By Dr. Aneel Salman and Sheraz Ahmad Choudhary
PTI-led government is trying to make taxation a more reliable system but myriad problems like inequality of tax collection, corruption, cost of tax collection and protection of confidential data are afflicting the system. However, solution lies in blockchain technology to fix the faults in the taxation regime.
Tax is a compulsory contribution for the basic items in an economy that individuals are required to pay for a smooth working of financial events in a country. Public authorities levy taxes on merchandise, firms, people, and social orders. The framework of taxation in Pakistan is quite like some other tax frameworks in the world. The tax revenue of government can be characterized into two general classes: direct taxes; and indirect taxes. Direct taxes incorporate compensations, premium on protections, income from property, and income from the business, while indirect taxes are levied on goods and services.
Unfortunately, less than 2 % of individuals in Pakistan pay taxes. Rest of the 98% either do not pay taxes or evade from paying by developing a relationship with a tax professionals and senior officials. Tax collection has become one of the major economic challenges in Pakistan. There are many factors, which are responsible for a poor tax system in Pakistan, such as, poor management of tax offices, unprofessional behaviour of tax officials, tax laws, public unawareness about importance of taxes, poor administration of tax department. Moreover, the taxpayers have a trust deficit, and they think their tax money is not utilized properly and this could be the main reason behind unwillingness of Pakistanis to pay their taxes.
Pakistan faces a lot of issues in tax collection, however in year 2020, the total tax collection of Pakistan was Rs 6272 billion, which is much more than the tax amount collected in 2019. This has been mainly due to levying more taxes than an improvement of in the tax collection system.
“Unfortunately, less than 2 % of individuals in Pakistan pay taxes. Rest of the 98% either do not pay taxes or evade from paying by developing a relationship with a tax professionals and senior officials.”
The country lacks capacity to effectively levy taxes through traditional bureaucratic methods, it makes sense to automate the tax code and settle payments via blockchain. Pakistan needs an overhauling of the tax system to make tax collection more efficient, transparent, and secure. Blockchain could solve some of Pakistan’s most intractable and deeply intertwined problems: limited state capacity, poor tax collection and corruption.
Globally, the countries are deploying blockchain technology for an improvement of tax collection. Governments and tax specialists believe blockchain technology is good move towards digitizing the tax framework and continuous tax evaluation. The countries like Japan, China, Lebanon, Switzerland, South Africa, United Kingdom, Singapore, Bahamas, United States, Estonia, USA, Korea, etc are using blockchain technology to improve their taxation system through digitization and trying to make the system more reliable and protected. Europe is considering block chain to combat VAT fraud.
“If Pakistan uses blockchain technology to collect taxes, all the tax collection will be in between taxpayer and government, which means that all the work will be done by computers through blockchain technologies. So, the cost of tax collection will decrease.“
First application of blockchain was introduced in 2008. After that world is trying to dig out the importance of this technology. Crypto currency is the first example of blockchain technology. It is the massive capability of blockchain in taxation which is attracting government specialists to try different things with its deep-rooted taxation frameworks. Countries like Luxembourg have taken great measures and have allocated resources for organizations that are working on the utilization of blockchain technology in the tax collection. Japan is the first country which is carrying out this innovation. China is another country that intends to utilize blockchain for tax collection soon.
Although, current government in Pakistan is trying to make taxation a more reliable system but still there are problems which needs better solution like the inequality of tax collection, corruption at the time of tax collection, most importantly the cost of collecting taxes and protection of confidential data. Blockchain technology could solve all these issues if tax authorities in Pakistan try to implement this technology in their taxation system.
Private associations, governments, technology experts, and tax experts across the world are conceptualizing to utilizing blockchain in taxation. This is for sure that the innovation hold guarantees for the taxpayers and the specialists equally. For example, if a taxpayer wants to know, which tax was imposed, where, and why; tax specialists can utilize blockchain to recognize fakes and rebelliousness. Since blockchain requires no manual information, when someone is observed as a defaulter; a taxpayer will be eliminated from the blockchain and most likely will never be able to work his direction around, just like the case with existing tax frameworks.
