The document discusses Pakistan's tax efforts and reforms. It notes that Pakistan has a very low tax-GDP ratio due to its reliance on consumption taxes and exemptions. This leads to inflationary pressures to raise revenues. Several studies cited find that the majority remain outside the tax net due to low incomes and the large informal economy. Reforms since the 1990s have increased the share of direct taxes but indirect taxes still account for over 60% of revenues. Econometric analysis shows a positive relationship between income and direct taxes but not overall taxes, while the underground economy positively impacts tax revenues. Continued efforts are needed to broaden the tax base and increase compliance.

1. Tax Efforts
M. Ali Kemal

2. Introduction
• Very low tax – GDP ratio
• Mostly relies on consumption taxes
• Low revenue collection then results in
inflation tax as an alternative to raise
revenues.

3. What’s in the Studies
• Undocumented Economy
– Problem: Not under a tax net
• More than 50 percent of the informal economy is
documented
• Exemptions given to Agriculture income, KPK, certain
industries
– Problem: Increase tax evasion
• Low tax revenues is the problem of enforcement
Gordon and Li (2005)
• Large majority remain out of tax net because of overall
low average incomes Bilquees (2004)
• Relying on taxing goods and services-Developing
Countries and relying on taxing income profits and
capital gains have better performance Gupta (2007)

4. Determinants of Tax Efforts
• Tax-GDP ratio is a proxy to tax efforts
• Income (Wagner Law)
• Openness (Rodrik, 1998)
• Share of value added sectors
• Underground Activities
• see for example Tanzi (1981, 1987, 1992), Leuthold
(1991), Tait and Eichengreen (1978), Chellian et al
(1975), Bahl (1971), and Etony (2002)

5. Structure
• Direct Taxes
– Income Taxes:
• 0, 5,10,15, and 20
– Corporate Taxes:
• 25 for small companies and 35 for bigger companies (30 % new)
– Withholding tax
• Dividends: 10 percent if they are above 10,000
– Capital Gains Tax
• 10% (< 6 months holdings) and 8% (6-12 months holdings)
• Indirect taxes
– Sales Taxes: 16 percent (17% new)
– Excise Taxes:
– Custom Duties: Normal maximum tariff rate is 20 percent

6. IMF Programs
• Tax Concessions in 1980s leads to higher fiscal deficit
– 8.5% of GDP by 1987-88
• Pakistan had a chain of stand by, structural
adjustment and stabilization agreements with
IMF.
• Special focus on tax reforms including
– Improved tax governance
– Increasing share of direct taxes
– Expanding the tax net
– Imposition of sales tax on wider scales &
– Improving the tax elasticity and buoyancy

8. REFORMS

9. Commissions and Reports
• Report by the National Taxation Reform Commission (NTRC) (1986)
• Report by the Resource Mobilization and Tax Reforms Commission
(1994)
• The Strategy Document on Tax Reform (2001)
• Report on Income Tax Law Reforms (2001) by Committee to Revise
Income Tax Ordinance, 1979 (CRITO) –WITHOLDING Taxes
• Several Reports by the Task Force on Reform of Tax Administration
(2001)
• Strategy and Priorities for Tax and Customs Administration Reform
(2001)
• Pakistan: A Preliminary Assessment of the Federal Tax System (2006)
and
• Tax Policy in Pakistan: An Assessment of Major Taxes and Options for
Reform (2008)

10. Tax Reforms
• Tax reforms efforts since 1990s
• Share of direct taxes in total tax revenues
– 17.3 percent in 1990-91 and 35.28 percent in 2010-11
• Share of indirect taxes in total tax revenues
– 82.7 percent in 1990-91 and 64.72 percent in 2010-11
• Share of sales tax in total tax revenues
– 15.4 percent in 1990-91 and 37 percent in 2010-11
• The reform efforts remained ineffective due to
the inherent weaknesses in the tax system and an
ineffective tax administration – Economic Survey
(2007-08)

11. Data
• Tax variables: Central Board of Revenue and Economic Survey
• GDP, Per capita income (in dollars), agriculture, manufacturing
and services: 50 years of Pakistan Statistics and Various issues
of Economic surveys
• Exports and imports: International Financial Statistics
• Underground economy as percentage of GDP: Omer and
Kemal (2016)
• Period: 1974 to 2014
• Share of value added sector is calculated by dividing each
value added sector with GDP.
• Openness index is calculated by adding exports and imports
and dividing it by GDP.
• Tax ratios are calculated by dividing each source of tax
revenues with GDP.

