Political Instability & Economic Growth

Making A Strong Case for Governance Reforms

Economic growth and political stability are deeply interconnected. If, on one hand, the uncertainty
associated with unstable political environment reduces investment and the speed of economic
development on the other, the poor economic performance may lead to government collapse and
further political unrest. Economists consider political instability as a serious malaise that impedes
economic growth because it not only shortens policymakers’ horizons leading to sub-optimal short-
term macroeconomic policies, it may also lead to a more frequent switch of policies, creating volatility;
thus, negatively affecting macroeconomic performance. The uncertainty that has engulfed Pakistan
because of intermittent instances of political instability has taken a heavy toll on Pakistan’s economic
development.
In theoretical and empirical literature, the fact that political factors impact economic performance is well
established. It is also true that there are many channels of political impact on the economy. Political
instability hampers economic growth as it attracts lower investment which leads to low-key economic
activities. In the modern-day world, there are many instances where the political volatility phenomenon
led to shortened government tenures which, in turn, jeopardized the prospects of implementation of sound
economic policies. Fragile political systems in many countries of Sub-Saharan Africa, the Western
Europe and the Middle East have been a major constraint for economic development. The experience of
these countries reinforces that political factors be accorded an important place in the discussion of
economic progress of countries.
Prerequisites for Economic Growth
There are at least four essential prerequisites to achieving the goal of a sustained economic growth.
 First, is a long-term vision that the
country’s leadership provides to set the direction of the country’s economy as well as the goals to be
achieved. It is the leadership that also formulates the execution strategy through which this vision is to be
translated into reality. Today, all countries of the world are faced with changing environments and
uncertainty is besetting them. This requires a continuous adjustment and fine-tuning is required by the
policymakers.
For instance, China laid down its 25-year plan in 1980 under the visionary leadership of Deng Xiaoping.
Every succeeding leader followed that plan after some modifications to suit the contemporary
circumstances. One of the explanations for China’s stellar achievements in infrastructure and energy is
the disciplined pursuit of this long-term plan.

Second, political stability is another sine quo non for economic growth. If the investors are constantly
told that the government’s days have been numbered and that it is going to be removed or toppled any
time soon, they would never put their money at risk. Candidly, if they are not sure about the returns they
will get on their investments, they would never invest. As investment remains shy, growth will remain a
dream. This leads to high unemployment and acute poverty. Political stability can be cultivated only if
there is an orderly and predictable transition of power at regular intervals. Premature and abrupt
dismissal of elected governments — which Pakistan has witnessed many times — is highly inimical for
sustained economic growth.

Third, almost every new government in Pakistan reverses the policies, suspends or abandons the
programmes and projects initiated by the previous government without any solid justification. So, the
private investors shy away from committing their money in the country. Although a broad political
consensus does exist in Pakistan on the direction of economic policies, yet every government tends to
condemn whatever has been done during the tenure of the previous government. This causes serious
handicaps for economic development. Continuity, consistency and predictability, thus, are the things
which foreign investors  like.

Fourth, overall governance structure and the strength of institutions determine whether we can achieve
the goals we have set for ourselves. If the enforcement agencies are saddled with corruption,
incompetence, indifference and ineptness, there will, surely, be a lot of leakages and waste. A rupee, if
properly invested, can bring 10pc returns but if only half rupee is invested and the other half is pocketed
for personal use, then we will end up with negative returns and, ultimately, a faltering economy.

Positive Factors Influencing Pakistan’s Growth

At present, there are at least six factors which serve as good omens for the future of Pakistan’s economy.

First is the size of domestic market. With a population of more than 180 million people, Pakistan offers a
huge and attractive market for goods and services. Pakistan’s ever-growing middle class with its rising
purchasing power creates demand for goods and services. Expansion of this demand helps the industry in
achieving economies of scale and lowers per unit cost of production.

Second factor is the favourable demographics. While the rest of the world, particularly the advanced
countries, would have rising dependence ratios due to increase in ageing population, Pakistan has
relatively a younger population — 63 percent of Pakistan’s population is below the age of 25 years while
almost 50 percent is below the age of 19. If properly educated and skilled, this youth would serve as the
workforce for the labour-deficient countries.

Third, Pakistan enjoys a highly favourable geostrategic location. Two giant economies of the world —
India and China — are immediate neighbours to the country. With India, a peaceful relationship can
spawn benefits to our country’s economy through trade, economic cooperation and scientific and
investment collaboration. On the other side, linking western China with Gwadar Port through railways,
highways, pipelines, etc., can be mutually profitable for both the countries.  Some important Central
Asian Republics as well as Afghanistan are landlocked countries. If Gwadar serves as the most
economical transit route for their international trade, the  hydropower and gas resources of the CARs
can help resolve Pakistan’s acute energy crisis.

Fourth, the Indus Basin of Pakistan is one of the largest and well-developed irrigation systems in the
world and it has boosted Pakistan’s agricultural productivity over time. Although both the share of
labour force employed in agriculture sector and the share of agriculture in the GDP have declined over
time, the physical output has multiplied eight to ten times.

Fifth, Pakistan’s enterprising Diaspora, which has ventured out to almost all parts of the world, accounts
for more than 3 million people. This migration has been a consistent and upward inclining source of
foreign exchange in form of remittances. In many instances investment has flown into Pakistan from the
relatively well off overseas Pakistanis.

Sixth, Pakistan is capable of performing well if the economy is managed properly.  However, the record
is not too good compared to other countries in Asia which have overtaken us and have done much better
than us.

Challenges
A. Domestic
There are nearly six negative factors that are pulling Pakistan’s economy down. However, all these
factors are very much in our own control and can be rectified with little but sincere efforts.

1. Our domestic savings rate is dismally low.

So, we have to depend on foreign savings to boost our investment rate. To grow by 6 percent per annum,
a country needs at least 24-25 percent of GDP. Thus the effect of low domestic savings rate is either we
have inadequate investment rate and consequently a much lower growth rate or we have to seek
assistance from foreign sources to fill this void.
2. Pakistan’s fiscal imbalances are a source of macroeconomic stress. Financing fiscal deficit by heavy
borrowings from the Central Bank and rising public debt have created inflationary pressures, giving rise
to high interest rates and crowded out private sector credit.  Public debt servicing now eats up one-third
of government budgetary expenditure and leaves very little degree of manoeuvrability in fiscal
management. Unless tax evasion is curbed, tax net is widened and tax collection machinery is improved,
fiscal imbalances are likely to persist.

3. Public sector enterprises and corporations have become a major burden on the country’s exchequer.
The enormous waste, corruption, leakages and losses are adding pressures on the budget. Government
should have a strong regulatory framework and an enabling environment to facilitate private sector to
run these businesses.
4. Weak social indicators and lack of attention to human capital formation over last sixty-seven years has
done more damage to the country’s economic potential than any other single factor. However, investment
in social services and human capital formation does not impose a great burden on the finances but
requires improvement in the organization and delivery of services.

