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Corruption in Tax System Discourages Business

Posted on the 27 September 2011 by Center For International Private Enterprise @CIPEglobal

Corruption in tax system discourages business

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Pakistan has one of the lowest tax to GDP ratios in the world: it has been hovering around 9% for the last several years. This means that the tax base remains narrow and a small section of the economy is heavily taxed compared to global trends. Corporate tax rate in Pakistan, 42%, is much higher than the global average of 25.5% and regional ASEAN average of 27.5%.


A recently concluded Economic Summit organized by the American Business Council of Pakistan (ABC) stressed that the Federal Board of Revenue (FBR) should introduce appropriate policies to bring tax to GDP ratio to 15%. ABC also highlighted the importance of expanding the tax base in the country and one possible way recommended was to bring the agricultural sector in the tax-net. Agriculture is a major contributor in the GDP but successive governments, while reforming the tax system in the country, kept this sector out of the tax system.

Speakers also expressed business community’s concerns in dealing with the officials of Federal Board of Revenue — corruption being one of the key problems. The issue of corruption was also highlighted in the recent World Bank report in which Pakistan’s existing tax system was considered as opportunity provider for corrupt practices.

The report further said that,

“More than half of firms in Pakistan beside Bangladesh and India are expected to pay bribes during tax inspections. The tax systems in these countries are complex and create not only high costs of compliance but also opportunities for corruption. The high frequency of bribes faced in connecting to power supply is another dimension of the issue of access to electricity and could be related to businesses having to compete to secure much needed power. The firms expected to give gifts to public officials, by different type of interactions. According to the report 71 percent companies expected to give “gifts” to public officials for electrical connections adding that 62 percent companies for getting water connections, 59 percent for tax meetings, 32 percent companies for getting phone connections, 22 percent companies for getting construction permits, 15 percent for government contracts and 12 percent for operating license in Pakistan.”

The fact that more than half of Pakistani firms expect to have to pay bribes during tax inspections is striking. There is no doubt that in the past tax reforms have improved the efficiency of FBR, but a lot more is required to encourage more businesses to enter the formal economy and become taxpayers without a fear of extortion or imposition of unfair taxes. However, for the last three years, the reforms have been halted by the current political climate, and since elections are expected in 2012, the government is highly unlikely to take action to reform the tax system before that.

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