Reducing corruption in tax collection via mobile payments in PakistanM-Tax system by Civic Synergies

Background and Need

Pakistan has one of the lowest tax collection rates in the world In 2012, only 0.6 percent of Pakistanis paid income

taxes (Tran)

A low tax revenue stream… Prevents the government from earning sufficient

revenue to support public services Forces the government to borrow heavily and seek

aid from abroad Raises inflation rates

Factors contributing to low tax collection

Many factors lead to low tax collection rates in Pakistan Wealthy misreport financial information Tax payers refuse to pay because lack of trust in

government Low penalties for tax evasion Complicated tax code

Government solutions Transgender tax collectors

Corruption

Corruption a major contributor for low tax collection Tax collectors prefer to take bribes rather than taxes Tax payers rather pay bribe than full amount of tax

In 2002, tax payers paid Rs. 3,858 (about 36 USD) in bribes to tax collectors in total for the year Paid up to Rs. 5,586 (about 52 USD) on average to

receive an underassessment

32.2% paid a bribe to reduce the tax Almost 14% paid to reduce fictitious assessments About 13% paid a bribe to for under assessment

Solution: Collect/pay taxes by mobile

Payment by mobile allows tax payers to directly pay government their taxes owed No exchange of cash with collector Receipt via SMS lets them know their payment was

received

Tax collector paid immediately on commission for taxes Reduces incentive to ask for bribe

Simple and secure system increases tax collection rates Generates revenue for government Helps growth

M-money success in other countries

Successful use of m-money technology by other developing country governments Tanzania

Pay vehicle license fees with m-money Afghanistan

Paying police officers via m-money

Mobile phone use in Pakistan

Majority of population has access to mobile phone 89% of population owns or has access to mobile phones 47% of phone owners use SMS due to low texting costs (0.32

cents per message in Pakistan, compared to 22 cents in US) Equal access of mobile phones across socio-economic classes;

among Pakistani adults, 37% of the poorest 60% own a mobile phone

How it works

Tax collector arrives to collect tax from individual

Tax collector texts system with person’s ID number and receives alpha-numeric code; Tax collector shows unique code to tax payer

Tax payer uses mobile money system to pay taxes owed, using unique code

Tax payer receives SMS from system confirming payment, and information on how many other people have paid their taxes so far

Tax collector receives immediate m-money payment from system for successful collection

Additional impacts

Propagates use of mobile payment technology Pay collectors, encourages citizens to use m-money services

Improves buy-in/trust in public authority by society Tax payers know government received taxes they paid, know other

citizens pay their taxes Potential for expansion

Use in other government departments, countries Electronic data collection for use by government

Information about who is paying their taxes No need for tax collectors in future Could contribute to existing literacy initiatives by improving

ability to read and send text messages

Challenges and solutions

• Run a media campaign to inform tax payers of proper procedures and prevent collectors from providing false information

Complexity of tax code may prevent collection via m-

money• Existing vendors, such as Easypaisa, can expand business and provide

m-money access• Only 5% of Pakistani households use m-money, but recent report

finds potential for viral uptake of m-money technology in Pakistan• Offer discount on first payment or rebate on taxes

Tax payers lack access to mobile phones or m-money

accounts

• M-money vendors can provide confirmation of tax receipts OTCTax payers may hesitate to use m-money or borrow

phones without confirmation

• Media and financial literacy campaigns can empower women to purchase and use mobile phones and become financially independent

Women may lack access to m-money (only 5% of m-money

users are women)

Challenges Solutions

Cost-Benefit Analysis

Costs of program: Research Cell phones for tax collectors Software or partnership with third-party to transfer money and

track tax payments using m-money

Cost Savings Bribes: tax payers pay collectors Rs. 3,858 on average to lower tax

rates or determine correct tax assessment

Revenues Tax Revenue: In comparable countries, 15% of the population pay

taxes. Even if 5% of the population pays taxes (up from less than 1%), the government could generate significant revenue

Implementation

Identify partners: donor agency, tax collection agency, m-money firms

Additional research on tax collection practices and bribe amounts

Identify urban neighborhood with high use of mobile money for beta trial

Training course with tax collectors

Awareness/media campaign of new tax collection in selected neighborhood

References

Mark Tran, “Pakistan Needs to Recoup More in Taxes Before Any Aid Boost, Says MPs,” The Guardian, 3 April 2013, http://www.theguardian.com/global-development/2013/apr/04/pakistan-recoup-taxes-aid-mps.

Sabrina Tavernise, “Pakistan’s Elite Pay Few Taxes, Widening Gap,” New York Times, 18 July 2010, http://www.nytimes.com/2010/07/19/world/asia/19taxes.html?pagewanted=all&_r=1&.

Zain Chaudhry, “Dealing with Pakistan’s Tax Problem,” Pakistan Today, 8 January 2012, http://www.pakistantoday.com.pk/2012/01/08/news/profit/dealing-with-pakistan%E2%80%99s-tax-problem/?printType=article.

Financial Inclusion Tracker Surveys Project, “Mobile Money in Pakistan: Use, Barriers and Opportunities,” Intermedia April 2013, 4, http://www.intermedia.org/wp-content/uploads/2013/06/FITS_Pakistan_FullReport_final_REV1.pdf. Rose Athumani, “Tanzania: Mobile Tax Remittance System Rakes in Sh4.7 Billion,” Tanzania Daily News, 6 September 2013, http://allafrica.com/stories/201309060354.html.

“Nature & Extent of Corruption in the Public Sector 2002,” Transparency International (Karachi: Transparency International-Pakistan, 2002), http://www.transparency.org.pk/documents/csr.pdf.

Riaz Haq, “Pakistan Leads the World in Low Cost Texting,” South Asia Investor Review, 12 January 2012, http://southasiainvestor.blogspot.com/2012/01/pakistan-leads-world-in-low-cost.html