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Tax reformsa year on

The first year under the PTI led government has earned us a record 8.9% fiscal deficit. Yes, this fiscal deficit is the highest since 1979 as per Pakistan’s economic surveys and bells are ringing. But the government was conscious of this, we would hope, since the focus was on expenditure control whilst revenues were in shortfall. 2019 was meant to be the year where Pakistan would take significant steps towards improving its taxation system given inflationary pressures, disastrously declining exports and a wider-than-ever inherited current account gap. And boy did it take significant steps, hell bent on price adjustment strategies and taxation reforms as the way forward. The unprecedented fall in tax-to-GDP ratio over many years has justified a strategy for introducing new taxation measures and a major overhaul of the taxation system that can be deemed experimental reforms. But again, national tax reforms world over are always just that: informed by the rules of economics yet experimental at best. Their intention of course in simple terms for Pakistan is revenue mobilisation in the short and medium term and economic productivity catch-up in the long run.
Certainly, the economy and tax reform are currently a hot public topic. What is common amongst folks is that they seem to exhibit a victim mind-set where they consider themselves to be burdened by the state. Why target us the working class and not the elite? Let’s not forget that if we want human development and poverty reduction, then tax contribution must be a mutual obligation. The hardship has to be collective if you want social mobility. For governments it is ineffective to think and act at the individual unit of analysis when it comes to economic planning. Governments must think and plan at the unit of socio-economic groups. No doubt, there is much scope still for the government to play Robin Hood here and devise effective taxation policies where the rich are contributing more than the poor to the pot. Corporate taxation mechanisms will need to improve because income and excise tax adjustments cannot be compensatory revenue streams. Yes, there are socialist rather than neo-liberal connotations here, but again this was always PTI’s ideology which fuelled their economic revival plans that went hand-in-hand with their corruption eradication agenda.
Pakistan’s attempt to push through major reforms to improve tax revenue collection, as being witnessed, is not an isolated example. The trend is long apparent across both developed and developing countries. Pakistan is only catching up and has genuinely embarked on its own unique journey. Globally, the 1980’s as a result of oil shocks and debt crisis saw the theory and practice of tax reform to be based on principles of neutrality and liberty where markets could promote development. In line with this fruitful market model, the 1990’s saw a wider call and support for improving tax governance. The 2010’s as a result of the global financial crisis saw the role of politics in tax theory and reform become far more prominent world over, where the focus shifted to issues of international taxation and minimising losses from tax evasion and tax avoidance. For instance, on one end we have seen the likes of the British government desiring more political interference in flushing out UK based corporate from international tax havens, whilst on the other hand we see dramatic arm-twisting and hotel-caging tactics of a monarch-led Saudi government recouping revenues by targeting wealthy individuals. Pakistan too is now developing its unique tax reform mechanisms and mobilising its resources, to which the backdrop is a dramatic ‘good guys defeat the bad guys’ story that morally nourishes a nation.
Whilst various experimental economic development models were available to the new government, a model laden with IMF rulebooks and guidelines has emerged because firstly, it provided an experimented and benchmarked model of developmental economics that has been trialled in other countries. Secondly, there is little choice one has when they owe money to loan sharks and has a poor track record of keeping up with repayments. To IMF’s credit, they have successfully supported developing countries in improving revenue mobilisation by helping to advance tax-to-GDP ratios, providing there is strong political will for it by governments. Bangladesh and Rwanda are good examples of this where tax revenue as percentage of GDP increased by 2.5% and 2.9% respectively over a five year term.
Concerning the fiscal sector, certain structural reforms indexes are being rapidly addressed including tax policy, anti-corruption legislation, expenditure and debt management measures based on IMF guidelines, whilst other indexes require far more attention such as improving fiscal transparency and social sector reforms where social safety nets (primarily health and education) need an overhaul. For the real sector, private sector regulation reforms, labour market reforms and price controlling as indexes require immediate attention too if public trust is to be managed in the long run. This is important since Pakistan intends to move away from being an aid dependent country. If that is to be the case, then increasing domestic tax revenue requires growth in formal employment and private spending. Not easy in the face of a rapidly growing youth population and stagnant net household disposable income. Here it’s important not to be fooled by any elusive suggestions (like the ones seen on political TV chat shows) that enhanced tax collection efficiency and improved tax revenue alone will lead to economic development, since there is little evidence of this anywhere. Historically, Pakistan has had a poor tax-to-GDP ratio simply because it has always maintained a highaid-to-GDP ratio combined with short-lived policies. This is essentially what this new government aspires to change.
It will be a challenge for the government to improve institutional productivity through structural tax reforms since institutional trust is at an all-time low amongst entrepreneurs and investors. What seems to particularly irk people is not necessarily the fiscal and real sector reforms themselves, but rather the pace of these reforms and the lack of clarity and guidance around them. Pakistan’s unfriendly tax policies give it a rather poor ranking in the World Bank’s Ease of Doing business Index (136th) and Ease of Paying Taxes (172nd). For instance, visit FBR’s website for tax notification updates and you shall depart more confused than you had arrived. The need to educate and support people and businesses around these pacey reforms will be a real task for the government moving into a second year.
Looking back at the government’s efforts one year into power, it seems to have ticked OECD laden technicalities in its attempt to make domestic resource mobilisation successful. It has treated tax policy reform and tax administration as mutually reinforcing one another, has attempted to broaden the tax base and register more taxpayers since they are key, whilst also attempting to simplify tax procedures and genuinely fight corruption. Certainly, here is a government that is refraining from short-cuts and taking the long and hard route. A rarity in Pakistan’s ruling party politics. Ad Astraper Aspera.



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