Transcript Political Economy of Tax Reforms in Pakistan

POLITICAL ECONOMY OF TAX REFORMS
IN PAKISTAN*
By
Prof. Dr. Khalida Ghaus**
* Prepared for the Workshop on South Asia Tax Systems, 8-9 August 2010, Singapore.
** Dr. Ghaus is Managing Director of Social Policy and Development Centre (SPDC), Pakistan
Taxation System in Pakistan
 Highly centralized taxation system; over 95 % of tax
revenue is collected by federal government
 Overall level of fiscal effort is low; tax-to-GDP ratio
remained more or less stagnant at 10 to11 % during
this decade
 More reliance on indirect taxes where 63% revenue is
generated from indirect taxes while 37% of revenue is
generated from direct taxes
 Effective tax base remains narrow due to exemptions,
concessions and tax evasion (for example, agricultural
income is exempt from tax)
The Reforms
 Major taxation reforms initiated in early 1990’s (and are
on-going)
- Introduction of withholding and presumptive tax regime
- Reduction in income and corporate tax rates
- Broad-basing of General Sales Tax (GST)
- Initial attempts to convert GST into VAT
- Tariff reforms (bringing down tariff rates)
 Outcomes
- Share of direct taxes in total tax revenue increased (from
15% in 1990 to over 30% in 2000); currently it is 37%
- Within indirect taxes, share of GST increased while that
of Custom Duties decreased
- Overall, tax-to-GDP ratio did not improve much
Continued.
 In nineties success was achieved by the government in
extending the network of withholding /presumptive
taxes by including, for example, interest income, from
financial institutions, dividends, exports, electricity
bills, etc.
 The government, however, could not succeed in
eliminating concessions and exemptions enjoyed as a
privilege by power groups such as agriculturists and
business community
 Similarly, GST could not be implemented in true VAT
mode and was not extended to wholesale and retail
trade and services
 Influence of various interest groups still remains
effective
Role of Lobbies
 There are a number of formal and informal lobbies in
Pakistan, which influence policy formulation including tax
reforms.
 Some of the most influential lobbies include:
- Agriculturists (large land holders, strong presence in
parliament)
- Business Lobby (Chambers of Commerce and
Industries, All Pakistan Textile Mills Association,
Overseas Chamber of Commerce, Associations of
wholesale and retail traders)
- Banking sector
- Stock Markets
Some examples of the influence on tax policy:
Continued.
 Agricultural income continues to remains exempted from
tax
 though provinces have levied agricultural income tax but the
collection is negligible and the tax is mainly based on land
holding not on agricultural income
 Several efforts from government for greater documentation
of economy have failed due to strong resistance from
business lobby. For example, survey for the documentation
of economy launched by the government in 2000 was
strongly opposed and resisted by the business sector
 Banking sector made huge profits during last decade while
tax rate for banking companies were brought down from
50% in 2002 to 35% in 2007
Continued.
 The Stock Exchange lobby resisted successfully to avoid
taxation on capital gains until 2010-11. Capital Gains Tax
could not be levied at the time when stock markets were
flourishing.
 Capital Gains Tax on real estate could not be levied due to
strong resistance from the concerned interest groups
 GST could not be implemented in true VAT mode.
 It was not extended to wholesale trade and services due to
strong resistance from trading community
 Recently, government planned to introduce new system of
VAT (including removal of exemptions) in the budget 201011, which would replace current GST. However, introduction
of VAT was delayed till October 2011 due to strong
opposition from business community as well as from
political parties