By Katharine Houreld
ISLAMABAD (Reuters) - Almost 70 percent of Pakistani lawmakers did not file income taxes last year, an investigative journalism group said on Wednesday, highlighting deep flaws in a taxation system that has drawn repeated criticism from Western aid donors.
The Center for Investigative Reporting in Pakistan released a report based on leaked tax returns, marking the first time that the records of 446 lawmakers 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 destabilize 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 Tareen, who gave up his seat in parliament in frustration over his inability to push chang-es. "Right now the rich are colluding to live off the poor."
Umar Cheema, an award-winning journalist heading the Center for Investigative Reporting, said he hoped the report 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 $25 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 lawmakers often have their income exempt from tax, he said.
Huge swathes of the economy, like agriculture, are virtually exempt. Specially designated products also benefit from "zero-ratings" and are not subject to any tax.
"We want to cut down on zero ratings and loopholes," said Ali Arshad Hakeem, the head of the Federal Board of Revenue. He has vowed to crack down on tax cheats.
"Parliamentarians are just a subsection of the population we want to become compliant," he said.
Enforcement is so poor that paying tax is almost voluntary, another revenue official said. About one percent of Pakistanis file tax returns.
The investigative group said it had not been able to find tax returns for 35 out of 55 government ministers, including Interior Minister Rehman Malik.
Finance Minister Hafiz Sheikh was among those who did file, paying $1,700 in tax on his ministerial salary. His money from private equity funds would be exempt, a tax official said. He spent more on his electricity bill than his taxes, according to a federal tax record seen by Reuters.
The interior and finance ministries did not return calls or emails inquiring about tax obligations for ministers. Visits by a Reuters reporter also did not yield any comments.
Foreign Minister Hina Rabbani Khar paid $670, the investigative center said. Her spokesman said she paid $1,700, more than most. Her agricultural income and a small dividend from up-market restaurants she co-owns were exempt, he said.
Among the ordinary members of parliament whose tax returns the investigative group was unable to find is Mehboob Ullah Jan, a former secretary for religious affairs.
He is often pictured wearing a traditional flat cap, handing out aid to poor families fleeing fighting in his native northwestern Pakistan.
Jan has assets of more than $30 million, making him the country's richest legislator, according to an analysis of asset declarations by the Pakistan Institute of Legislative Development and Transparency, an Islamabad-based think-tank.
Jan did not return calls seeking comment.
The average Pakistani legislator has assets of $800,000, the investigative center's study of their declarations found. Yet of those who paid tax, most paid less than $1,000, it said.
Former minister and Georgetown University graduate Mushahid Hussain Syed paid less than a dollar in tax, the center said. The senator was attending a conference in Bali but sent an email disputing the report and saying he had paid $6.
"I was not a Senator then, my source of support was from my family's agricultural income and lecture honoraria," he told Reuters.
According to his tax record, Syed paid $6 but had $5 due as a refund.
"RIDDLED WITH HOLES"
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 $3 billion over the past two years.
Pakistan also owes the International Monetary Fund (IMF) $7 billion. 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 percent of their economic output in tax. In Pakistan, less than 10 percent is collected, Franks said.
Pakistan revenue authorities say 0.57 percent 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 report author Cheema.
"If our rulers are not paying for themselves, why should taxpayers in other countries pay for them?"
Part of the problem with going after tax evaders is the poor state of records at the Federal Board of Revenue. It's hard to distinguish ineptitude from corruption, officials said.
About three quarters of the time, people's declarations of what they paid did not match the actual payments, the officials said. An official said authorities never really tried to match up the records: "Oh dear God, no!" he laughed.
(Editing by Michael Georgy and Robert Birsel)