Tuesday, October 13, 2009

Comparing US and Pakistani Tax Evasion

In addition to borrowing heavily, the US collects over 28% of the nation's GDP to support various government expenditures. As the government spending continues to grow to stimulate demand, the US national debt is ballooning, forcing Uncle Sam to pursue offshore tax cheats.

Thursday is the deadline for Americans to come clean about the money they have hidden offshore, in places like Swiss bank accounts. No one can say with certainty how much money is out there — the accounts are secret — but the hoard may be tens of billions of dollars, The New York Times’s Lynnley Browning reports.

Several thousand wealthy Americans have come forward, hoping to avoid large fines or possibly even prison. But many others are still weighing their options. The choice is clear: They can confess and pay the penalties, or gamble that they will not get caught. With the deadline only days away, tax lawyers say they are being inundated by anxious clients, according to the New York Times.

In contrast to the US, Pakistan collects only about 11% of the country's GDP in tax revenue. Farm income, mostly earned by the nation's feudal ruling elite, accounting for about 20% of the GDP is entirely exempt from any income tax under the law. Only 2.5 million of 172 million Pakistanis pay income tax. Of them, 1.8 million are salaried and paid Rs.27.37 billion in taxes during ended fiscal 2008-09, according to a report to the Senate by Minister of State for Finance and Economic Affairs Hina Rabbani Khar. The government runs large current account deficits, forcing it to beg and borrow to meet the budget needs. The budget deficit for 2008-09 was 4.3% of GDP and it is likely to grow with lower revenue amidst slowing economy in 2009-10. The tax evasion in Pakistan is estimated at Rs500 – 600 billion a year, almost half of the total tax collection of about Rs1200 billion during 2008-08. The untapped amount is almost equivalent to the country’s annual budget deficit.

In a country where majority of the transactions, including purchase of big ticket items, occur in cash, there is widespread tax evasion and a sizable informal economy. The estimates for Pakistan's underground economy vary from 25% to 50% of the formal economy. A recent World Bank (WB) report concluded that every Pakistani citizen evaded tax amounting to Rs 4800 in the year 2007-08, while the total tax evaded in the period stood at Rs 796 billion.

During the height of corruption under Bhutto-Zardari-Sharif governments in the 1990s, the size of the underground economy rose to almost 55% in 1999, by one estimate. As the military regime of President Musharraf cracked down on tax cheats, the nation's revenue collection doubled from Rs. 500 million in 2000 to to Rs. 1.04 trillion in 2007-08.

While the income, assets and taxes of the president and top government officials are publicly disclosed and heavily scrutinized by all in the US, no such transparency exists in Pakistan. In fact, tax cheating in Pakistan starts at the top. The richest and the most powerful politicians in the ruling elite pay little or no taxes, setting a horrible example for the rest of the nation.

For example, Benazir Bhutto, Asif Zardari and Nusrat Bhutto declared assets totaling $1.2 million in 1996 and never told Pakistani authorities of any foreign bank accounts or properties, as required by law in Pakistan. Zardari declared no net assets at all in 1990, the year Bhutto's first term ended, and only $402,000 in 1996, according to a report in the New York Times.

Bhutto's family's income tax declarations were similarly modest. The highest income Bhutto declared was $42,200 in 1996, with $5,110 in tax. In two of her years as prime minister, 1993 and 1994, she paid no income tax at all. Zardari's highest declared income was $13,100, also in 1996, when interest on bank deposits he controlled in Switzerland exceeded that much every week. In June 2008, a senior PPP leader and president of Pakistan's Supreme Court Bar Association, Mr. Aitzaz Ahsan, who was interior minister in Benazir Bhutto's first government, told James Traub of the New York Times that most of the corruption and criminal cases against PPP Co-Chairman Asif Ali Zardari which were dropped recently in Pakistan were justified, and that the PPP was a feudal political party led by a figure (Zardari) accused of corruption and violence. After a moment's reflection, Ahsan further added, “The type of expenses that she had and he has are not from sources of income that can be lawfully explained and accounted for.”

It was only in 2007 that President Asif Ali Zardari returned to Pakistan under an amnesty, euphemistically called National Reconciliation Ordinance (NRO), sponsored by the Americans. However, the Americans know that the corruption charges against Zardari were credible and he, along with his late wife, was convicted in at least one case by a Swiss judge. The conviction was under appeal in Switzerland when Pakistan government withdrew all charges pursuant to the NRO signed by then President Musharraf under pressure from the Americans.

There have been widespread complaints in Islamabad, including by Finance Minister Shaukat Tarin, that the government had solutions to improve the power output but was refusing to implement them in order to benefit a handful of power plant operators, such as those supplying rental power at exorbitant rates, while the IPPs are not being paid for supplying power from currently underutilized installed capacity. Requests for information by Transparency International Pakistan regarding rental power contracts have been ignored by the Ministry of Water and Power. There are widespread corruption allegations against Mr. Zardari personally who has influenced the award of the 783 MW rental power contracts to a former governor of Oklahoma and his Pakistani partner.

There are reports that Mr. Zardari is continuing to extort businesses to enrich himself and his cronies. As Tariq Ali put it in a recent article for Counterpunch, "Zardari has carried on from where he left off as minister of investment in his late wife’s second government. Within weeks of occupying President’s House, his minions were ringing the country’s top businessmen, demanding a share of their profits."

Ali continues, "Take the case of Mr X, who owns one of the country’s largest banks. He got a call. Apparently the president wanted to know why his bank had sacked a PPP member soon after Benazir Bhutto’s fall in the late 1990s. X said he would find out and let them know. It emerged that the sacked clerk had been caught with his fingers literally in the till. President’s House was informed. The explanation was rejected. The banker was told that the clerk had been victimized for political reasons. The man had to be reinstated and his salary over the last 18 years paid in full together with the interest due. The PPP had also to be compensated and would expect a cheque (the sum was specified) soon. Where the president leads, his retainers follow. Many members of the cabinet and their progeny are busy milking businessmen and foreign companies."

The PPP leadership is not alone in evading taxes. The PML leadership appears to be just as guilty. The entire Sharif family paid a nominal income tax of Rs 250,000, wealth tax of Rs 550,000 and agriculture tax of Rs 130,000, considering their vast assets and properties of at least 23 sugar and textile mills and huge agricultural land, according to the News. The tax evasion by the the Sharif family was the reason that the donor agencies giving aid to Pakistan in late 1990s insisted on publishing tax records of all lawmakers and senior bureaucrats, The News said, adding that for this reason, the donor agencies insisted on broadening the tax net to prop up government revenues.

