Evolution of Tax Culture in Pakistan

It was more than 70 years ago that Schumpeter used the term “Tax Culture” in his celebrated article “Economic and Sociology of the Income Tax”.
Schumpeterian view point is that “Tax Culture is an expression of human spirituality and creativity”. Some work on “Tax Culture” can also be found as undertaken by Armin Spitaler (1954) and he does have his own perspective while defining this term. Similarly Tax Culture can be found with the writings of other economists like Pausch (1992), Hartmann and Harbner (1997).

According to Spitalar’s insight “Taxation is influenced by economic, social, cultural, historical, geographical, psychological and further differences prevailing in the individual countries and their societies”. Alfons Pausch understands the Tax Culture of the country as being connected with the personalities, determining the evolution of tax system.


However, the most authoritative work on this term and topic in recent times has come to limelight of a German Scholar, Birger Nerre of University of Hamburg. According to him, the topic of Tax Culture appears precisely at the intersection of the disciplines, economics, sociology and history. In this article as surfaced in the year 2001 naming “The Concept of Tax Culture”, he defines and elaborates the term of Tax Culture by saying: “A country-specific tax culture is the entirety of all relevant formal and informal institutions connected with the national tax system and its practical execution, which are historically embedded within the country’s culture, including the dependencies and ties caused by their ongoing interaction”.




The phenomenon of Tax doesn’t exist in vacuum or otherwise it isn’t something that is abstract. This is rather very much concrete which is rooted in the very fiber of the society or what Birger Nerre calls it that there is an embeddedness of Tax Culture. Moreover, the Tax Culture of a country or community isn’t the outcome of any single factor and the definitions which outlined such restrictive and narrow approaches have worn out over time. Now this has commonly shared understanding among the browsers of this topic that Tax Culture is the sum total emerging out of: 1. Tradition of Taxation, 2. Interaction of Actors including Politicians, Academics, Tax Officials, Taxpayers, Tax Experts and 3. The Cultural Values like “Honesty, “Justice”, and “Sense of Duty” etc.

This three pronged agglomeration tends to make out the tax culture of a particular country and this interplay has been vividly explained by Mr. Birger Nerre in the instant figure representation. The arrows indicate interaction between different groups of players as well as between the members of one and the same group. The author of this representation has shown the direct interaction among all the groups / actors except between the “taxpayers” and “academics” on the analogy that he was not sure about the existence of any (Direct) relationship between these two groups. However, with particular social milieu of Pakistan, you would concur with my observation that the role of “tax experts” is relatively more crucial and pivotal demanding more solicitation as without their active participation, concurrence and authentication, any formulation of opinion or code and any execution of programme of action would doom its failure.

While talking about “tax”, we are of course divulging on something which is intensely “disliked”. This is not only the case with Pakistan and Pakistani Taxpayers but this syndrome is very much there in rest of the parts of the world including country like U.S. While reading the paper on the “New Hope for the Future Delivering on Pakistan’s Economic Reform” this “disliking” of the tax by the Americans was even acknowledged and conceded by Mr. Thomas W. Simons, Jr. Former U.S. Ambassador to Pakistan.

Georgi Boss (1999) Minister for Taxes & Duties of the Russian Federation remarked that “There is not any country where people are happy to pay taxes but they do pay taxes because of their tax culture”. However Economic strategy Minister German Graf (2000) is very apt when he states that he fully understands that “a tax culture can’t be inculcated in one year”.

Going into the inner causation of this phenomenon, Dr. Ignacio Ruiz Jarabo, in his paper presented at the 33rd General Assembly of Inter – American Centre of Tax Administration (CIAT), explicitly stated that there are factors that render difficult the social acceptance of the tax system, beginning with the fact that the relationships between the tax administration and the citizen are marked with a certain level of tension and conflict.

According to him, this marked tension and conflict are due to the fact that taxes are economic burdens of an obligatory nature from which the taxpayer does not drive a direct, personal and immediate benefit.

At this juncture, I would like to borrow the words of Mr. Alain Zenner, Government Commissioner of Belgium who’s very frank and direct in saying “… the tax administrations too often give me the impression as if they would only have one important task and that is: taxation ! … taxation is often seen as a divine mission, an ideal that would justify all means. (However) … this can last no longer! The mission of the tax administration is not to tax at all costs, but to recover the fair tax. From there the need to redefine the values that should be complied with by the tax administration in the exercise of its duties.”