5. In recent years, the energy crisis has wreaked havoc on economy. The benefits of rupee depreciation
could not be availed by our exporters as they were not able to deliver the orders on time due to load-
shedding and gas shutdowns. Overdue reforms in the energy sector as well as new investment in non-
fossil oil energy sources are urgently needed to overcome these problems.

6. The poor governance and dysfunctional civilian institutions are the main culprits for most of the
economic woes of the country. Civil service, police, judiciary were all well functioning institutions but
with the passage of time they have gone through a decay. The writ of the state has eroded and the
capacity to implement projects and programmes has weakened. But, economic welfare is closely linked
with good governance and sound institutions and the reforms for revamping them would make a huge
difference to the lives of the ordinary citizens.

B. External
Pakistan has suffered at least four major external shocks during the recent years:

1. The first shock was precipitated by Pakistan’s participation in the US-led war on terror which has
caused colossal losses to the economy that far exceed $100 billion along with the unaccounted for losses
of human lives and a state of anarchy permeating throughout Pakistan by the unending suicide bomb
attacks. A country in dire economic conditions like Pakistan can hardly afford to tolerate such a heavy
financial burden.

2. The second shock occurred in 2007-08 when the global food and fuel prices went through an abnormal
and abrupt hike. Oil prices went up from $55 per barrel to $150 per barrel in a period of twelve months
and so did the prices of commodities such as palm oil  that  Pakistan imports. These price hikes put
enormous pressures on the current account as the import bill jumped by almost 20-25 percent in one
year.

3. The third shock was the Global Financial Crisis of 2008-09 that resulted in a worldwide recession of
the magnitude not witnessed since 1930s. As the incomes slumped in the US and Europe, the demand for
Pakistani goods and services also slackened.

4. The fourth and most severe shock has been the floods that time and again devastated a large chunk of
arable lands, displaced countless people, destroyed or damaged millions of houses, roads, bridges, power
grids, embankments, spurs, railway tracks, etc.

To sum up, the challenges faced by Pakistan’s economy are quite formidable but the salvation lies in
resumption of growth that will result in decline in both unemployment and the incidence of poverty and
preserve the living standards of the middle class. The reprioritization of development expenditures,
savings on recurrent expenditure, reduction in across-the-board subsidies to PSEs and corporations and
improvement in tax collection can provide the stimulus for growth. Governance reforms are the key to
economic stability and growth in Pakistan and those should be relentlessly pursued.
TAX Evasion and Economic Growth
Finding the correlation
Tax evasion is among the biggest problems Pakistan is faced with today. The fiscal deficit of the country
has increased from 4.6 percent of GDP in 2015-16 to 6.8 percent in 2017-18. Increase in the fiscal deficit
is due, mainly, to excessive expenditures and extremely low tax-to-GDP ratio, which remained within a
narrow band of 9.8 percent in 2012-13 to 12.4 percent in 2016-17 (Table 1). Similarly, non-tax revenue-
to-GDP ratio has also decreased from 3.5 percent in 2012-13 to 3.0 percent in 2016-17.

In view of extremely low and further

dwindling non-tax revenue, tax revenue remains the leading source of income for the government to
balance the budgets. However, tax-to-GDP ratio remains low despite increase in real GDP growth in the
recent years mainly because of wide tax gap, which is as large as 9.8 percent of GDP – equivalent to
nearly Rs 3,200 billion. In other words, potential tax revenue is much more than actual tax collection.
Given the same level of tax enforcement, the tax gap will further enlarge in the coming years due to
substantial increase in the income tax exemption threshold for the individuals, including salaried persons
from Rs 4,00,000 to Rs 12,00,000, effective from current tax year (Tax Year 2019). With this enhanced
threshold, about 521,597 income tax return filers will be out of the tax net in the current tax year and it
will cause reduction in tax revenue by around Rs 35.2 billion.

Furthermore, reduction in corporate income tax rates will result in a greater decline in tax collection as
income tax rate for companies, excluding banking and small companies, for the tax year 2019 has been
reduced to 29 percent from 30 percent, which will be further reduced by 1 percent for each of the
following years until the tax year 2023 (Table 2).

In view of the increasing trend in fiscal deficits, it is indispensable to mobilize additional tax revenue and
it is possible only by reducing the tax gap, which is the difference between anticipated tax revenue and
actual tax revenue. For bridging the tax gap, strict enforcement through audits and penalties is
recommended.

Read More: Causes for failure to achieve tax revenue target

 There are different approaches
towards tax evasion. An important perspective is to see whether tax evasion reduces economic growth.
Higher economic growth is required for optimum welfare of the people. A benign attitude towards tax
evasion may be warranted if evasion results in greater economic growth by leaving more resources in the
private sector for investment that otherwise could go wasted due to corruption, ineptness or inefficiency
in the public sector.
There are no two opinions that tax evasion increases disposable income, the use of which is important
from growth perspectives. It is because savings increase due to increased disposable incomes and saved
incomes increase the economy’s capital stock, and boost thereby economic growth. Alternatively, the
evaded money invested abroad would reduce the capital stock of the economy. Moreover, higher tax
evasion results in lower revenue for the government that places greater constraints on government
spending on public goods and services that hurts economic growth as well.

To overcome the revenue shortfall due to greater evasion, the government may be forced to raise tax
rates or devote more resources for enforcement to curtail tax evasion in a bid to increase revenue levels.
Higher tax rates would create more distortions in the economy, resulting in lower economic growth.
Higher resource allocation to enforcement reduces resources available for more productive purposes,
thus, leaving the effect of stunting economic growth.

Tax evasion also has an associated excess burden in the form of anxiety costs of hiding income that
reduces welfare. Additionally, tax evasion may result in allocation of resources toward non-productive
purposes, as the illicit money may be shifted to the underground sector. Tax evasion also imposes an
externality on honest taxpayers as they must compensate for the evaded revenue with their own income.

The large shortfall in revenues compels the government to seek loans. In the recent years, Pakistan has
experienced significant increase in the public debt from 64 percent of GDP in 2012-13 to 70 percent of
GDP in 2017-18 as shown in Table 3.

The growth of public debt beyond 60 percent of GDP is a violation of the Fiscal Responsibility and Debt
Limitation Act (FRDLA), 2005, which has been amended to provide legislation for bringing down the
federal fiscal deficit to 3.5 percent by 2017-18 and overall debt to 50 percent of GDP within the next ten-
year period. But, oppositely, the debt-to-GDP ratio has reached 70 percent in 2017-18.
 In view of the growth effects of tax
evasion and its compliance factors, the economic growth maximizing government needs to make more
informed decisions regarding compliance factors such as audit rates and any potential trade-offs with
economic growth. For example, increasing audit rate may result in higher tax revenue and if higher tax
rates result in lower economic growth, the government may revisit the enforcement policy and may
forego the additional tax revenue that higher audits bring. Similarly, if the private sector is unable to use
proceeds of evasion productively or those are shifted abroad, the government may resort to strict
enforcement measures in a bid to use that revenue for more productive purposes to boost economic
growth.