“There is no chance of corruption while using blockchain technology, which ensures that none of the parties like government and public go against the ledgers and the taxpayer can directly pay their taxes to the government, and it is secured by computers which are based on blockchain technology.“
Essentially, the blockchain component depends upon two sections: initially is Blocks; and the other is Chain. Ledger or stored data belongs to blocks. All the data stored in the form of “Hash”, which works on the standard of “secure Hashing Algorithm 256”. Each information is stored and secured in the form of Hash, and anyone can access this information online, but all the data and information are unchangeable. Blocks relate to each other with the help of chain. The main role of chain is to connect all the blocks and keep the record of the history of transactions. This is how blockchain works.
Blockchain technology tend to cut back the 3rd party and only the brunch of computers does the task and there is no man involvement in this technology. This type of networking is called “peer-to-peer networking”. There is no middleman involved in it.
There is no chance of corruption while using blockchain technology, which ensures that none of the parties like government and public go against the ledgers and the taxpayer can directly pay their taxes to the government, and it is secured by computers which are based on blockchain technology.
If Pakistan uses blockchain technology to collect taxes, all the tax collection will be in between taxpayer and government, which means that all the work will be done by computers through blockchain technologies. So, the cost of tax collection will decrease.
As we all know that recently the FBR site was hacked, and all the data were trickled down to dark web which means that the sites are not safe; however, blockchain technology can make all essential-private-files and software safe and it is highly unlikely that someone can hack these sites.
Moreover, it is practically difficult to change the information of a block because of the intricacy of the Hash; however, for example, if someone breaks into one block and adjusts the value-based information, he/she will have to change the whole record of the relative multitude of previous blocks because each block is associated with each other and contains the conditional history, which is humanly unimaginable. This makes blockchain innovation a hackproof evidence.
Everyone on the internet can access the tax collection data, which is being made as blockchain data, it is an open data base, so nothing is hidden from anyone anywhere. The blockchain innovation will fundamentally support the speed and proficiency of payments. Blockchain will give guarantee that transfer of cash is secure and transparent, as all data put away, shared, or transferred through the blockchain settlement stage will be encoded with advanced protocol to ensure protection.
“Pakistan needs an overhauling of the tax system to make tax collection more efficient, transparent and secure and blockchain technology could solve some of the most intractable and deeply intertwined problems: limited state capacity, poor tax collection and corruption.“
The blockchain agreements permit proposed to some degree or completely conveyed contracts with no human help; however, this has not been carried out so far and this is perceived as one of the dreams about the blockchain innovation. Once digitalization system will combine with the online tax collection system, then Pakistan will ultimately be able to overcome the corruption within tax collection and remittances. The individuals, who do not pay taxes will be recognized and punished. Furthermore, the corruption will end finally.
Federal Board of Revenue (FBR) declared that Karachi is the highest tax paying city in the country. Six biggest markets in Karachi are generating more tax revenue than Lahore, Rawalpindi, Islamabad, and Faisalabad. According to FBR, only the market of Karachi is generating Rs 30.87 billion of tax yearly. On the other side, four major markets of Lahore are paying Rs 567 million in taxes. Islamabad is paying almost Rs 1.93 billion in taxes every year. Tax collection in Pakistan needs to better system because markets in Pakistan are producing millions of Rupees daily, but tax collection is not accordingly, which means that there is need of a proper mechanism of tax collection.
Blockchain is a technocratic solution that need not be managed by the state. It would be preferable to have private actors design such a system and stand between the State and society. Blockchain technology is a peer-to-peer model or decentralized model, which gives us a direct link between two parties without any third-party validation.
Utilizing blockchain stage in taxation is in its initial stages. A great deal of work is required to improving the protection concerns, such as a great deal of decentralization is required. Though, the reaction so far has been incredibly uplifting. Governments, tax specialists, and research organizations are involved in discussion to minimize the concerns, so that they can devise a policy, and apparently blockchain technology seems an ideal opportunity as far as the taxation is concerned.