As Pakistan faces a severe economic crisis and the current leaders appear ready to mortgage the nation's future, the chances of the ruling elite setting a good example by paying their taxes in full appear rather remote. In fact, the feudal politicians are fighting the current IMF condition for even a modest tax on farm income. The only hope for a fairer tax system and improved collection from the rich and powerful to fund education and health care lies in serious and sustained pressure on Pakistan's ruling elite from the donors and lenders, backed by the United States.

Related Links:

Zardari Corruption Probe in Switzerland

ADB Report on Taxes in India

Obama-Biden Financial Disclosures

"Ahmad Rashid's War" by Tariq Ali

Revenue Collection as Percent of GDP

Pakistan's Underground Economy


The Gori Wife said...

This is really fascinating, thanks. I've long wondered about the Pakistani tag regime, and I am disgusted to think that the highest officials are so corrupt. How can they call on Pakistani citizens for anything when they themselves can't fulfill even the basest of national duties like pay their taxes?

Very well written!

Anonymous said...


All politicians are corrupt. Power corrupts and absolute power corrupts absolutely.

did not usa tell the whole world that iraq has WMD and waged the war and where is the WMD ?

Same manner it is any economy whether it democratic, monarthy or dictatorship

Suhail said...


Pakistan's tax revenues are indeed small for which the following aspects need to be addressed:

1- The tax payer is a very small segment of the population, limited to industry and service sectors. These sectors are highly taxed to the extent of their becoming uncompetitive both from the points of exports and import substitution. The way taxes are recovered is by upfront deduction in the form of with holding (or advance) income tax on the revenues earned, generally much more than what is finally due after tax computations, so tax evasion is very limited and not a major issue. During Musharraf's tenure, these sectors became pretty well documented so by and large are part of the formal economy. However, to increase revenues, the government taxes these sectors more, thereby actually reducing tax revenues as businesses keep becoming uncompetitive and closing down fast. Enterpreneurs switch to trading which is by and large in the informal sector, thus spiralling a downward trend in revenue collection increasing dependence on aid and overdrafts.
2- An expansion of tax net to agricultural sector is a logical step and should be implemented too to discipline the politicians as you've said. However, this will not result in much increase in tax revenues as agricultural sector is very inefficient has low productivity. Production is not increasing as much as the costs thereby rendering agriculturists cash strapped. If proper accounting is imposed, they'll come up with little taxable earnings. The affluence you see with Pakistani rural elite is because they extract a lot from government funds when they're in power. And the rich families always remain in power because of multiple and shifting alliances. So while I agree that rural income should be taxed, it is to bring sanity into the political system by disciplining the politicians; it will not increase tax revenues substantially.
3- The only way tax revenues can be increased is by a) increasing industry and service sector outputs by adopting investment friendly policies, including lowering of taxes, and b) increasing agricultural productivity by changing its complexion to an indudtry like venture thereby bringing in investments to increase farm productivity. Tax on agriculture will then become a significant source of revenue.

I agree with your conclusion about US forcing Pakistani political elite to pay taxes as the only seemingly possible way forward, but then this becomes part of "micromanagement" that is fast becoming an issue in Pakistani media, political circles and civil society. The urban middle classes appear well set to becoming the harbinger of the campaign against US micromanagement in Pakistan, thereby once again damaging themselves as well as the country's future.

Riaz Haq said...

Here is a report in Dawn today about how the Sharif brothers, waiting the wing to grab power, engaged in "money laundering", according to Ishaq Dar, a close associate and PML leader:

NAB Court documents have recently emerged which show that Senator Dar made some interesting revelations in an accountability court in April 2000.

The court was hearing the famous Hudaibiya Paper Mills case against the Sharif brothers.

The 43-page confessional statement of Senator Ishaq Dar was recorded on April 25th 2000 before the District Magistrate Lahore. Dar was produced before the court by the then Assistant Director Basharrat M Shahzad, of the Federal Investigation Agency (FIA).

Dar, in his statement had admitted that he had been handling the money matters of the Sharif family and he also alleged that Mian Nawaz Sharif and Mian Shahbaz Sharif were involved in money laundering worth at least $14.886 million.

The statement by Senator Ishaq Dar is irrevocable as it was recorded under section 164 of the Criminal Procedure Code (CrPC).

Senator Ishaq Dar is a high-profile PML-N leader and has always been considered close to the Sharif brothers as his son, Ali Dar, is married to Nawaz Sharif’s daughter, Asma.

But in April 2000 the top PML-N leadership had hit a rough patch by then and some of their loyal lieutenants were busy developing a new political system for General (retired) Pervez Musharraf after his October 1999 military coup.

In this context, Ishaq Dar accused Nawaz and Shahbaz Sharif of money laundering in the Hudaibiya Paper Mills case.

Interestingly, Ishaq Dar also implicated himself by confessing in the court that he – along with his friends Kamal Qureshi and Naeem Mehmood – had opened fake foreign currency accounts in different international banks.

He said that the entire amount in these banks finally landed in the accounts of Hudaibiya Paper Mills Limited.

Senator Ishaq Dar was the main witness against Nawaz and Shahbaz Sharif in the case.

The Hudaibiya Paper Mills case is still pending in the National Accountability Bureau.

Since the statement made by Dar was recorded under section 164 of the Criminal Procedure Code, the statement has become a permanent part of the case against the top PML-N leaders.

If the case is opened again, the Sharif brothers may discover that the tightening noose around them was originally prepared by one of their own family members and trusted lieutenant Senator Ishaq Dar.—DawnNews


Riaz Haq said...

It was widely reported over a year ago that the corruption case was closed and $60 million handed back to Asif Zardari after the Pakistani Government withdrew its requests for judicial assistance from Switzerland and said it had no claim on his assets.

After an agreement in February this year by the Swiss banking giant UBS to pay $780 million and admit to criminal wrongdoing in selling offshore banking services that had enabled tax evasion, 14,700 Americans with foreign bank accounts have now come forward and admitted wrongdoing and agreed to pay taxes.