Causes of Low Tax-to-GDP Ratio in Pakistan

n Pakistan, tax collection as a percentage of gross domestic product (GDP) is considerably low when
compared to similar economies. The ratio is low for both direct and indirect taxes. In 2012-13, tax-GDP
ratio for direct and indirect taxes collected by the Federal Board of Revenue (FBR) was 3.2pc and 5.3pc,
respectively. Overall the ratio was 8.5pc.

There are numerous reasons for low tax-GDP ratio in the country. Some of them are discussed
hereunder:

1. Tax Evasion
The extent of tax evasion in Pakistan could be estimated by looking at the tax gap. The operational
definition of the tax gap is the difference between potential and actual tax revenue, where the potential
tax revenue is the amount of tax the government would collect if every person liable to pay tax fully pays
his due tax and complies with tax law. There is an enormous revenue loss due to exemptions, allowances
and deductions from income tax, sales tax and customs duty, which was Rs. 887.5 billion or equal to
3.9pc of GDP in fiscal year 2012-13.
Generally, the tax incentives (exemptions) are provided to the investors to boost economic growth and
create jobs. But, slow GDP expansion over the last five years or so has demonstrated the ineffectiveness
of tax incentives in accelerating the pace of growth.
Likewise, the tax amnesty schemes, introduced from time to time, frustrate the FBR’s efforts to curb tax
evasion. These schemes adversely affect documentation, distort uniform collection of taxes and ensure
horizontal and vertical equity, violating the two golden principles of good taxation.

Such schemes widen tax policy gap as they raise expectations of taxpayers for more such packages in the
future. Furthermore, as the amnesties provide immunity from tax audit, they further hinder the process of
tax compliance. There are more than one form of tax evasion such as none or under-reporting of tax
liability.

Inadequate staff, scarcity of physical and financial resources and/or poor working capacity of the tax
officials may result in weak enforcement. And tax-evaders exploit weaknesses in the enforcement
mechanism to their benefit.

In order to improve revenue performance, it is necessary to bridge the tax policy gap as well as tax gap
arising from weak enforcement. Minimal use of exemptions is needed to refine the existing taxes and to
provide level playing field for all sectors of economy. At the same time, it is crucial to strengthen the
current enforcement mechanism by enhancing administrative efficiency and capability as well as
improving taxpayer compliance through taxpayer services and education.

In addition, regular and effective examination of records could be a deterrent against tax evasion and
underreporting. At the same time, appropriate training of the relevant staff could improve recovery out of
demand created from examination of records. The effective use of relevant information could help bridge
the tax gap besides encouraging documentation.

Listening to public opinions and suggestions could improve mutual understanding and trust between
taxpayers and tax officials, and this has to be addressed at each level of tax management.

Last but not least, it is imperative to impose stipulated penalties on taxpayers who violate provisions of
law. At the same time, s

trengthening the tax investigation system is fundamental in creating deterrence against tax evasion and
bridging the tax gap.

2. The Black Economy

The unreported economy or the black or underground economy comprises those activities that evade the
payment of taxes and thus violate the fiscal rules. It includes income which should be reported to the
authorities but is not. The size and growth of black economy adversely affects various economic and tax
reform policies, the budget deficits, debt burden, etc. Revenue loss estimated due to undocumented
economy is massive.

3. Sales Tax Frauds

The taxpayers exploit the multiple sales tax regimes to evade taxes through fraudulent schemes. VAT/GST
fraud is a matter of serious concern for the tax administration of both developing and developed
countries and Pakistan, too, is no exception to that. It’s an issue of growing concern that has put a
question mark on the superiority of VAT over other forms of consumption taxes such as retail sales tax.   
 
The issue of sales tax fraud in terms of size and frequency is a matter of grave concern for the tax
authorities in Pakistan. GST fraud exists in a number of forms, some prominent of them are:
a. Registration of dummy units
In some cases, the businesses got sales tax registration by submitting documents of employees. Under
such circumstances, the actual beneficiaries of refunds or input tax adjustments remained underground.
Whenever records of such dummy units are subjected to examination, tax demand so created could not be
collected as the amount is assessed against the poor employees rather than rich, real owner of the
business.

b. Fake import of goods declarations

There are cases wherein invoices were being issued on the strength of fake /non-verifiable import of
goods declaration (GDs) in the sales tax returns. Thus the whole amount of input tax adjusted by the
buyers proved to be illegal and recoverable. In fact, goods were being supplied to unregistered persons
and invoices generated on the strength of fake GDs were being utilized for input tax adjustment.  

c. Flying invoices
It is found in certain cases that the registered persons supply taxable goods to unregistered persons but
succeed to obtain invoices from registered units involved in supply of different goods. These flying
invoices are being used extensively to claim input tax or sales tax refunds.

d. Fake bank accounts

The registered persons claiming input tax on invoices more than Rs. 50,000 are required to make
payments through banking channels. The tax fraudsters opened bank accounts sometimes in connivance
with the bank officials utilizing documents/signatures of persons other than actual beneficiaries and this
enables buyers to ensure compliance of section 73 of the Sales Tax Act 1990.

e. Suppression of taxable supplies

Sales tax is an indirect tax. The businesses are supposed to shift the burden of this tax to final consumers
of goods and services. In many cases, the registered persons, though charge sales tax on all supplies,
they don’t declare true turnover in the sales tax returns and thus evade sales tax.  In other cases, many
businesses declare turnover just below threshold required for sales tax registration and thus continue to
operate in an undocumented economy. These businesses actually capture large share of market due to
less product prices as compared to those operating under the sales tax net.

Reducing Income Inequality Through Taxation

The word ‘democracy’ a Greek word in origin’ is
composed of Demo or the people and ‘Cracy’ rule,
or rule of people, it started in city states of Greece. A
lame tradition of Democracy was practiced in Rome
where it got mixed up with Emperorship and had a
zigzag course. Otherwise in Europe, worst
authoritarian rule remained entrenched till the
French Revolution or the 18th century where the
theory of Divine Rights of Kings was propounded. It
developed after the French Revolution or after the
18th century primarily in England and also in France
but naturally under the hallow of different cultural
backgrounds ‘Democracy’ as is now practiced
evolved in England and the British Parliament is
called the mother of all parliaments.
A possible explanation for the rising inequality in the country could be the flawed and ineffective taxation
policy and the imperfect enforcement thereto. Our tax-to-GDP ratio ‘at below 10pc’ is the lowest among
other economies of our size. On average, the tax-to-GDP ratio has been marginally above 9pc for the
period 2003-04 to 2012-13. Though tax collection in absolute numbers has increased over the years, yet
in terms of percentage to GDP, it has been stagnant and has even declined in the recent past.