12. Buoyancy Elasticity
Mukarram
(2001)
Shaikh
(2012)
Rasheed
(2006)
Bilquees (2004)
Mukarram
(2001)
Bilquees (2004)
Long
run
Short
Run
Long
run
Short
Run
Direct
taxes 1.61 - - - - 1.13 - -
Custom
Duties 0.55 - - 0.48 -0.06 0.32 0.43 -0.2
Excise
Duties 0.76 - - -1.19 0.48 0.47 0.44 0.06
Sales Tax 1.51 - - 1.41 0.42 0.99 1.5 0.38
Total Taxes 1 - 0.174 0.92 0.44 0.64 0.88 0.33
Income and
Corporate
Taxes - 1.17 - 1.23 0.4 - 1.21 0.31

13. Correlation
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Total tax revenues Direct taxes Indirect taxes
Per capita Income Underground Economy Openness
Agriculture Manufacturing Services

14. Econometric Analysis
• ARDL Approach of Cointegration by Hashem
and Pesaran (1997)
• Lags are chosen using AIC
• General-to-Specific Methodology is used after
choosing appropriate lag length
TestJoCondition
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15. Dependant Variable
Total Tax
Revenues
Direct
Taxes
Indirect
Taxes
Log (Per Capita Income)t-1
0.10
(0.86)
0.97
(4.32)
0.16
(1.59)
Log (Openness)t-1
-0.66
(-5.65)
-1.23
(-3.40)
-0.67
(-3.34)
Log (Manufacturing/GDP)t-1
-0.45
(-2.64)
-0.74
(2.58)
0.46
(2.92)
Log (Services/GDP)t-1
-0.64
(-0.82)
-5.97
(-3.59)
-2.53
(-3.22)
Log (Underground
Economy/GDP)t-1
0.25
(4.59)
0.77
(6.58)
-0.04
(-1.44)
Dummy – 1987
0.06
(2.96)
- -
Dummy - 2003
-0.18
(-2.50)
0.24
(2.29)
-
Error Correction
-0.52
(-3.07)
-0.43
(-3.52)
-0.424
(-2.43)

16. Conclusions
• Since the recent tax reforms of 1990s share of direct taxes has
substantially increased
• Due to swapping of Custom and excise duties share of sales tax has
increased
• Overall indirect taxes as percentage of GDP has declined.
• Higher income is positively associated with Direct taxes but not
with overall and indirect taxes.
• Openness is negatively associated with the tax efforts.
• Share of manufacturing according to the expectation is positively
associated with the indirect taxes
– Coefficient is less than half
– The sector must be evading taxes
• Services sector is mostly part of informal exempted sector
– Hurting both direct and indirect tax revenue efforts
• Indirect/consumption taxes are difficult to evade than direct taxes.

18. In addition to increase revenues…
• Equitable tax policy – Policy constraints
• Efficient tax administration
• Facilitation to taxpayers
• Introducing ICT technology
• Broadening the tax base
• Increase income tax filers
• Anti evasion efforts

19. Problems of Taxation
• Tax base is not broad, 760,000 people are in tax
net (Less than 1 percent of the population)
• 3.2 million potential taxpayers are now identified
– Problem
• What do you call it, no voluntary compliance or
lack of implementation
– 47800 companies have NTN #s and 16500 filing tax
returns (Kardar, 2013)
– 400,000 industrial electricity connection (Kardar,
2013)
– 3.2 million commercial electricity connections and
50,000 file tax returns (Kardar, 2013)