Before proceeding further, this would be advantageous to have a cursory analysis of historical developments in to the formal efforts for the codification of the taxation laws. First of all, I would like to put the case of Income Tax and 1860 is the crucial year when the colonial forces promulgated the first Income Tax Act. This was very much patterned after the scheme of taxation observed in United Kingdom; however, talking in the perspective of sub-continent, this was a deliberate effort to end the budgetary deficit which followed the war of independence of 1857.

This very Act lasted five years when this had to be completely withdrawn followed by a Vacuum period of two years when there was no Income Tax Law in force. However, this was re-enforced with a new title of The License Tax Act 1867 and this would be for the interest of the participants that income earned more than Rs. 200 per annum was made taxable at the rate of 2 per cent. Subsequently developments gave rise to a new Income Tax Act in 1886 which in turn had to give way to the substituted Income Tax Act of 1918 and during the intervening period only one major amendment was made in the year 1903.

Certain difficulties emanated out of this latest legislation, where upon Income Tax Act 1922 was promulgated and the same was adopted by our country after winning independence in the year 1947. This very Act remained very much in the field to be replaced only by the Income Tax Ordinance 1979. Between 1922 and 1979, as many as 71 amendment acts were passed by the legislators. Here comes the most controversial code of Income Tax Ordinance 2001 and this is very unique feature of this piece of legislation that before the date of its enforcement, the government made as many as 322 changes in it through Finance Ordinance 2002. The controversies over it run through the areas of typographical errors, drafting blunders, legal lacunas, inconsistencies, conceptual fallacies / dichotomies so on and so forth.

The excise laws goes back to the year 1934 when a compendium was drafted which agglomerated more than ten separate excise acts which had grown up piecemeal over many years. Another useful effort was made in the year 1944 when a consolidated and single enactment saw the light of the day and which still holds the field in the excise laws to be called as the Central Excise Act, 1944.

The custom laws, which in common parlance, is also termed as the “Law of Notifications” due to the rapidity and frequency of repeated notifications. This branch of law has been on the statute books for more than a century. The Sea Customs Act was enacted in 1878. It covered sea side of the country. Import and export through land routes were dealt under the Land Customs Act, 1924 whereas the air traffic was governed by the rules framed under the Air Ship Act, 1911. The current Customs Act 1969 consolidated all such laws on the subject into one statute.

Last but not the least is sales tax which according to its contribution in the total revenue qua the remaining taxes surpasses the all. According to Govt. of India Act 1935, as adopted for Pakistan on independence, sales tax was a provincial subject. As the exigency of the situation demanded, the federal government enacted law called the Pakistan General Sales Tax Act 1948 by virtue of which the sales tax became a central subject. Again this would be information for the distinguished participants that according to this act, every dealer with an annual turn over of more than Rs. 5,000 was amenable for assessment.

This created resentment among the dealers where upon a sales tax committee was appointed by the government and on its recommendations, the Sales Tax Act 1951 was adopted. As against the levy of sales tax at multiple stages as was the case with the former Act, instead the latter law accommodated the demand of the traders to levy the sales tax only at one stage. In order to fashion the sales tax in accordance with the changed economic and social realities, a need was strongly felt over time to re-enact this branch of the law where upon the instant Sales Tax Act 1990 came into being. Progression of the sales tax into Pakistan’s key revenue earner is more than manifest from the recent statistics released by the CBR.

While talking about the state of taxes in our country, I would quote the data collected by the Chamber of Commerce & Industry, Karachi in the year 1996, it was found that there were 79 taxes in all, in Pakistan – 20 federal, 21 provincial, 14 municiple and 24 others. This is again a stark reality that the major chunk of the effectees belongs to the poor class. Let us see how Mr. Shaukat Aziz, the highest economic manager in the country enumerates this malady “a society where a large segment of the population, particularly the poor, bears the greater burden of cost of governance while a small group of influential rent seekers reap its benefits is bound to promote upheavals.” Far from suffering from a culture of tax evasion, as somebody quotes it, Pakistanis, particularly the poor are the most indirectly taxed people in the world.

