When he took power in a coup last October, Gen. Pervez Musharraf declared that reviving the economy was his top priority. Pakistan is broke–and one reason why is that the country has great trouble collecting taxes. In a country of 140 million people, only 1.4 million (1 percent) pay income taxes. Business and retail tax revenues are equally meager. Tax evasion has given risen to a huge underground economy that economists say is bigger than the legal economy. The country’s tax revenue amounts to 11 percent of annual economic output–one of the lowest rates in the world. The International Monetary Fund and other aid agencies are withholding new loan packages until Pakistan enacts tax reform. Without more tax revenues, say economists, Pakistan will have no money for pressing educational, health-care and other development needs. “We’ve come to a point where the very survival of the country is at stake,” says Syed Shahid Husain, a former World Bank executive who heads a government task force on tax reform. But to get its hands on the money it needs, the regime must face off with two of Pakistan’s most powerful groups–small businessmen and the country’s wealthy oligarchs.
The government’s crackdown on the underground economy hasn’t worked. Most shop owners simply ignored a June 30 deadline for turning in a new tax-survey form and declaring their income. Islamabad has set an ambitious goal of collecting an additional $1.6 billion in taxes this year–but thus far only $600 million in previously undeclared wealth has been reported, a fraction of the amount needed to reach the tax-return target. “We prefer to close shop than to place ourselves at the mercy of corrupt tax officials,” said Mohammed Ibarahim, who owns a grocery shop in Karachi.
Tax evasion is ingrained in Pakistan, and the country’s oligarchs are the worst offenders. Big businesses and feudal lords, who have controlled political power since the country’s creation, have always been able to avoid the tax man. In 1997, deposed prime minister Nawaz Sharif, who comes from one of Pakistan’s wealthiest families, paid less than $100 in taxes. (He’s serving a life sentence for terrorism and hijacking.) In the same year, former prime minister Benazir Bhutto, one of the country’s biggest landlords, paid only $600 in taxes. A land tax was introduced by the Sharif government, but very few property owners paid it. The Sharif Parliament collectively paid less income tax in 1997 than was paid by Khalid Ishaq, a leading lawyer in Karachi. He paid $100,000.
Husain, the task-force leader, concedes that corruption in the tax department is a major problem. Tax collectors are untrained and underpaid, and they regularly abuse their discretionary powers. In return for bribes, many tax collectors will connive with firms and business people to grossly underreport business revenues and personal income. “Corruption causes a loss of more than 60 percent in tax revenue,” Husain told NEWSWEEK. The new military regime has sacked more than 1,000 tax officials, but putting the department on a reputable footing could take years.
Musharraf doesn’t have that luxury. More than 80 percent of national revenue is now spent on defense and debt servicing. A growing budget deficit has fueled a marked rise in poverty; a recent government report says that 40 percent of the population lives below the poverty line. Earlier this year Pakistan rescheduled its $35 billion of foreign debt, but the grace period will end in January. Banks aren’t inclined to reschedule the debt again until Pakistan complies with the IMF program–and that means collecting taxes. Meantime, warring traders have been getting support from extremist Islamic political groups and the Pakistan Muslim League, the political party previously led by Sharif. Musharraf is getting squeezed on all sides. He must figure out a way to bring in more tax money–or keep begging for money.