20. Problems
• Frequent reversals of administrative reforms
• Lack of political will in maintaining fiscal discipline
• Poor expenditure management, reduces desire to pay taxes
• Delays in the system of enforcement
• Political interference in important policy decision such as
implementation of agriculture income taxes
• Low tax compliant culture
• Mafias
• Automation constraints (technical as well as administrative)
• Undocumented economy
• Sectoral contribution of GDP
• Lack of proper training of tax auditors and other staff

21. Turkey
• Improve tax stability
• Transparency
• Equity
• Minimise distortions

22. Success Story – New Zealand
• Single VAT system
• Base Broadening
• Low Rates
• Closure of Loopholes
• Removal of Distortions

23. What FBR Chairman Says…?
• Tax evasion
• Excessive tax exemptions
• Administrative weaknesses
• Narrow tax base
• Poor compliance by taxpayers
• Too much centralization
• Adverse taxpayers perception
• Mismatch between sectoral shares in tax and
GDP ratio.

24. Suggestions …
• FPCCI President said to pursue more people
into the tax net, all taxpayers should be issued
a card on the pattern of credit card with the
title FBR National Identity Card
– taxpayers should be given one percent concession
on all transactions, government payments, utility
bills and government challans while non-taxpayers
should be charged one percent additional on all
such transactions.
http://www.pakistantoday.com.pk/2013/05/01/news/profit/tax-
reforms-necessary-for-economic-revival/#sthash.y7qkFhmn.dpuf

25. Solutions…
• Good tax administration is only possible when
– Tax administration is well educated and trained,
– Handsome wages are paid to the administration and
– Better equipment [Tanzi and Zee (2000)]
• Exemptions should be stopped (Kardar, 2005,
2012 & 2013) Everyone should be taxed on their
income irrespective of their source.
• SROs should be abolished
• Reduce income tax rates (0, 5%, 10%, 15% & 20%)
• Governance structure
• Less Centralization (Nasir Iqbal (2012))

26. Solutions …
• Documenting the undocumented sector
– Solution as well as a problem
• FBR autonomy
– Work under independent board of directors, which
should be the professionals
• E-Governance Structure
• Punishment System (imprisonment and fines)
– Fines reduce tax evasion activities (Qasim 2011)
• Effective Audit System
• Raise Pays
• Monetize Perks

27. Prepared by Barrie Russell at the IMF
• Improving tax compliance requires long-term reform efforts
– Strengthening the organization and management of the revenue agency
– Implementing robust collection systems (e.g., payment and withholding
systems)
– Building capacity in core tax administration functions (registration, fi ling and
payment enforcement, debt collection, audit, taxpayer services, and
processing of appeals).
• Reform of the legal framework and judiciary to ensure that the necessary
powers, penalty regimes, and dispute resolution processes are in place.
• Increasingly, information and communications technology (e.g., through
automatic gathering of third-party information as a by-product of natural
business processes; use of electronic invoices to facilitate real-time
transaction monitoring and verification; and analysis of revenue risks).
• Reform priorities to improve tax compliance differ across countries and
regions
• Taxpayer service operations and effective audit and enforcement should
be the first step

28. WB TARP
• THE government of Pakistan subscribed to
the World Bank’s Tax Administration Reform
Programme (TARP) to fundamentally reform
the Federal Bureau of Revenue ‘for a more
efficient and effective revenue administration
system’.
– December 2004 - December 2011
– Costing $149 million.
– The amount included a World Bank loan worth
$102.90 million which was to be borne by the
taxpayers of Pakistan.

29. Another Program… Should we do it?
• Support for good governance in Pakistan – tax
reform
• Overall term: 2010 to 2020
• Commissioned by: German Federal Ministry
for Economic Cooperation and Development
(BMZ)
http://www.giz.de/themen/en/35156.htm