See the contrast? While US aided and abetted Zardari's corruption and tax evasion by sponsoring amnesty of Zardari by Musharraf, American attitude is very different when it comes to enforcing the law in US.

Riaz Haq said...

The Supreme Court of Pakistan has declared NRO null and void ab initio, according to Dawn News:

ISLAMABAD: The Supreme Court has declared the controversial National Reconciliation Ordinance (NRO) null and void in a short order.

In a landmark decision, the apex court unanimously decided that the ordinance was unconstitutional.

All old cases that had been dismissed under the NRO stand revived and can now be reopened as per the court orders.

The court said that all orders that were passed and all acquittals under the NRO were illegal and never existed.

The apex court in its order also said that all convictions that were held prior to the enactment of the NRO stand revived as well.

Now the Zardari camp is expected to argue that, under the constitution of Pakistan, President Zardari is immune from prosecution as long as he is in office.

Riaz Haq said...

Here's a Daily Times report on FDI:

KARACHI: The Overseas Chamber of Commerce and Industry (OICCI) has launched Investment Survey Report (ISR) 2009 according to which the business margins have come under pressure, leading to declining profitability and hence declining investments in Pakistan.

The results of the OICCI ISR show a limited increase in FDI by 0.97 percent, Rs 148 billion in FY08 as compared to Rs 146 billion in FY07. Behind this nominal increase law and order, power deficit and implementation of policy remain significant concerns impacting both new FDI and re-investment by existing companies.

However, this cautious but continued increase in investments comes as a positive surprise, forecasts for the following year i.e. FY09 indicate that members plan to withhold investments by approximately Rs 55 billion – a substantial decline of approximately 37 percent.

“This clearly indicates that foreign investors who had over the years continued to show confidence in the country are now cautious of bringing additional capital for the time being – Rs 93 billion planned for FY09.”

It is worth mentioning that despite declining profitability, tax paid to the government has increased by 8.41 percent.

Basically, the ISR 2009 report is based on the responses of 124 member companies (71 percent of OICCI members) and gives a snapshot of foreign investors and companies present in Pakistan.

Farrukh H. Khan, President, OICCI, while launching of ISR 2009 said that the key conclusions to be drawn from the Survey are that although OICCI member companies have continued to grow in terms of revenue, margins have come under pressure, leading to declining profitability and hence declining investments in Pakistan.

Pointing out the main issues he said that important issue impacting profitability, highlighted by OICCI members repeatedly, is the high incidence of direct and indirect taxes in Pakistan – which remains the highest in the region. He further added that as important stakeholders and partners in Pakistan’s progress, OICCI would urge the government to implement its recommendations and continue to include OICCI in policy-making forums. However, “most of the OICCI budget proposals were also neglected in the previous budget,” he claimed.

The ISR 2009 highlights that new and concrete measures are needed to enhance tax revenue by expanding the tax base rather than imposing further taxes on existing taxpayers, which has started to yield negative results. Despite the challenging global climate, exports from OICCI member companies increased by 33 percent to RS 34.8 billion during FY07 and FY08.

While recorded figures in Corporate Social Expenditure indicate a decline, it must be noted that these are not completely reflective of the full degree of contributions. Whether it is contribution towards national tragedies like that of the recent Internally Displaced Persons (IDPs) in the aftermath of the military operations in the North or investing in society for overall development, member companies continue to make generous contributions in cash and kind as well as in the form of sharing of skilled personnel.

It should be noted that the 124 members (survey respondents) of OICCI have invested paid-up capital worth $9.6 billion in Pakistan with the majority of investment in sectors such as Financial Services (27 percent), Oil/Gas & Energy (21 percent) and Food & Consumer Products (18 percent). The total equity (capital plus reserves) would be significantly higher.

While Pakistan’s intrinsic comparative advantages have succeeded in attracting significant amounts of foreign investment into the country, it is important to realize that unless the potential for development and growth is carefully utilized in the near term, OICCI members or other potential investors may reconsider their priorities with regards to existing and planned investments in Pakistan.

Riaz Haq said...

Here's a recent Daily Times report about Bhasha Dam in Pakistan:

ISLAMABAD: Deputy Chairman Planning Commission, Sardar Asef Ahmad Ali on Thursday said some changes had been made in Bhasha Dam project, particularly in its power component. In an exclusive interview with Daily Times he said the power component of Bhasha Dam would be run on Public Private Partnership basis so that burden on the government kitty might be reduced. In this regard he said that a ‘Company’ would be established, which would be converted into an international consortium. The consortium would be able to get equity as well as funds from the International Financial Institutions (IFI), Kuwait Funds and others.

Once the Company is established, he said that there would be no problems for funding, as it would be able to borrow from the market and repay the loan. “The government has assigned me to structure the Company,” the Deputy Chairman said and added that he would invite all power distribution companies including KESC to purchase its shares. The government and WAPDA might also purchase its share and later, expatriates would also be offered shares in it. In this manner, it would enjoy the status of an International Company. Its marketing plan would be carried out at world-class top companies and arrangements would be made to conduct internationals show for it. In this way, all requirements for making it an ‘Equity’ would be fulfilled, he added. All these measures have been carried out for the first time in Pakistan.

About PSDP (Public Sector Development Programme) he said that as a routine, the government releases 19 to 20 percent developmental funds in first quarter of the current fiscal year (July-September 2009). Reason for low allocation was the slow process of revenue generation through new measures adopted in the annual budget. PSDP releases for second quarter (Oct to Dec 2009) was already in progress. If the funds are released in time, he expressed hope that the government would be able to achieve its targets. At present, he said there was no indication by the ministry of finance regarding cut in PSDP 2009-10.

Currently the country’s revenue generation remained stagnant at 8.5 percent of the GDP, which he termed as lowest in the world. The government wanted to increase it to the level of 11 percent of the GDP. “Finance Minister Shaukat Tareen informed me that the government identified 2 million new taxpayers in the existing system and if it remains successful, then the PSDP will be remain as it is”, he maintained.

Riaz Haq said...

