Karachi Photo: Wikimedia Commons
Pakistan’s overall tax-to-GDP ratio has been hovering around 10 per cent for the past decade, which is approximately five per cent lower than the average of comparable economies. Despite a large tax base available in all provinces, they collectively contribute only seven per cent in overall revenues.
Federal revenues are low, and government coffers are emptied by debt servicing, high defense spending, and power subsidies, resulting in government institutions without adequate budgets to operate. Without tax reform, Pakistan’s civilian government and its ability to govern remains weak and ineffective. Moreover, Pakistan remains on the brink financial crisis.
Since the passage of a constitutional amendment in 2010 aimed at rolling back the excessive power the central government had built up over years of military rule, the provincial administrations have been entrusted with greater revenue mobilization responsibilities. The amendment was intended to bring education, health, and other basic government services closer to the people and help develop areas that were historically ignored by Islamabad, and was viewed as an important first step in a series of reforms to create a responsive and accountable democratic Pakistan.
However, empowering provinces without the proper mechanisms in place for implementation, and conflict resolution, and without strengthening revenue raising capability at the provincial level, has resulted in greater duplication of bureaucratic structures and processes at central and provincial levels, leading to more wasteful spending and higher budget deficits. Moreover, government services that are now to be provided by the provincial governments are often not provided at all, as provincial governments themselves appear confused or reluctant to take on service delivery and financial responsibilities.
Apart from the traditional taxes under provincial jurisdiction (e.g. property, transport and agriculture taxes), the sales tax on services falls under the provincial domain. However, lack of harmonization between provinces is distorting the business environment and increasing the cost of doing business for ventures operating across Pakistan.
CIPE, in partnership with the Sustainable Development Policy Institute (SDPI), an Islamabad-based think tank, initiated a policy advocacy project to understand and highlight the critical need for tax reforms and harmonization of tax rules between the center and the provinces, and among provinces.
After consultations with business communities in Sindh and Punjab provinces, SDPI prepared a report to assess the local business climate from a taxation perspective and develop a set of recommendations. SDPI found that the business community supports the idea of a census-based baseline to strengthen its tax system and improving coordination between federal and provincial tax authorities. Businesses also recommended that provincial tax authorities should form a cross provincial working group to undertake a national comprehensive tax reform initiative. Since CIPE and SDPI started the national debate around this subject, business associations have taken the discussion to the next level with the government.
While the federal government is currently in the process of finalizing the Federal Budget for 2016-17, the chambers and sectoral business associations are fully engaged with the government to ensure that their tax reform recommendations are considered in the budget. CIPE has worked with the business community for the last ten years, providing technical assistance, capacity building through workshops and seminars, and small grants dedicated towards locally-driven advocacy campaigns. The impact of CIPE’s many years of engagement is shining through as the local business community eagerly adopted the CIPE/SDPI recommendations and started their own advocacy initiatives, which have included:
- Islamabad Chamber of Commerce & Industry (ICCI) is pushing for the overall structural reform of taxation in the country
- At the All Pakistan Chamber President Conference, tax reforms was one of the key topic.
- The Lahore Chamber of Commerce & Industry (LCCI) invited former Finance Minister Dr. Salman to discuss possible tax reforms.
- The Lahore, DG Khan, Okara, Vehari, Sargodha, Rawalpindi, Gujrat and Quetta Chambers’ of Commerce and Industry included tax reforms and tax harmonization as one of the recommendation in their 2016 budget proposal sent to government of Pakistan.
- The Rawalpindi Chamber of Commerce & Industry deliberated with Federal Government Adviser on Taxation for taking comprehensive measures for tax harmonization between provinces.
- One of the leading Op-Ed writer Imtiaz Gul wrote an article covering the need for wide tax reform.
As a result of this effort, Federal Finance Minister, Ishaq Dar expressed commitment to reforming the tax structure to ensure an increase in revenue generation. It is however important that both federal and provincial governments listen to the local private sector and set clear objectives for taxation reforms. These may include: revenue mobilization in untapped productive sectors, e.g., agriculture, services and property; increased financing for high-priority expenditures; and provincial taxation reforms.
Huzaifa Shabbir Hussain is Assistant Program Manager for CIPE Pakistan.