Let’s go into some observations regarding the Evolution of Pakistani’s Tax System as made in the famous report of Mr. Shahid Hussain, Chairman of The Task Force on Tax Administration (2000).

First, legal and administrative changes are frequent and ad hoc. Taxpayers have insufficient knowledge of their obligations and tax collectors have substantial discretion.

Second, major tax policy changes are not accompanied by adequate changes in administrative framework.

Third, the relationship between the taxpayer and tax collector is largely adversal.

Fourth, organization, business processes, systems, facilities and budget have not kept pace with the growing demands on tax administration.

Fifth, the management of human resources is severely deficient. Most tax officials are not paid a living wage; nobody is paid a middle class wage. For most, honesty is an impossible proposition. Most of the 33000 persons employed in the tax administration are in lower ranks with low productivity and are a drag on the system.

In particular case of Pakistan, we inherited the legal system of the colonial era and the tax code is no exception in any way. We will have to appreciate that the colonial masters promulgated such fiscal and tax laws which were better suited to their own vested interests. They extracted maximum out of the minimum from the local populace for furthering their imperialistic designs. However, after winning independence, this was an uphill task to refashion and remodel the taxation laws according to our own peculiar socio – economic and politico, religio – cultural circumstances. Although various efforts were made and multiple commissions and task forces were constituted but I’m sorry to say, that all these exercises could not be channelised for the greater aim of enacting a true and workable tax code sensitive to the genuine objective conditions of the local population particularly that of the poor class. Despite of recent additions of withholding, presumptive, capital value and turnover taxes, the situation has not improved.

There are certain salient features of our Tax Culture and without their proper appreciation and understandings, I’m afraid; we would remain yearning for the quest of maximum revenue collection but without the actualization of the insurmountable targets.

This is also heart burning that while formulating tax code in our country, the experts and legislators either have not taken due care of the sensitivities of our cultural norms or otherwise they have completely ignored this vital aspect of social reality. Due to this very reason, the tax code could not ingrain in the attitudes and behaviour patterns of the taxpayers or in other words what the Birger Nerre called it the process of the “embeddedness of the tax culture” could not be realized. The recent prominent example of not taking care of the sensitivities of local population of Pakistan can be found in the very enactment of Income Tax Ordinance 2001 which as the saying goes has been enacted by a foreigner who was oblivion of the socio economic and political, religio-cultural realities of the land and its populace. Now the question arises, what are those realities which need to be understood while enacting any code or formulating any policy in the corridors of tax administration. Now I try to give a brief account of those features and I would say that the list is not complete however this would give an understanding for giving due accommodation to the socio economic and politico, religio-cultural sensitivities very much pervasive in our society.

(1) Tax Illiteracy

This is very much known that according to official statistics, the literacy rate in our country is not more than 36% and in this figuration there are those people who can merely read or write their names. When this is the state of literacy in our country, we can very well judge that to what extent our population or otherwise the taxpayers would be equipped with the proper understandings and education of our tax code. While talking about the evolution of tax culture of our country, we’ll have to launch a mass campaign of tax literacy.

(2) Complexity of the Tax Code

Keeping the overall low level of literacy among the population aside, the problem of proper understanding of the tax code due to its intricacy and complexity becomes enormous and manifold. A very little effort has yet been made to simplify the tax code for its easy grasp and smooth application. The prevalent legislation on taxation is so much complex and difficult that even the tax experts take great pains for its due comprehension what to talk about the commoners who happened to come across with the same. A concerted effort with a strong will is abundantly needed to simplify the tax code. For this, we all of us being the stake holders in the existing tax milieu should share our responsibility for evolving and proliferating a shorter, easier and simpler tax code. Writing of texts of law is indeed a difficult task. This is to be conceded that whatever may be the efforts to simplify the statute, its complexity can’t be altogether abated, but serious efforts should be continued to ease down its tone and texture.

(3) Warding off Foreign Dictation

As we’re mostly dependent on foreign loans for the survival of our economy and even for the running of our day to day state business, we’ve to take heavy loans. These donor states and institutions always dole out these loans with a certain package of “prerequisites and conditionalities”. We being the recipient country have to surrender, sorry to say, a limb of our sovereignty and have to make compromises against the interest of our already marginalized population. So much so the donors impose on us greater burdens to be shifted on the already vulnerable taxpayers who have been destined to become at their tether end. This would be an appeal to the people at the helm of affairs to ward off the foreign pressures, to the maximum possible extent, if not altogether, in order to safeguard the paramount interest of the local population.