Here's a report in the Nation about a Supreme Court challenge on the veracity of politcians' assets declaration:

ISLAMABAD – The assets declared by the members of the Parliament (MPs) to Election Commission of Pakistan (ECP) were challenged in the Supreme Court here on Friday.
The petitioner, Advocate Sikandar Hayat Khan, argued that the assets declared by the MPs were not correct. The application was filed under Article 184/3 of the Constitution.
The applicant pleaded that accurate estimation of their assets should be undertaken while an inquiry should be conducted regarding others assets named after their (MPs) families, praying that appropriate direction may be issued to the Chairman FBR to protect national kitty.
“Through print and electronic media, an impression has been created that certain politicians, their wives and dependent children have amassed huge assets which require due scrutiny by tax authorities, who alone have the expertise to clarify the impression in the public interest,” petition stated. From such newspaper reports including electronic media broadcasts, it seems that assets amassed by politicians, their wives and dependent children were either not subjected to scrutiny by various tax jurisdictions or are highly understated, it added.
“I am a taxpayer along with others in Pakistan and it is in public interest that a scrutiny be carried out by various tax jurisdictions of Pakistan regarding the amassing of assets by politicians, their wives and dependent children in the interest of justice.
That is also desirable to have a correct valuation of the amassed assets of the politicians, their wives and dependent children, as in its absence, the burden of existing tax payers is increased because they are subjected to higher rates of taxation with a view to filling the gap between what they pay and what they ought to be paying.
“Under the tax jurisdiction, based on tax treaties, we can call for any information regarding tax matters from foreign tax jurisdiction to which they are a party and inconsequence of which they are obliged to comply with our request. In the past such information was called by me in respect of certain cases and was provided without any hesitation by the contracting states subject to Agreements for Avoidance of Tax Evasion, the applicant maintained.”
It is relevant to mention here that the applicant is also a former senior most officer of the Income Tax Group on National basis.

Riaz Haq said...

Here are excerpts from a recent Business Recorder story about the challenges of revenue collection in Pakistan:

All this calls for increasing the tax-to-GDP ratio, which has remained stuck at approximately 9.5 percent. Secondly, the broadening of the tax base, through bringing under the tax net non-compliant sectors and individuals, can eventually ensure fair distribution of the tax burden among various sectors of the economy.

The services sector, including the wholesale and retail trade, as well as agriculture are the potential candidates for broadening the tax base. Our tax base has essentially remained narrow, because of a wide range of exemptions and concessions, as well as large-scale tax evasion, which needs to be controlled. The systemic distortions need to be identified and removed. One of the causes of tax evasion is that our tax rates have been pitched at much higher levels, which has generated a vicious circle of tax-base erosion and higher tax rates.

For instance, in economies like Singapore, Malaysia and Indonesia, the direct tax-to-GDP ratio ranges between six and seven percent, as against the contribution of direct taxes in Pakistan, which has remained stuck at around only three percent, in relative terms, over the past many years.

While the countrywide crackdown against the 100 top tax defaulters of sales and income tax can result in the recovery of sizeable revenue, the government needs also to redouble its efforts to bring under the tax net such non-compliant sectors as agriculture which, it is said, can yield annual revenue in excess of Rs 500 billion.

Secondly, there is an equally urgent need to plug revenue pilferage in the FBR, which is said to range between Rs 350 and Rs 500 billion per annum. If a majority of the exemptions, concessions and defaulted amounts are recovered and faithfully utilised for progress of the economy, there will be no need for us to seek expensive bailouts from international lending institutions. FBR's decision, at last, to go after top defaulters is a move in the right direction.

Riaz Haq said...

Here's another Business Recorder story on cracking down on tax evasion in Pakistan:

Chairman Federal Board of Revenue (FBR), Sohail Ahmed has said that FBR has found, with the help of Nadra database, that 300,000 to 500,000 people are earning more than tax exempted limit, but are not paying taxes.

Speaking at a dinner meeting of Korangi Association of Trade and Industry (KATI) on Saturday, he said that FBR had advised and persuaded all the newly discovered tax evaders to start paying taxes and sending the SMS on the advice of the Finance Minister, Shaukat Tarin. Referring to General Sales Tax scheme (GST), he said that GST scheme would be converted into Value Added Tax (VAT) mode gradually.

Due to exemptions, concessions and frequent changes in GST scheme it was decided either to clean it or substitute it with the VAT mode, he added. However, he added that VAT would only be implemented after the approval of the parliament but it is more likely that there would be two rates of VAT.

He assured the business community that FBR would consult the stakeholders and take them into confidence before finalising the VAT system. He added that the FBR officials would soon start visiting chambers and trade bodies to discuss and get feedback in this regard.

Sohail said that VAT scheme is prevalent in 150 countries out of which few had withdrawn it, but three of them again adopted VAT mode regime. He opined VAT mode has a potential to generate Rs600 billion as it would be levied both on goods and services, which would be collected by the single agency FBR, provincial assistance and co-operation after getting consensus from all the four provinces during NFC Award meeting.

Regarding Self-Assessment Scheme (SAS), the Chairman said that the scheme would continue as it has yielded good results. He agreed that revenue targets for the current fiscal are not modest but also not unachievable either.

Regarding bowing down to IMF he said that he feels ashamed sometimes when he faces the IMF officials. He agreed with the KATI Patron In-Chief that if, as a result of the incentives given to the expatriates, the remittances double, then the country would not need to beg from IMF.

S M Muneer stressed the need to provide level playing field to the trade and industry in order to compete in the region. He said that Pakistani manufacturers are fully capable of competing or able to perform better than China, India and other competitors if the ever-increasing tariffs of gas and power would be brought at par with the competitors.

He reiterated his claim that if the overseas Pakistanis are given only one percent incentive the remittances would be 16 billion dollars by the next year and there would be no need to beg from the exploiters such as IMF and World Bank.

He said that IMF is all-out to destroy Pakistan's economy and the government must come out of its shackles. The Chairman, KATI, Razzak Hashim Paracha said in his welcome address that VAT should not be replaced with GST without consultations with the business community otherwise its implementation may not prove successful.

He said that VAT mode scheme would be a totally new experiment for our country. It would again take a long time for taxpayers to get accustomed by it. He said that the industry, especially the export sector, should be provided level playing field as soaring utilities prices are causing massive shut down of industrial sector.

The Chairman, KATI's Standing Committee on FBR and Taxation, Mian Zahid Husain advised the government to support legal economy against parallel economy if it wants VAT system to be successful.

He said that tax collectors should collect taxes softly and there should be no harassment otherwise they would not be able to get even the revenue they are getting right now.