The low and declining tax-to-GDP ratio suggests that a massive tax avoidance and evasion has become a
usual matter for the corporate and non-corporate taxpayers either with or without the connivance of tax
functionaries. This phenomenon also manifests the weak tax enforcement.
As the rich and influential people in Pakistan evade paying the due tax, so the policymakers are left with
no option but to rely on indirect taxation in order to secure revenue that is essential to balance the
budget. At present, more than 60pc of the total tax revenues is being generated through indirect taxes
including sales tax (44pc) and customs and excise duty (16pc). Even within the ambit of direct taxation,
income tax is the main source of revenue with 98pc contribution. Ironically, around 60pc income tax
revenue is being raised through withholding tax regime, which is overwhelmingly presumptive in nature
and has the tendency to assume indirect form of taxation.
Furthermore, a wide range of tax deductions, credits and exemptions have benefitted only those who
already have hefty incomes. Secondly, there are no recurrent taxes such as inheritance tax, wealth tax,
gift tax, etc. Even though the agriculture is the backbone of our economy, there is no tax on agricultural
income of the owners of large landholdings.

In the presence of a taxation policy that is heavily reliant and dependent on indirect taxes it is not
possible to reduce income inequality; rather the situation has become exacerbating and perturbing. It is
because the indirect taxes are directly included in the final prices of commodities which the consumers
purchase and hence pay for that tax. This gives rise to a soaring inflation. With double digit inflation
during the last decade, the $1 a day yardstick for defining poverty has lost its significance and the
Finance Minister, Mr Ishaq Dar, has declared a new benchmark of $2 a day.

In this context, it is important to mention that there are two measures of equity: (i) Horizontal equity that
requires that the taxpayers with equal level of income pay the same amount of tax and thus bear equal tax
burden; (ii) vertical equity that requires the taxpayers with different levels of income to pay different
amounts of tax and thus bear unequal tax burden.

The government should introduce a series of reforms to ensure that the top earners do contribute their
fair share of tax to the national exchequer. For this, formulation and implementation of effective taxation
policy, which is fundamental to achieve redistribution of income and to reduce the income inequality, is
more than indispensable now.

Abolishing or scaling or rationalizing back a wide range of tax deduction, credits and exemptions, which
are benefiting only the big businesses, should be reconsidered at the earliest. There is a dire need for
restricted and careful use of SROs, because so far these haven’t been beneficial to the economy, rather
have contributed to the complication of the tax system which has been a source of huge losses to the
national kitty.

Shifting the tax mix towards a greater reliance on recurrent taxes on immoveable property could also be
a viable option.

It is also important to review other forms of wealth tax such as inheritance tax, gift tax, etc.

At the same time, international cooperation should be sought to minimize tax evasion on cross-border
transactions as high-income individuals and companies structure their finances to take account of
favourable tax provisions in different countries.

Broadening the income tax base to fill up lacunas and reduce tax evasion opportunities is much needed.
This is the only way to optimize revenue and reduce inequality.

Last but not least, ensuring tax compliance by tax enforcement measures such as penalties, additional
taxes, etc., is of pivotal importance to securing revenue and to allow the self-assessment system to
perpetuate in the society.

Raising Taxes | Policy Options before Tax Reform Commission

At present, the Federal Board of Revenue (FBR) is

under immense pressure to raise tax-to-GDP ratio
essential for creating fiscal space. To take up all
types of tax-related matters including determination
of various taxes and duties and finalizing tax ratios,
a tax reform commission is in the offing. Given
limited fiscal space, narrow tax base and poor tax
compliance, presenting various tax policy options
before the commission is seriously warranted.
It is worth mentioning that Pakistan is lesser successful in tax collection than other developing countries.
In 2011, the tax-GDP ratio in the country was 9.2 per cent as against 14.8 per cent in developing Asia-
Pacific countries, 17.1 per cent in Latin America and the Caribbean regions, and 16.3 per cent in Sub-
Saharan Africa.

There could be various tax policy options before the tax reform commission for strengthening tax
revenues. A large number of micro- and small-sized businesses are operating in the informal sector not
only causing loss of tax revenue but also hampering competitiveness and productivity. To bring these
businesses in the tax net, sales tax registration for every business with industrial utility connection or
commercial connection may be made compulsory regardless of the annual threshold. For taxation
purpose, a special tax regime may be introduced for micro and small businesses. Under such a tax
regime, these businesses may be subjected to a single income tax levy and lower sales tax rate and may
not allow credit of input tax against output tax. To facilitate micro and small businesses, these may be
asked to pay tax on quarterly basis in instalments. Partial exemption from payment of tax during first two
to three years of activity may be offered to businesses created under special tax regime as an incentive.

In Pakistan, although the average corporate tax rate is higher as compared to other regions, no
significant increase in tax collection has been witnessed. The average corporate tax rate from 2006 until
2014 was 34.89 per cent in Pakistan as against 28.3 per cent in the Asia-Pacific region, 29.8 per cent in
Africa and 32.2 per cent in Latin America. It implies significant enforcement gap. To bridge this gap,
granting a level of institutional autonomy to FBR to protect tax administration from corruption, political
interference and pressure from various vested interests can be a better option.
In Pakistan, the corporate tax rate was reduced from 35 per cent to 34 per cent for 2014 in a tax
competition with other economies of the region and in order to attract foreign direct investment (FDI).
However, there is an immediate need to examine the impact of lower corporate tax rate on total revenue
and investment as a string of studies found insignificant relationship between lower corporate tax rate
and foreign direct investment. Therefore, enhancing corporate tax rate may be an area of interest before
the commission.

With respect to individual income tax rates, a flat tax rate, like in Kazakhstan, Russia and Georgia, could
be another option to simplify the tax system in order to curb tax evasion and tax avoidance and also to
reduce the tax administration cost. However, the option of flat rate taxation needs to be considered
carefully as such rates are highly regressive and have the potential of widening income inequality.

Another tax policy choice could be the reintroduction of tax on wealth that stood rescinded from 2001-
2002. A number of countries that previously abolished the wealth tax are deliberating to reintroduce it so
that the increasing income and wealth inequalities may be mitigated and the national debt eliminated.  In
addition, tax on wealth is considered an instrument to decrease inequality and to strengthen democracy.

Establishing dual income tax system that taxes income on labour and capital gains separately with lower
tax rate on capital to encourage savings and investments could be another tax policy option. Taxing
capital gain at lower rate is also likely to allow some room to address tax competition aimed at attracting
investment.

With regard to tax exemptions and concessions, it is emphasized that these are costly in terms of revenue
losses as compared to the benefits of increased foreign direct investment and are thus counterproductive.
The estimated revenue losses due to exemptions and waivers of income tax, sales tax and customs duty
went up from PKR 164.5 billion or 10.7 of total tax revenues in 2010-11 to PKR 208.2 billion or 9.9per
cent of total tax revenues in 2011-12. Therefore, reducing and rationalizing tax expenditures could be a
viable option for strengthening tax revenues and minimizing distortions.
To harmonize taxes and avoid tax competition, promoting regional cooperation would be useful in
dealing with tax havens. For this purpose, the member states of the South Asian Association of Regional
Cooperation (Saarc) can consider a certain level of harmonization of the taxation of profits of
multinational companies. Furthermore, the transfer pricing issues necessitate more harmonizing of
corporate tax rates in the region. Better information reporting and additional enforcement are the
measures required to combat tax haven and transfer of funds out of country without taxation.

