did not file income taxes last year, highlighting deep flaws in a taxation system that has drawn repeated criticism from western aid donors.

ISLAMABAD // Almost 70 per cent of Pakistani legislators did not file income taxes last year, highlighting deep flaws in a taxation system that has drawn repeated criticism from western aid donors.

The Centre for Investigative Reporting in Pakistan released a report based on leaked tax returns, marking the first time that the records of 446 members of parliament and ministers have been published and focusing scrutiny on individuals ahead of polls next year.

Pakistan's inability to raise revenue has constrained government spending, depriving schools and hospitals of funds and exacerbating a power crisis, causing widespread hardship in the nuclear-armed country of 180 million people.

Western allies have poured billions of dollars in aid into Pakistan, worried that growing public anger may boost recruitment to Islamist militant groups threatening to destabilise Pakistan and beyond.

But the aid has not been nearly enough to plug the huge gap between members of the elite, who often pay little tax, and the poor who desperately need the public services taxes should fund.

"This is what the people of Pakistan are upset about," said Jehangir Tareen, a trim, silver-haired businessman who paid the most tax in the National Assembly last year. He tried to set a precedent by making his returns public but no one followed suit.

"Taxes are the beginning and end of reform in Pakistan," said Mr Tareen, who gave up his seat in parliament in frustration over his inability to push changes. "Right now the rich are colluding to live off the poor."

Umar Cheema, an award-winning journalist heading the Centre for Investigative Reporting, said he hoped the report, which was published on Wednesday, would make members of parliament more accountable to voters.

Cheema took legislators' identity card numbers from their public election nomination papers, then convinced employees at the Federal Board of Revenue to leak the tax returns related to the identity numbers. It took him a year to collect the data.

The report highlights why Pakistan has failed to improve its tax collection rates: politicians benefit from a lax regime. No one has been convicted of income tax evasion in 25 years and few Pakistanis see a failure to pay tax as shameful.

Although lawmakers have about 2,500 rupees (Dh95) a month deducted from their basic pay in tax, almost all have second incomes.

"They built this system for their own benefit," said tax expert Ikramul Haq. Poor laws and loopholes meant MPs often have their income exempt from tax, he said.

The report makes troubling reading for Pakistan's donors. Much of their aid supports services normally funded by state revenues.

Britain has begun a five-year, billion-dollar project to improve education in Pakistan. The United States has given Pakistan more than US$3 billion (Dh11bn) over the past two years.

Pakistan also owes the International Monetary Fund $7bn. The IMF has repeatedly demanded Pakistan widen its tax base as a precondition of possibly rescheduling loan repayments.

"The tax net is riddled with holes," said Jeffrey Franks, a regional advisor to the IMF.

Most countries collect between 20 to 40 per cent of their economic output in tax. In Pakistan, less than 10 per cent is collected, Mr Franks said.

Pakistan revenue authorities say 0.57 per cent of adults pay income tax and the number is steadily declining.

"People know that the elites, the government, are corrupt but they don't understand how the corruption works," said the report's author, Cheema.

"If our rulers are not paying for themselves, why should taxpayers in other countries pay for them?"