Riaz Haq said...

Here's a piece from Daily Times on Pakistan's fiscal crisis:

KARACHI: The foreign loans obtained by the government reached 55 percent of the gross domestic product (GDP) and any new loan will put Pakistan on the list of mortgage states.

Public Accounts Committee (PAC) Special Committee on Budget Analysis Chairman Chaudhry Nisar Ali Khan, who is also head of PAC, expressed concerns over the grave situation Tuesday.

The PAC of the National Assembly will take serious views of the budget 2010-11 and foreign loans position today (Wednesday).

According to the government’s GDP rules and regulations, the government cannot surpass GDP’s 60 percent limit of taking foreign loans, as the present situation is already alarming.

Around 70 percent of the annual budget is being spent on defence, (Rs 675 billion) and Rs 683 billion on retiring foreign loans and interest, he added.

The federal government under National Finance Commission Award has to give 55 percent to 57 percent of the Rs 1 trillion towards the provinces’ share.

Punjab will get 47 percent share, Sindh partaking stands at 45 percent, Balochistan at 139 percent and Khyber Pakhtunkhwa 88 percent.

The PAC committee members including PPP MNA Raheela Qaimkhani, PML-Q MNA Waqas Akram, PML-N MNA Ramzan Masila, Jamat-e-Islami Senator Fareed Piracha and MQM Senator Dr Abdul Haq will discuss in length the budget 2010-11 allocations on major heads, implications of new taxation on the direction of International Monetary Fund (IMF) and World Bank and share of major sector in GDP.

The PAC members special committee on budget analysis will also deliver their expert opinions and suggestions to the government to save the country from plunging into the list of mortgage states.

It is a matter of concern that the budget deficit 2010-11 is Rs 680 billion and the government has already planned to levy tax on public utilities, which are already running on the higher side.

The government will fetch over Rs 46 billion from sales tax, billions of rupees from withholding tax, billions from surcharge on cigarette and curtailing 30 percent budget allocated for public welfare development projects in the country.

The government was unable to meet the condition of restricting the gap between its income and expenditure to under Rs 769 billion or 5.1 percent of the GDP. Pakistan has ended up with a budget deficit of 6.2 percent.

Commenting on the situation, Sindh Agriculture Forum senior member Shakeel Ahmad said the country’s foreign debt stood at Rs 3,000 billion and in only two years 2008-09 alone, it swelled to Rs 9,400 billion.

He said country’s export target is $20 billion while imports will stand $32 billion with a gap of $12 billion. Under such industrial and commercial activities, the country will not reach the export target, he added.

The IMF wanted Pakistan to raise tax revenue from the present 10 percent of GDP to 15 percent by 2013, which is peril for our economy, Ahmad maintained.

The IMF has already indicated that the conditions for release of the last tranche of $1.85 billion bailout package for Pakistan will be tougher.

The IMF would ask Pakistan to meet its conditions for levying tax on the agriculture sector, enhance energy price and ensure implementation of value-added tax (VAT) (new form of general sales tax) by October 2010.

He demanded of the President Asif Ali Zardari and PAC to inform the nation about the fact-findings, as the nation has great concern about the fate of the country.

Finance Minister Abdul Hafeez Shaikh and State Bank of Pakistan Acting Governor Yaseen Anwar along with a team are holding a meeting with the IMF officials in Washington on August 5 to pave way for the release of over $1.8 billion, the second last tranche of the $11.4 billion bailout package.

Riaz Haq said...

From NY Times today:

Of mounting concern to the Obama administration is the potential for serious unrest if the economy unspools further: inflation by some predictions will reach 25 percent in the coming period. The price of sugar has tripled, and the cost of flour has doubled since the government came to power nearly three years ago.

In particular, Washington wants the government to raise taxes on the wealthy landed and commercial class, a shortcoming that has become especially galling as Pakistan’s dependence on foreign donors rises.

Pakistan’s revenues from taxes are among the lowest in the world: only 2 million Pakistanis of a population of 170 million pay income tax, according to estimates by the United States.

A report in a leading newspaper, The News, said Monday that Mr. Gilani and 25 of his ministers, including the finance minister, Hafiz Shaikh, did not pay income taxes at all, according to sworn affidavits by the ministers to the Election Commission of Pakistan.

The alarm about the economy was first sounded by Mr. Shaikh, a former officer of the World Bank, who told a government meeting last month that the government had only enough money to pay two months’ salaries. The economy was “teetering on the brink” before the floods but was now heading for the “abyss,” Mr. Shaikh was quoted as saying.

Generals in Pakistan Push for Shakeup of Government

Riaz Haq said...

ADB's recent report on Pakistan's economy released before recent floods says tax-to-gdp ratio in FY 2009 under PPP govt dropped to ten year low of only 8.8%.

Riaz Haq said...

Here are some excerpts from a recent by India's Tehelka.com piece on the impact in South Asia of Swiss Bank secrecy law change forced by the United States:

SHAKEN BY the Swiss government’s recent announcement that it would reveal the names and account details of Indians who have stashed away an estimated $1.4 trillion ( Rs.62 lakh crore) in Swiss banks, the tax evaders are rushing the greenbacks back home. The Swiss are only waiting for the Indian Parliament to ratify the revised Double Taxation Avoidance Agreement (DTAA) that the two countries signed in August. The revised treaty is also likely to ensure that henceforth global shipping companies will be required to pay tax on their profits only in their country of domicile. Currently, though India has DTAAs with 79 countries, not all of them have provision for exchanging taxation-related information..............
As for the Swiss government, it could soon push its banks to exchange information related to the tax evaders’ bank account details, as per norms set by the Paris-based Organisation for Economic Cooperation and Development. The move is believed to have been prompted by intense pressure from G-20 nations. “This is worrying many Indians who have money stashed away in those banks,” says Jethmalani, adding: “So they are taking out their money and, for the time being at least, investing heavily in the market.”

And this has been happening in Pakistan as well, ever since the Swiss Parliament’s historic move to pass the Return of Illicit Assets Act (RIAA). There, too, the tax evaders have started transferring billions of dollars from their Swiss bank accounts to secret destinations in Europe and Asia. According to recent estimates, roughly $200 billion — four times the external debt of Pakistan — is stashed away in Swiss banks and is now being withdrawn. Top sources in Lahore say they have evidence that Pakistanis are moving their black money to two destinations — London and Islamabad — via PN, and opening sub-accounts with FIIs. “Our problems are similar. They are making everything above board, everything official,” said Ali Mohammed, a broker at the Karachi Stock Exchange.