To sum up, reducing tax expenditures, increasing tax collection efficiency, extending sales tax base,
taxing capital gains effectively, taxing imports of services, taxing foreign operations, improving tax
administration and harmonizing income tax rates are the potential measures that could help in
strengthening tax revenues and reducing distortions.

Pakistan has significant potential for enhancing tax revenues, improving the quality of tax
administration, rationalizing tax rates and reducing the level of tax expenditures.

Broadening the Tax Base, A dire need of the hour

Narrow tax base has often been cited as the most obvious reason for low tax
collection in Pakistan. However, the very term “tax base” is largely
misinterpreted and is unknown to many people despite the fact that their
incomes or activities, annually or periodically, are subject to tax.
In Pakistan, Rs 400,000 of non-agricultural income per annum is normally a base for imposing income
tax. Nonetheless, many other bases are also used for collection of income tax. For example, advance
income tax is levied on amounts of bills of all landline and  cellphone users irrespective of that whether
the amount of bill is paid out of the agricultural income or the exempt income. Although the tax so
deducted is adjustable but most people do not claim adjustment mainly due to lack of awareness and
complex administrative procedures.

There are several other bases as well such as value of goods, gross amount of air ticket, cash withdrawn
from a bank account, etc. that are used for collection or deduction of advance income tax. It is worth
mentioning that about 40pc of these bases are presumptive in nature wherein tax collected or deducted is
not allowed to adjust for determination of net tax liability or for claiming refunds.
It becomes clear from the structure of income tax system in place in Pakistan that the authorities are
using supplementary measures such as adjustable and non-adjustable withholding taxes and minimum
taxes to collect income tax on various bases to meet revenue targets. Such tax structure cannot ensure
vertical and horizontal equity, fairness and neutrality.

It is a dire need of the time that potential taxpayers are brought in the tax net purely on the basis of
annual taxable income exceeding the threshold fixed by the government instead of collecting tax in an
indirect way from those who are not obliged to pay taxes.

There are several impediments to bringing potential taxpayers into the tax net. For instance, overall tax
system is complex as indicated by time to comply and number of payments — higher than the world
average. Small and medium enterprises shy away from entering into the tax net mainly due to lengthy,
complex and time-consuming procedures.
 Excessive tax exemptions and concessions promote
unfair competition between informal and formal sectors of business enterprises and thus it encourages
the growth of informal sector. These measures are causing 2-3pc loss of tax revenue as a percentage to
GDP each year.
At enforcement level, a culture of favouritism, nepotism and corruption has impeded the process of taxing
individuals with high net worth, in accordance with their capacity to pay. At present, the government is
under immense pressure to raise tax revenue by broadening the tax base. It is because for the last many
years, tax collection has been on the decline not only at federal level but also at provincial level, which is
a sign of an increase in the size of informal or undocumented economy.

In the last year’s Finance Bill, several changes were introduced to increase the cost of non-compliance.
For example, the airlines were obligated to collect advance tax at the rate of 3pc on the sale of first class
and executive class air tickets in case of compliant taxpayer and at 5% if the passenger is a non-
compliant.

Similarly, adjustable advance tax is required to be collected on purchase of immovable property of worth
more than Rs3 million at the rate of 1pc for compliant taxpayers and 2% for the non-compliant ones.

Furthermore, obtaining NTN has been made mandatory for installation of commercial and industrial
electricity and gas connections.

Nevertheless, these and many other attempts aimed at broadening the tax base have failed to yield the
desired results due to inadequate and insufficiently skilled supporting staff. Additionally, survey
information is not being used effectively. Adequate tax facilitation to the enterprises is also not available
at enforcement level.

Lack of trust and confidence among the people regarding fair and neutral taxation and also the correct
spending of public funds is another source that contributes to lower tax compliance. Important
determinants of trust deficit include corruption, lack of trust regarding tax utilization and cumbersome
filing procedures. Tax compliance is also low due to prevalence of high rate of illiteracy in the country.

To broaden the tax base, the field formations need to explore opportunities for conducting public
education programmes on tax laws, tax procedures and accounting requirements, particularly for small
enterprises. Working with industry and community groups for promoting benefits of filing tax returns
such as lower tax rates, adjustments of tax withheld and refund claims is also crucial.

Similarly, penalty or other enforcement measures must also be taken into consideration keeping in view
the past compliance behaviour of the taxpayer.

Last but not least, targeted amnesties may be employed to promote tax compliance in informal economy.
It also requires continued working with industry groups for reducing cost of compliance in terms of hours
for making payments, number of payments, return filing, etc.

Strengthening Tax Administration

Importance of tax revenue in the fiscal system of a country cannot be negated
because it is a leading source of revenue for balancing the budgets. Tax revenue
constitutes major component of revenue receipts in all around the world with the
exception of a few natural-resource-rich countries where non-tax revenue is a
major source of revenue. It is also not out of place to mention that public service
delivery at operational and tactical level is adequate in countries where tax
collection as a percentage of GDP is considerably higher.
In Pakistan, like many developing countries where tax collection falls short of targets, public services
such as education, health, security and justice are not adequate. As a result, literacy rate is extremely low
(below 60pc), law and order situation is poor and justice is dispensed belatedly.

Another disadvantage of limited tax collection is large and sustained budget deficits (the budget deficit
reaches as high as 8.5pc), which are accumulated in huge debts. At present, national debt is more than
64pc of GDP. Ideally the debt burden as a percentage of GDP in developing countries must not exceed
60pc from sustainability point of view.
Limited tax collection is due to flawed tax policy as well as weak enforcement. For the last many years,
the tax to GDP ratio has been hovering around 10pc, which is considerably smaller even than the
world’s average tax-GDP ratio of 14.8pc. It is beyond any doubt that the current tax collection is much
lower than the potential. The gap is due to widespread tax evasion on account of direct and indirect
taxes. People hardly feel shame in evading taxes. Federal Board of Revenue (FBR) reported an estimate
of the corporate evasion rate equal to 45 pc. A study by the World Bank (2009) estimated the evasion rate
as high as 218pc of actual corporate income tax payments.

Ideally tax policy should be based on principles of good taxation such as simplicity, vertical and
horizontal equity, neutrality, efficiency, etc. It must not create distortions in the economic system by
taxing some individuals or sectors of economy while leaving others untaxed; it must ensure uniform
distribution of tax burden. In other words, choices of consumers and investors must not be adversely
affected by tax policy.

