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POLITICAL ECONOMY OF TAX REFORMS: The Pakistan Experience

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  • Hafiz A. PASHA*

Abstract

Pakistan's tax system is characterized by a number of structural problems. First, the overall level of fiscal effort is low and the tax-to-GDP ration has remained, more or less, stagnant at between 12 to 13 per cent. This is one major explanation why budget deficits .have been high, generally in excess of six per cent of the GDP. Second, there is over dependence on indirect taxes, which until recently accounted for a share in revenues of over 80 per cent. This has increased the regressivity of the tax system and imposed a higher excess burden of taxation. Third, within indirect taxes there is domination of taxes on international trade, which has promoted inefficiency, distorted the allocation of resources and encouraged illicit trade. Fourth, the effective tax bases of most taxes is narrow due to wide ranging exemptions and concessions and rampant tax evasion. For example, there is less than one income tax assessee per 100 persons and less ~an 60 per cent of imports actually pay duty. Consequently, tax rates have had to be pitched at high levels which has created a vicious circle of more tax base erosion and higher tax rates. Fifth, tax administration is characterized by primitive and out moded procedures, complex laws and considerable arbitrariness and discretion. The common perception is one of high levels corruption and inefficiency. Despite these problems which have been manifest for a long time Pakistan has been slow to embark on the path of tax reforms. In the 80s, higher fiscal effort was substituted for by large bank and non-bank borrowings. However, the extremely rapid growth in debt servicing clearly indicated that the task of resource mobilization from taxes could not be postponed indefinitely. The commencement of the decade of the 90s coincided with the induction of a newly elected (IJI) government

Suggested Citation

  • Hafiz A. PASHA*, 1995. "POLITICAL ECONOMY OF TAX REFORMS: The Pakistan Experience," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 11, pages 129-154.
  • Handle: RePEc:pje:journl:article1995iv
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    Cited by:

    1. Mahmood Khalid & Muhammad Nasir, 2020. "Tax Structure in Pakistan: Fragmented, Exploitative and Anti-growth," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(3), pages 461-468.
    2. Muhammad Ashfaq Ahmed, 2020. "Pakistan: Withholdingisation of the Economic System—A Source of Revenue, Civil Strife, or Dutch Disease?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(3), pages 469-516.
    3. A. R. Kemal, 2001. "Debt Accumulation and Its Implications for Growth and Poverty," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 263-281.
    4. Muhammad Azeem Qureshi, 2009. "Human development, public expenditure and economic growth: a system dynamics approach," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 36(1/2), pages 93-104, January.
    5. Manzoor Ahmed & Khalid Khan, 2014. "An Essay on the Political Economy of Fiscal Policy Making in Pakistan," International Journal of Business, Economics and Management, Conscientia Beam, vol. 1(9), pages 229-241.
    6. Muhammad Ashfaq Ahmed, 2018. "Pakistan: wither tax reforms — the case of large taxpayers’ unit, Islamabad," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 4(3), pages 202-222.
    7. A. R. Kemal, 2005. "Macroeconomic Management: Breaking out of the Debt Trap," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 10(Special E), pages 45-62, September.
    8. Muhammad Azeem Qureshi, 2008. "Challenging trickle‐down approach," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 35(4), pages 269-282, March.

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