Earlier this month, Christa Markwalder, president, Foreign Affairs Committee (Presidentin Aussenpolitische Kommission des National Rats) of the Swiss Parliament told Tarun Vijay, MP and national spokesperson of the Bharatiya Janata Party, that she had recently explained to Finance Minister Pranab Mukherjee about how the matter could be resolved to India's satisfaction. Incidentally, Vijay was the first to directly contact the Swiss government in this regard. But Jethmalani feels India is not pressing the Swiss hard enough. “Soon, there will be a crash of an unusual nature in the markets — because even if the Swiss government is keen, the Indian government does not seem to be keen to push the agenda,” says Jethmalani.

Riaz Haq said...

Here are excepts fom a recent Op Ed piece by Maliha Khan published on Chowk.com regading the need for land and tax refoms in Pakistan:

In September, the Carnegie Endowment for International Peace reported that “Fewer than three million of Pakistan’s 175 million citizens pay any income taxes, and the country’s tax-to-GDP ratio is only 9 percent.” This is one of the lowest tax-to-GDP ratios in the world. Mohsin Hamid writes in his Dawn News Editorial that in comparison to Pakistan, “Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24 per cent, Americans pay 28 per cent and Swedes pay a fat 50 per cent.”

The main reason behind Pakistan’s low tax-to-GDP ratio is tax evasion by the country’s elite. Federal officials, including ministers (even Prime Minister Gilani), only pay taxes on their government salaries and not on their personal assets. Although the government promises to take steps toward tax reform, it continues to dodge the issue every chance it gets.
Recently, the Muttahida Quami Movement (MQM), a coalition partner of the PPP-led government, submitted the Redistributive Land Reforms Bill in the National Assembly. Land reform is a major potential contributor to tax reform. The bill proposed by MQM aims to “reduce the wide disparity of income and opportunity between the rich landlords and the poor tillers of the soils…” According to the World Bank, “More than two-thirds of Pakistanis live in rural areas, of which about 68 percent are employed in agriculture (40 percent of the total labor force).” Due to inequality in land distribution, there is a wide gap between landlords and peasants. Approximately 2 percent of households control 45 percent of the land. If implemented, the new bill will establish a limit on family holdings of irrigated land at 36 acres and 54 acres of arid land. Furthermore, the bill calls for the resumption and redistribution of all excess land amongst its landless cultivators, landless tenants, and small land-owners by the government, while also compensating the previous land owners.
While the new bill specifically addresses land redistribution and agricultural development, it will indirectly play a great role in the expansion of the Pakistani tax base. In his article, “Doing Tax Reform Right: Think Big, Think Bold,” author Salahuddin Khan makes the case for “abolish[ing] all income tax and in its place introduce[ing] a gradually increasing property tax on real estate owned.” He points out that while liquid personal assets such as cash are easy to hide, real property cannot be hidden, and is therefore easier to tax. Khan also suggests incentivizing the ownership of smaller portions of land by making it “disproportionally expensive to own over certain thresholds of land.” The case Khan makes supports the undeniable link between tax and land reform. But even though his suggestions may be great, they are useless without any kind of land reform first.

Riaz Haq said...

Here is an Op Ed by Shaukat Tarin, Pakistan's fomer finance minister published in Daily Times:

Pakistan’s perennial structural weakness has been its abysmally low – and declining – tax collection. Even Pakistan’s most powerful government of recent times, that of Pervez Musharraf, left in its wake a tax-to-GDP ratio of less than 10 percent after over eight years in unbridled power. This is amongst the lowest tax collection ratios in the world.

Leaving total collection aside, the composition of tax receipts in Pakistan depicts huge inequity. Direct tax collection constitutes less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at FBR. The bulk of the tax receipts are collected in the form of sales tax. Far from being progressive, the taxation regime is highly regressive, meaning that the poor and less affluent are taxed more heavily as a proportion of their income than the rich.

The other weak (rather, missing) link in public finances is the lack of fiscal effort by the provinces. With some of the largest segments of economic activity such as agriculture, real estate, and services in the provincial domain with regards to taxation, it is baffling that provincial tax receipts total an abysmal 0.7 percent of GDP.

At the heart of it, these issues are related to governance. This state of affairs is a manifestation of a broader challenge that Pakistan has grappled with virtually since independence – the shifting of the burden of responsibility by a small, self-serving and venal elite to the rest of the population.

The flip side of not collecting taxes, and not being able to manage expenditures, is debt. This was never more evident than in early 2008 when a new government took office after elections. It inherited a tax-to-GDP ratio of less than 10 percent, a fiscal deficit of nearly 8 percent of GDP, and a current account deficit of over $14 billion (a record 8.5 percent of GDP). Despite receiving generous assistance from the international community year after year, as reflected in the country’s total external debt rising from $35 billion to $46 billion between 2005 and 2008 (over and above budgetary grants), the previous administration mind-bogglingly resorted to printing currency to the tune of over Rs 700 billion in two years. This factor was a major contributor to the spiral of inflation that was set in motion from 2007 onwards.

The nexus between not collecting taxes and having to borrow cannot be over-emphasised. To place this in context, consider the following: if Pakistan’s tax to GDP ratio had been increased to a modest 13 percent in 2005 when the global as well as domestic economic conditions were most favourable, and kept stable since, Pakistan’s public debt would have been almost 15 percent of GDP lower (at around 44 percent of GDP, instead of close to 60 percent currently). Put differently, since 2005, the government has cumulatively borrowed over Rs 1,600 billion largely on account of not being able or willing to collect taxes.

The net effect of this state of affairs was high inflation, pressure on FX reserves, a decline in the value of the rupee, and an erosion of market and investor confidence. This was a perfect recipe for tipping the country into a full-blown macroeconomic crisis, which came with full force in 2008. To stabilise the country’s fast depleting reserves, it is not surprising that the government had to resort to borrowing from the IMF in November 2008.

Hence, the primary factors behind the increase in public debt over the past three years include recourse to the IMF, a large adjustment in the value of the rupee after several years of the currency being kept artificially stable, and a large decline in grants and other non-debt creating inflows such as FDI after 2007.