In Pakistan, tax policy provides tax exemptions to some individuals and sectors of economy and shifts the
burden of tax, in the form of high taxes, on others. Frequent changes in the tax policy through statutory
regulatory orders (SROs) create uncertainty and make the tax system complex. Furthermore, tax
exemptions and frequent changes have the potential of promoting tax evasion. Table below provides for
various tax exemptions and average loss of income tax revenue (only direct tax levy at federal level)
during the period 2009-10 to 2013-14 due to flawed tax policy.

Another important reason for collection of tax revenue less than potential is weaker enforcement of laws.
One plausible reason for weak enforcement is inadequate human resources. With a population of
exceeding 180 million, there were only 13,344 tax officials against the sanctioned strength of 17,044. On
the other hand, in Japan for a population of 128 million, tax administration consists of more than 53,000
officials. Though two zones broadening of tax base (BTB) and withholding taxes (WT) have been created
in each of the eighteen Regional Tax Offices but no additional workforce has been recruited to be
employed there. With same sanctioned strength, the officers and staff in these zones are under a lot of
pressure to complete arduous tasks of BTB and WT.

The size of black or undocumented economy in the country is estimated to be around 60pc of GDP.
Therefore, revenue potential is far greater than the actual collection.

There was no tax investigation system of direct taxes before 2011-12. However, Finance Bill 2011-12
introduced Intelligence & Investigation System for surveillance of all inland taxes including income tax,
sales tax and federal excise duty (FED). But these offices lack sufficient resources in terms of manpower
 and logistics to carry out the task of prosecuting the tax fraudsters. Furthermore, limited capacity of tax
auditors and other staff due to lack of training is another reason of weak intelligence.

Literacy rate is less than 60pc in the country which is another important reason behind non-compliance
of tax laws. Additionally, cost of tax compliance is very high. Pakistan ranked 162 out of 185 world
economies with regard to tax dealing (World Bank “Paying Taxes”, 2013). In Pakistan, the taxpayers
spend 560 hours on dealing tax matters against the world average of 267 hours. Undoubtedly, taxpayers’
understanding of the tax system, tax laws and tax administration largely influences tax compliance
behaviour. It is found that high tax-compliance cost discourages voluntary tax compliance and tax
education, tax morale and tax information so also have an impact on tax compliance.

For increasing tax collection and reducing tax evasion, strengthening tax administration is required,
which can be strengthened through following measures:

1. A gradual increase of the tax administration staff

2. Strengthening the careers of officials
3. Restructuring staff remunerations
4. Streamlining duties and functions of offices
5. Providing relevant foreign and local training  to tax administrators
6. Reinforcement of internal controls and strict accountability to reduce corruption in the fiscal
system
7. Solidification of the intelligence and investigation system by putting right type of human
resources and logistics.

Tax Measures For Promoting Investment

Investment occupies pivotal position in the growth equation. Governments

employ combination of fiscal and monetary policies to optimize investment
activity so as to create jobs and achieve higher economic growth — the two
major macroeconomic goals. In the federal budget for 2015-16, the government
of Pakistan has adopted several tax measures as fiscal instruments to encourage
investment activity in the country. 
As tax exemptions and concessions are considered against the principle of equity and fair play, the
Government of Pakistan has decided to withdraw discriminatory tax exemptions and concessions to
provide level playing field to all sectors of economy where they have equal chances of competing and
growing. It is worth mentioning that several tax exemptions on account of income tax (Rs.83.6 billion),
sales tax (Rs.478.4 billion) and customs duty (Rs.103 billion) have caused revenue losses to the tune of
Rs.665 billion during 2014-15. The major beneficiaries of income tax exemptions were independent
power producers (IPPs) as they enjoyed tax exemptions of Rs.51.5 billion out of total income tax
exemptions of Rs.83.6 billion.

To attract investments in agriculture sector, which contributes around 21pc of GDP and employs more
than 45pc of workforce, several measures have been announced in the budget.
 The companies that will set halal meat
production plants and obtain halal meat certification by December 31, 2016 will enjoy tax exemption for
four years. It is expected that this measure will attract huge investment in the halal meat industry and will
help in boosting halal meat exports.
It is not out of place to mention here that halal meat market caters to 1.8 billion Muslims all over the
world. Pakistan’s total halal meat exports hovered around $230 million in 2014. The size of global halal
market is expected to swell to $2 trillion by 2030 from currently $635 billion. Amazingly only 20pc halal
market producers are Muslim countries and the remaining 80pc are non-Muslim ones such as Australia,
Brazil, India, etc. Pakistan ranks 5th in world in cattle and buffalo population but 18th in halal meat
exports — with only 0.26pc share in global market.

Pakistan can easily increase its share in global halal meat exports. It’s a Muslim country where animal
feed is 100pc organic. Almost 60pc of its rural population is associated with farming. It has vast
rangelands and abundant labour resources. Its location too offers it large halal meat market. Above all,
meat produced in the country is better in quality than that of other halal-meat-exporting countries such
as Brazil and Australia, due to less-fat contents.

However, there is a need to overcome supply side constraints in order to boost halal meat exports. Raw
material in halal meat industry is animals. But, the shortage of animals has been posing serious problems
in ensuring consistent supply in terms of number and quality due to export and illegal trade of live
animals.

To increase investment activity in the agriculture sector, others measures adopted include:

(a) Income tax holiday for 3 years for new industrial undertakings engaged in setting up and operating
cold chain facilities, and setting up and operating warehousing facilities for storage of agriculture
produce. Increasing storage capacity for agriculture produce is essential for preserving excess supply in
case of bumper crops and to stabilize the market by ensuring smooth supply.

(b) Exemption from minimum tax for the tax year 2015 to rice mills suffering from low global demand.
This year, there was considerably low price for paddy due to low demand and the farmers and businesses
were adversely affected.

(c) Exemption from withholding tax on supply of agricultural produce extended to supply of fish.
 (d) In order to promote farm mechanization
and enhance productivity non-adjustable sales tax at reduced rate of 7pc, instead of existing rate of 17pc
has been imposed. Remembering, mechanized farming is required to increase per hectare yield and to
avert any incidence of food insecurity.
(e) Interest-free loans of up to Rs.1 million for setting up new solar tube wells or replacing the existing
ones with solar shall be provided in order to facilitate the small growers and to reduce heavy expenditure
incurred on diesel- and electricity-run tube wells.

Manufacturing — large and small scale — is an important sector of growth. A number of incentives have
been offered to manufacturers in the budget.

(a) If a company, being a manufacturer, is set up during next three years and it employs more than 50
employees duly registered with Social Security and Employees’ Old-Age Benefits Institution, an
employment tax credit equal to 1pc of the income tax payable for every 50 employees shall be provided to
the company, subject to a maximum of 10pc. On demand of various investors and business community,
this exemption is being extended up to 30th June, 2017.

(b) Exemption from income tax for 5 years is being granted to industrial undertaking engaged in the
manufacturing of equipment, plant and items required to produce solar and wind energy.