(4) Mis-declaration of Income

Honest declaration of income is all the more pivotal when we talk about Income Tax liability. I must concede and realize it to the respectable participants that we as a nation have not been loyal enough to expose what we own and what we have. I’m talking about the growing tendency among the taxpayers regarding concealment of their true income and mis-declaration on their part while tendering their “returns”. Mr. Vakeel Ahmad Khan, the Member Direct Taxes, Central Board of Revenue is very right when he says that it is simply not possible for the Government to reduce the tax rates in the current scenario where the declaration of actual income isn’t the norm of the day. Two pronged measures occur to my mind for grappling with the deviant culture of mis-declaration of income, one which I rate very high and above the other is the nurturing of moral obligation among us for being true in our affairs qua the country and of course qua the tax department, the other which I would talk in some detail under a separate head note is the true enforcement of laws to disdain the tax evaders. Our tax culture should be based on trust, fairness and mutual respect.

(5) Broadening the Base of Taxpaying population

Again I would talk about Income Tax and moot the point which you’re very well cognizant of is it that the total number of income taxpayers in our country approximately makes up one million. This figure speaks itself that how there is only a meager segment of population presently in the tax net while there is a more significant strata among population which is beyond and out of the tax net. According to the statistics of CBR, 36% people in the opulent areas do not contribute to the national exchequer. So many tax surveys have been conducted and many amnesty schemes have been introduced to “grab” and “lure” the non taxpaying community but Mr. Chairman, your Honour being the head of the CBR would concur that the required targets have yet to see the light of the day. To remain out of the tax net is the ignominious feature of our tax culture. There may be many causes behind this phenomenon, some might have been noticed and many may not, but this is crying need of the day to address the same to tackle with and arrest the tax evading culture. Improvement in the collection of taxes is so crucial that government can’t and should not wait, nor will half measures do. Widening tax net will allow reduction in tax rates, without reducing revenue.

(6) Rampant Corruption in the Tax Administration

The melody of corruption is a much talked of subject in these days. This isn’t restricted within any circumscribed boundaries or any specific class of people. Since the tax institutions is part of and linked with the other institutions, it isn’t immune from the negative effects permeating in those others. I would not let myself to raise eyebrows against any specific person or any particular segment; however, I would be failing in my duty if I do not concede that many of us have not been able to clean their Augean stables to transform a cleaner and transparent tax culture. Encouragement and flourishment of tax culture can only take place through the removal of gray areas and discretionary powers presently used with impunity by taxation officers. Removal of corruption will ensure wise and prudent expenditure of collected revenue, which will encourage and mobilize new taxpayers who are hesitant to contribute and continue to remain outside the tax net.

(7) Mistrust and Misgivings about use of Tax Money

On the one hand there is very insignificant population which is in the tax net while on the other, there is a feeling of mistrust and obscurity among the taxpaying community against the government as to the fact that the funds generated out of their taxes are not properly used rather they are mishandled and so to say are bungled. In this background, many taxpayers don’t feel the moral obligations to fulfill their part of institutional contract between the state and its citizens as long as the state doesn’t fulfill its part in a proper way. The values of integrity, trust, respect, commitment to service, teamwork, personal responsibility and continuous improvement should be upheld.

(8) De jure Taxation and De facto Taxation

By de jure taxation I mean the tax system and the tax code as it stands and exists which is likely to be observed and implemented in the community while by the de facto taxation I amplify the tax system and the tax organism as it is practiced and followed. I see a visible gap between these two systems of taxation as one is aspired and the other is in vogue. We should solicit means and should carve out ways to bridge the gap existing between two systems of tax administration and tax code. The sooner this dichotomy is resolved, the better it would be for the introduction of a transparent and true tax culture in our country. The basic principle of taxation, viz equity, certainty, convenience, economy and simplicity had been ignored prior to enacting tax laws.