Riaz Haq said...

Here are some excerpts from an Op Ed in Newsweek Pakistan by Meekal Ahmed, a former IMF official:

The government hopes to generate Rs. 53 billion during the last quarter of the current financial year, which concludes on June 30. It hopes to achieve this by imposing a 15 percent surcharge on income tax paid by Pakistan’s paltry 1.7 million registered, individual taxpayers. Given the small tax base and modest yield, the surcharge seems unfair and not worth it. In a move that is regressive and potentially inflationary, depending on the market, excise duty on certain import items has been increased from 1 percent to 2.5 percent until end-June. While these measures are better than doing nothing at all—which is what happened during the first three quarters—they are far from ideal, and don’t go far enough to address the big problems with the economy.

But it’s not all bad. The elimination of tax exemptions for agricultural inputs (including tractors, fertilizers, and pesticides) was long overdue. With a strong agro-lobby preventing taxation on their handsome incomes in a sector that contributes 21 percent of GDP, the government might as well tax the inputs. Tax exemptions for export quality textiles sold within Pakistan have also been nixed despite resistance from the fierce textile lobby. The freeze on additional hiring in the public sector, and the 50 percent cut in several spending categories should also be welcomed.

Then there is the profusion of what many Pakistani media outlets call “petrol bombs”—highly unpopular oil price adjustments at the start of each month. The government announces the adjustments, and then rolls them back under popular and political pressure. The fuel price adjustments are unavoidable. Pakistan is a net oil importer and can’t insulate itself from global price shocks. Oil prices have risen steeply in the last three months, and have now crossed the psychologically important 100-dollar mark. Pakistan’s fuel subsidies—at an estimated Rs. 5 billion per month that could have been spent on development—are unaffordable and unsustainable. Oil prices will remain high for a while. Pakistanis must adjust to this reality. .....
Despite the new measures, doubts remain about the revised tax-revenue targets and the state’s capacity to achieve them. The Federal Board of Revenue is notorious for its chronic underperformance. The justification that there is a tax revenue shortfall because the economy is in recession holds no water. An economy expected to grow at around 3 percent is not, technically speaking, in recession, but is growing below its potential. There is no cycle for fiscal revenues in Pakistan: whether the economy grows at 3 percent or 7 percent, whether inflation is 2 percent or 25 percent, tax revenues fail to keep up. If they did not, there would be a constant tax-to-GDP ratio, which is actually falling. This trend points to the existence of deep-rooted structural deficiencies in the tax system, which is regressive, anti-poor and plagued by too many exemptions and concessions. Then there’s also corruption, abuse of the system, and evasion. Even taxes withheld at source are not deposited in the government’s account because of alleged connivance between withholding agents and tax officials.

Riaz Haq said...

Pakistan Business Council (PBC) has proposed that income from all sources above threshold of Rs 300,000 should be taxed to raise tax-to-GDP ratio to 15 percent, according to pkeconomists.com:

According to a position paper of the PBC on the macroeconomic stabilization, issued at the national dialogue of political parties on the national economic agenda, the reform of the tax system could be done by adopting the principle of taxation regardless of source of income. Several studies which have been carried out recently show that the government could generate an additional Rs300-400 billion in revenue within the present tax regime through better coverage and enforcement.
The taxation measures should focus on documentation and broadening the tax base for direct taxes, PBC said.
It stated that the presumptive basis of taxation should be replaced by net income tax earned basis. Wealth tax in the old form need not be introduced but a tax on assets created out of untaxed income be levied. Moreover, the reforms are needed to address over-invoicing, misdeclaration and Afghan Transit Trade leakage issues. The use of IT tools in customs could help in this regard. The gradual reduction in custom duties on smuggling prone items will discourage these malpractice. The provincial governments do have the necessary legislations in place to tax income on agriculture. The threshold levels, exemption limits should be reinforced, the collection machinery, compliance and enforcement measures strengthened. Urban immovable property tax in major cities can substantially augment the tax base of the local governments if a more realistic valuation is arrived at through periodic surveys and assessments.
The expenditures can be reduced by restructuring of Public Sector Enterprises that will staunch operating losses; by Subsidy rationalization and targeting subsidies to the poor only through Benazir Income Support program (BISP); better implementation and avoidance of waste in development projects.
If the above measures are implemented, and a policy that taxes incomes from all sources above threshold of Rs 300,000 is implemented it is expected that Tax -to- GDP ratio would reach 15 percent in five years time and sustained fiscal deficit would not exceed 4 percent of GDP, the PBC added.

Riaz Haq said...

Here's a Businessweek story on Pakistan's informal economy:

It’s early morning in Karachi, Pakistan’s biggest city, and Muhammad Nasir is outside his makeshift shelter of palm leaves, rags, and bamboo, washing up after breakfast. He uses water stolen from a nearby supply pipe that belongs to the local water utility. The 17-year-old bids farewell to his mother, an unlicensed midwife, and walks to his tire-repair shop, an open-air stand in a residential area with a table of tools and a wooden bench. He checks to make sure the electricity he’s drawing illegally from the overhead power line is on so he can run his tire pump. Then he sends 10-year-old Abid, one of his two employees, along with 12-year-old Irfan, to get tea from a nearby shop.

Nasir’s business, his home, his power and water supply, and even the cup of tea Abid brings him don’t exist in Pakistan’s official figures. They’re part of another economy that doesn’t pay taxes or heed regulations. It probably employs more than three quarters of the nation’s 54 million workers and is worth as much as 50 percent of Pakistan’s 18 trillion rupee ($200 billion) official gross domestic product. And while the documented economy had its smallest expansion in a decade at 2.4 percent in the year ended June 2011, soaring demand for cars, cement for houses, and other goods shows the underground market is thriving.
the nation’s purchasing power is more than estimated, says Nadeem Naqvi, managing director of the Karachi Stock Exchange. Rising crop prices have pumped an extra 1 trillion rupees into the rural economy in the past four years, most of it undocumented, Naqvi says. He estimates agriculture may account for as much as 35 percent of GDP, instead of the 21 percent reported.