Construction sector has a ripple effect and impacts other sectors of economy. Measures adopted in the
budget to boost construction activity include:

(a) Mark-up on housing loans obtained by individuals from banks and other institutional lenders for
construction or buying a house to be allowed as a deduction against income up to 50pc of taxable income
or Rs.1 million.

(b) Similarly, the minimum tax on builders leviable for the business of construction and sale of residential
and other buildings is being suspended for a period of three years.

(c) Furthermore, capital gains of any person who sells a property to a real estate investment trust (REIT)
development scheme formed for the development of housing sector will be exempt from Income Tax up to
30.6.2018. Supply of bricks and crushed stone will be exempted from Sales Tax for three years up to
30.6.2018.
(d) Last but not least, on import of construction machinery in used condition by the Construction
Companies registered with Pakistan Engineering Council and SECP, the customs duty is reduced to
10pc.

Introducing tax measures to make taxation

system equitable and efficient may 2020
magzine
Raising Taxes | Policy Options before Tax
Reform Commission

Weaknesses in Taxation System

Public finances are needed for rendering public services; ranging from security, justice and other
basic amenities like health, education, etc. One of the striking features of the countries that made
extraordinary development in almost every field of life is that they had the capacity to raise much
higher tax revenues as a percentage of GDP. Of course, some other factors such as endowments,
geography and culture also play an important role in the development.
Unlike developed countries, the developing countries like Pakistan have limited capacity to raise public
finances; hence, there is inadequate supply of public services, an optimal supply of which is crucial for
development. For example, maintaining law and order situation is a prerequisite for boosting economic
activity as it affects foreign direct investment as well as domestic investment, the key drivers of long-term
economic growth.  However, the central question is how the developing countries like Pakistan could
strengthen revenue mobilization that is much needed for financing development activities in the country?

Remembering, development process requires not only increasing the level of taxation but also making
drastic changes in the patterns of taxation with greater focus on broadening the tax base, which demands
fewer exemptions and containing informal economic activities.

In view of globalization, the tax policy changes with heavy reliance on taxes on income and the value
added, along with the diminishing dependence on trade and excise taxes from the last two decades or so
are rightly directed. These tax policy changes are reflected from the reduced share of customs and excise
duties and increased share of income tax and value added tax (sales tax) in federal tax receipts over the
years.

Contribution of customs duty and excise duty in federal tax receipts was around 46% and 21% in 1990-
91, which has declined to around 12% and 6%, respectively, in 2012-13. On the other hand, share of
income tax and value added tax (sales tax) has increased from about 17% and 15% respectively in 1990-
91 to 37% and 43% in 2012-13.

At present, some major challenges confronting the tax system in Pakistan are:
1. Narrow Tax Base
The base of taxes on income and value added is not broad enough to allow mobilization of sufficient tax
revenues largely because of substantial informal economy and widespread exemptions. And this does not
allow for evolution of better working tax system as well. Needless to say that a well-designed tax system
could minimize the efficiency losses imposed by taxes and even raise the growth rates. A narrow GST
base, for example, is perceptible from the fact that more than 78% domestic GST revenue is being
collected from 14 commodities and more than 74% GST revenue on imports is being collected from only
10 commodities.

2. Inadequate Tax Policy

There are considerable revenue losses due to inadequacy of the tax policy. The Federal Board of
Revenue (FBR) has been suffering a massive revenue loss to the tune of Rs. 361 billion per annum
(equivalent to 1.6% of the GDP) due to exemptions and concessions to various sectors. The losses on
account of tax holidays (lifetime) to Independent Power Producers (IPPs) were Rs. 63 billion, under-
recovery of capital gains on securities and property at Rs. 70 billion, accelerated depreciation allowance
at Rs. 64 billion, tax deduction on provisioning by banks at Rs. 24 billion, exemption of business income
of trusts and foundations at Rs. 12 billion, concessionary rates Rs. 34 billion, tax deduction on WWF and
WPPF payments Rs. 11 billion, low rates of AIT Rs. 40 billion and other revenue losses Rs. 43 billion.
Such tax exemptions and concessions accorded to certain sectors of economy or taxpayers are against
the principle of equity and fairness and tend to reduce tax compliance levels. Furthermore, these tax
exemptions and concessions shift excessive tax burden on the rest of the taxpayers and it is empirically
proved that high tax burden reduces tax compliance.

3. Weak Tax Enforcement

According to the figures from latest tax directory of the FBR, top 1% of companies accounted for 79% of
the corporate income tax while top 1% of individuals contributed 29% to the personal income tax.
Furthermore, revenue losses are colossal when combined with tax evasion and huge informal economy
due to weak and imperfect enforcement. The FBR reports an estimated corporate evasion rate of 45%
(FBR, 2012-2013) and a study by the World Bank (2009) estimates the evasion rate as high as 218% of
actual corporate income tax payments. It is not out of place to mention that out of a total population of
more than 180 million, only about 0.8 million file income tax returns and out of these filers, only 60% are
taxpayers. Administrative penalties (additional tax, additional charges, etc.) are supportive elements for
smooth functioning of the self-assessment system. On the one hand, administrative penalties are not
effectively enforced while, on the other, such penalties are waived off by the government through
statutory regulatory orders (SROs), which may be considered as an element of weak tax policy. It is
because if taxpayer knows that he has not to pay additional tax or penalties for tax default, he is more
likely to evade and avoid due payment of taxes. However, if fines are too high, the tax system is perceived
as unfair and unjust, it will also reduce taxpayers’ compliance.

4. Lack of Transparency
In 2012, Transparency International (TI) ranked Pakistan 33rd most corrupt country as compared with
42nd in 2011. Similarly, in the Rule of Law Index of 2012, Pakistan was declared the 7th most corrupt
country out of 97. This suggests that corruption level in Pakistan has increased substantially in the recent
years. Even according to National Accountability Bureau (NAB), the daily corruption in Pakistan is
nearly Rs. 7 billion. Likewise, according to FBR, a hefty amount of Rs. 15,000 billion was made legal by
just paying a meagre amount in taxes of Rs. 150 billion under the Tax Amnesty Scheme. In the National
Corruption Perception Survey 2011, the taxation department was found to be the 3rd most corrupt
department among the ten selected for the purpose — it was 8th in 2010. And out of different taxes,
income tax is the most corrupt field. The areas where corruption has been pointed out include: audit,
issuance of tax emption certificates and issuance of refunds, etc.

Good governance has positive impact on taxpayers’ compliance because it develops a trust in taxpayers
on the governance system to deliver optimum level of public services utilizing tax money. In case the
governance system is corrupt or it has connived with the taxpayers, the taxpayers’ compliance level will
be low, and vice versa.