(9) Restoration of the Self esteem of the Taxpayer

The instances are not infrequent when the taxpayers have been harassed or blackmailed by the personnel of the tax machinery. This leads to the feelings of hatred and avoidance on the part of taxpayers and this attitude has its resultant repercussions on the state interest of maximum revenue generation. According to rough estimates 73% of the tax is collected through the mechanism of withholding tax while 13% is voluntarily paid by the assesses with the returns and 14% of the total tax revenue is collected by the tax machinery working under the aegis of CBR. Mr. Chairman, frankly I’m not after your coveted slot but can we dare ask that if this is only that 14% for which is a much extended tax bureaucracy is engaged and again this is the area where most complaints regarding harassment and abuse of power are emanating . Mr. Chairman, I would very respectfully submit that now the taxpayers have started questioning the raison deter of this very large establishment, when the income tax contribution towards the total revenue from all sources is 16% which is inclusive of income tax deducted at source. Furthermore, about 80% of the total income tax is paid by 1, 000 multinational companies.

(10) Apprehension of Tax Evaders

Although I solicit that taxpayers should have an independent environment where they could act and pay their taxes without any fear or coercion, however, by this I do not mean that the taxpayers should be let escort free not to be answerable to the tax administration. I would add that over the period of time, many deviants and tax defrauders and hobnobbing and colluding with the tax collecting personnel and the “middleman” to completely evade from the tax net or otherwise to pay minimum tax although they should pay higher taxes according to the quantum of their income/assets. The existing cultural realities and social attitudes do warrant for taking a very stringent action against these delinquents and deviants. The machinery of the state should come into play with full force against them for bringing them to book. The CBR should come out to liaise with various departments of the federal and provincial governments, contact private and public institutions, tap banking sources both at home and abroad, and obtain information from newspapers, advertisements, informants and third parties on taxpayer’s incomes, expenditures, bank accounts, properties, assets and investments.

(11) Certainty of Tax Code / Legislation

I’ve no hesitation in saying that this has been the common characteristic of our tax culture that there happen frequent and haphazard changes in the tax code of the country. Mr. Chairman, let me say who’s here who doesn’t understand the vagaries of the phenomenon of SROs. Even the substantive and procedural parts of the tax legislation have continually been in the throes of repealing and amendments. My humble request on this eventful occasion would be to the legislators and the policy makers that please give some semblance of permanence and perpetuity to the tax code. It is quite apparent that income tax law has not been enacted with clear objectives and on long term basis. Moreover, there are abrupt and periodical amendments, which adversely affect the tax collection and business community.

(12) Automation of Tax Machinery

A culture isn’t straight jacket nor is it a water-tight compartment not to allow fresh intakes. Similar is the case of Tax Culture. We should always be open ended to give due room to the fresh ideas and to the modern technology. To be more precise, I’m talking about equipping the tax administration with the latest automation and reaping full benefits of the recent age of Information Technology. I appreciate and understand the constraint of our scarce resources but I would stand for the conviction and you would agree with me that we will have to leave no stone unturned for harnessing the best available modern automation infrastructure to meet the challenges of the day.

(13) Advertising

Advertising is a persuasion technique that can greatly support the articulation and development of tax culture. Tax Administration should have an aggressive communication policy to achieve the voluntary acceptance of taxes. I believe that the campaign for promoting and developing the tax culture through advertising can remove the inhibitions and persuade the citizens to promptly pay their taxes. Careful use of contents and message can obliterate the irritants and can further promote the tax consciousness among masses. It is obligatory to reinforce in the message, the norms, values and strengths that govern the tax system, focusing and centering attention on the concepts of transparency, efficiency, effectiveness, modernization, simplification, honesty, professionalism, ethics and service. I believe that the information campaign may instill in the taxpayers the spirit for paying their taxes voluntarily. The best way to promote tax culture in the people is to convince them that the revenue generated out of their taxes is being used by the Government honestly and for the greater welfare of the society. The mass media can further build a strong public opinion for the denouncement of those who happen to evade taxes. Only thus it will be possible to generate a true interaction between the different social sectors and the tax administration.

The culture can’t be changed only in a year or in a few years-that is what we’ve to do by promoting a new tax culture but of course we should tread on the right path not being disillusioned from achieving the object of a prosperous and bright future. I hope that the theory of tax culture will be able to lower the gap between pure theoretical economic fiction and cultural reality, particularly in the sphere of taxation.