5. Weak Intelligence and Investigation System

A strong system of intelligence and investigation plays an important role in smooth working of the self-
assessment and to promote voluntary tax compliance. In Pakistan, the intelligence and investigation
department was created in 2011 to carry out investigation and prosecution process into tax fraud cases
pertaining to individual income tax, corporate tax, sales tax (value added-tax) and federal excise duty.
The department lacks requisite human, physical and financial resources to carry out its functions
efficiently. The number of investigators with requisite capabilities and skills is not sufficient to carry out
exhaustive work of tax investigation and prosecution. The department lacks the desired level of legal
backing as well. In case the prosecution process is lethargic, the very objective of creating deterrence
against tax fraud through the investigation may not be achieved. A number of sales tax fraud cases
involving huge revenues have been identified by the department in the recent past. The tax fraudsters
have committed sales tax frauds by creating and registering fake firms and using fake invoices for
refunds. Furthermore, millions of citizens, who had enormous wealth but had not been paying taxes have
been identified.

6. Inadequate Taxpayers’ Service

In Pakistan, literacy rate is less than 60%, another important reason behind non-compliance of tax laws.
It is said that the taxpayers promptly comply tax rules if it is easier and costless for them. In Pakistan, the
taxpayers have to spend considerable time in making tax compliance. In a recent study by the World
Bank (Paying Taxes, 2013), Pakistan was ranked 162 out of 185 world economies with regard to tax
dealing. Pakistani taxpayers, on an average, spend 560 hours on dealing tax matters against the world
average of 267 hours. On the other hand, the taxpayers’ understanding of the tax system, tax laws and
tax administration largely influences tax compliance behaviour. It is also empirically found that high tax-
compliance cost discourages tax compliance. Likewise, tax education, tax morale, tax information, etc.
do also have an impact on tax compliance. The FBR is struggling to provide necessary services to
taxpayers through taxpayers’ facilitation centres but these are not enough to ensure optimum taxpayer
compliance of tax matters.

Let us focus on economic security

By early 2000 Pakistan had become perhaps the most sanctioned country after Libya. In October 1990
the US had imposed sanctions against Pakistan under the Pressler Amendment for having crossed the
nuclear red-line.  Next, new sanctions were imposed under Glenn and Symington amendments in May
1998 when we tested our basement bombs. The October 12 military take-over had brought with it more
curbs.

So, by December 1999 our isolation was almost complete which naturally triggered a serious debate in
the national media. However, General Musharraf was undeterred. He invited some senior journalists to
the COAS house for a briefing. He claimed:  Pakistan would never be consigned to isolation because it is
1) the hub of fundamentalism; 2) located adjacent to a major source of narcotics; 3) a nuclear armed
country and; 4) a close neighbour of China. This was proven immediately when Pakistan went to the IMF
for help under the standby arrangement. Two important members of the board: the US and the UK which
because of their respective domestic laws could not have approved the application of a country ruled by
the military, abstained from the June, 2000 Fund board meeting facilitating approval of our application.

This was proved once again recently when the Fund allowed Pakistan as many as 15 waivers, as we
‘successfully’ completed this September, a three-year Extended Fund Facility (EFF) amounting to
$615million. This happened despite the fact that the developed world led by the US has continued to
accuse Pakistan of playing a double game – going against militants challenging Pakistan’s security
agencies while allegedly protecting and promoting those who allegedly use Pakistan’s soil to launch
‘terror  attacks across the Durand Line and the Line of Control.’ However, our experience of the 1990s
should caution us against reposing too much faith in this ‘grudging goodwill’ of the developed world.
Already our detractors, especially the paid lobbyists of Modi’s India in the world capitals have started
mobilising political opinion for getting terror related sanctions imposed on Pakistan. And do we
remember what the US presidential candidate Hillary Clinton whose victory is almost guaranteed now
that her opponent has wrapped himself into a straightjacket told us when she was visiting Pakistan (Sept
2010) in the capacity of US secretary of state? She had warned Pakistan that if it wanted to continue
receiving US aid it must tax its elite.
Economic security which is very much essential for safeguarding the national security, therefore,
demands that we focus our attention single-mindedly on economic reforms, especially tax reforms as well
as on injecting new life in our cotton and textile sector – the backbone of our economy. Indian textiles are
said to have started displacing Pakistan from most of its traditional markets including even the Chinese
market.

This is happening because as the All Pakistan Textiles Mills Association (APTMA) claims one textile mill
is closing down every day in Pakistan. This is the situation in a sector which has a share of 52% in our
total export, contributes 46% in total manufacturing, has a share of 40 % in the total labor force,
contributes 8.5% to country’s total GDP and is one of the largest borrowers of banks and financial
institutions.

The APTMA further claims that as a result of the closure of so many mills textile machinery valuing
billions of dollars has become obsolete and hundreds and thousands of textile workers have been
rendered jobless. There has also been a sharp decrease in cotton growing area and Pakistan’s share in
global textile trade has come down to 1.5% from 2.3% as textile exports have dwindled to less than $18
billion from $25 billion in 2013-14.

One wonders why the government is not paying urgent attention to the remedial measures proposed by
the APTMA like withdrawal of 4% duty on import of cotton, resolution of anomalies relating to zero
rating, removal of 1.25% Cess collection on textile raw material, imposition of regulatory duty at the rate
15% on import of manmade fiber yarn, removal of Gas Infrastructure Development Cess  and reduction
of gas tariff and removal of all surcharges on electricity tariff in line with regional competing countries
and inclusion of long-term financing facility in indirect export and abolishing of turn over tax for the next
five years or reduced to 0.25%?
Taxation and Economic Growth
Pakistan Making Economic Strides, Ranking among the 10 most-
improved economies
High taxes, low yields

AN ECONOMY FOR THE 99%, It’s time to build a human economy

that benefits everyone
State of economy
TAXATION POLICY, For improving tax compliance

The Vulnerability of Pakistan’s Economy ADB’s premonitory concerns

Broadening of tax base
The roots of recurrent economic crises
Understanding Preconditions for Voluntary Tax Compliance
ECONOMIC CRIMES
Radical Tax Reforms
Causes for failure to achieve tax revenue target
Economic challenges for the new government
Issues in Pakistan’s Economy
Economy: Challenges and opportunities
Is the economy stupid
Tackling the Challenge of Tax Compliance
GROWTH-FRIENDLY TAX REGIME
How to Fix the Pakistani Economy
Pakistan’s Economic Dependency
Economic Sanctions and International Law
Attributes of A Good Tax System
What’s wrong with Pakistan’s Economy?
FAULT LINES IN SOCIO-ECONOMIC DEVELOPMENT OF
PAKISTAN
Dealing with the challenge of offshore tax evasion
Futuristic Needs and Socioeconomic Challenges for Pakistan
ECONOMIC CRISIS IN PAKISTAN
Money Laundering and Counter-terrorism Financing
Reflections on Pakistan’s Economy
Recent Tax Measures to Boost Investment
Recent Tax Developments
Tax Non-compliance and Its Consequences
Understanding Minimum tax
Pak economic survey 2020-21