Evidence of consumer demand is everywhere as new shopping malls and restaurants in Karachi are filled to capacity. Car sales rose 14 percent in February from a year earlier, as more people could afford a Toyota Corolla or Suzuki Mehran (a small hatchback), according to the Pakistan Automotive Manufacturers Association. More than half a million motorbikes hit the road in the eight months ended February, a 5 percent increase, perhaps a sign that Nasir’s tire business has a bright future. ..
The bottom line: If participants in Pakistan’s undocumented economy paid their taxes, the government would collect an extra 800 billion rupees.


Riaz Haq said...

Here's a News Op Ed on devolution of fiscal power in Pakistan's constitution:

Fiscal devolution involving the transfer of taxing and spending powers to sub-national levels of government is totally non-existent in Pakistan despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. Pakistan is in dire need of fiscal devolution — presently major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies the provinces right to levy sales tax on goods within their respective territories.
The provinces have also shown apathy to devolve administrative and fiscal powers to local governments. Since all broad-based and buoyant sources of revenue are with the federal government, contribution of provinces in total tax revenues is only six per cent and in overall national revenue base (tax and non-tax revenue) just around eight per cent. This has made them totally dependent on the Centre for transfers from divisible pool.
What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by the federal government through levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of other services.
Like other federations — notably India, USA, Canada — in Pakistan the provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Despite levying of taxes by the federal government that should have been the provinces’ right, Centre has miserably failed to reduce the burgeoning fiscal deficit that is reaching a horrifying mark of Rs1.8 trillion this year. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted.
The provincial parliaments in Pakistan should be pressurised by civil society to enact laws for establishment of local governments as ordained under Article 140A of the Constitution on the basis of social policy — they have so far just copied the previous outdated ones with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.
In a nutshell, for achieving the goal of fiscal devolution, local governments’ financial resources must be commensurate with the responsibilities provided for by the constitution and the law to ensure welfare of the people and ensure sustainable growth at grassroots level. Part of the financial resources of local authorities shall derive from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.


Riaz Haq said...

The irony: Cost to collect tax higher than tax collection in many major cities in #Punjab #KPK #Balochistan #Pakistan http://tribune.com.pk/story/881537/the-irony-cost-to-collect-tax-higher-than-tax-collection/ …

Out of the 21 formations, only six were collecting taxes, which were more than the total administrative cost and salary of officials serving at these stations. All these stations are located in Lahore, Karachi and Islamabad.

About 90% of the Rs64.3 billion was collected in these major cities since all major businesses have their head offices in one of these cities. The three LTUs situated in Karachi, Lahore and Islamabad pooled Rs57.6 billion or 90% of the total assessments.


Faisalabad is the country’s third populous city and the textile hub. However, the station generated just Rs193.1 million in income tax through FBR’s efforts at a total cost of Rs527.6 million. RTO Multan pooled just Rs77.6 million because of taxmen’s efforts while its administrative cost was Rs523.5 million.


The RTO Peshawar that deals most of the Khyber-Pakhtunkhwa (K-P) collected a meagre sum of Rs56.2 million at a cost of Rs561.4 million. The other station in K-P, RTO Abbottabad, collected Rs69.6 million through assessment but incurred Rs95.5 million. RTO Quetta collected Rs24.8 million at a cost of Rs86.2 million.

RTO Gujranwala – largely capturing the industrial area – collected Rs30.8 million at a cost of Rs317.6 million.

RTO Rawalpindi pooled just Rs46.4 million through FBR’s efforts at a cost of Rs417.2 million. RTO Sargodha collected Rs46 million at a cost of Rs187.8 million. RTO Sukkur collected Rs22.4 million at a cost of Rs223.8 million.

RTO Sialkot – hub of surgical and supports manufacturing units – collected Rs25.5 million at a cost of Rs240.5 million.

Riaz Haq said...

Mass tax avoidance chokes #Pakistan economy - http://FT.com http://on.ft.com/1eOItqc via @FT

As an industrialist in Pakistan’s southern port city of Karachi recounts his woes, from frequent power cuts to a shortage of trained workers, his accountant barges in with a question.
“Sir, how much should we earn from the farm this year?”

“Let me see how much we need to earn from the farm and get back to you,” the industrialist replies.
The encounter provides a glimpse of one of Pakistan’s toughest economic challenges: reforming its chronically dysfunctional tax-collection system.
Only about 0.5 per cent of Pakistan’s 200m people pay income tax, compared with 2-3 per cent in India and 20 per cent in China, according to the OECD.
Compliance with income tax payments is so poor in parts of the country that the cost of running local tax offices exceeds the tax they collect.
“Frankly, the government could end up saving money in some of our remote areas if the tax offices there were shut down today,” says one government official.
The problem has not been solved by a plummeting poverty rate, which fell from 65 per cent in 1991 to 13 per cent in 2011 according to UN figures released last week.
Huge numbers of affluent Pakistanis dodge their tax by colluding with corrupt tax officials to understate their incomes, exploiting loopholes, or both.
In one of the most notorious ploys, people buy farmland — for which there is a tax amnesty — then overstate their agricultural income and understate earnings from other business interests.
The country’s parliament, dominated by landowners, has blocked attempts by successive governments to remove this loophole.
A December 2013 study by the Centre for Investigative Reporting in Pakistan reported that almost half of the country’s 1,070 lawmakers in provincial and national assemblies paid no tax the previous year. More than 10 per cent did not even possess tax numbers.

The tax problem, analysts say, risks undermining Pakistan’s recent run of good economic news.
Business confidence is on the rise, economic growth has been recovering, hitting 4.1 per cent last year, and official liquid foreign reserves have grown almost fourfold in the past year to $12.5bn. Last month the central bank cut its benchmark interest rate 1 percentage point to 7 per cent and consumer price inflation is about 2 per cent, having been stuck above 8 per cent only a year ago.
But plunging oil import costs have played a large part in the upturn. The International Monetary Fund says decisive action on taxation is needed to back up this good fortune.
“The tax to gross domestic product ratio is still very low at 10-11 per cent,” says Harald Finger, the IMF official leading discussions with Pakistan on the next instalment of a $6.6bn loan programme. “For vibrant emerging markets, this should be in the 15-20 per cent range.”
Ishaq Dar, the finance minister preparing to present his annual budget on Friday, hails the government’s early success in broadening the tax base, boasting a rise of 200,000 taxpayers since mid-2013 to a total of about 900,000.
Officials say people have been targeted for whom there was clear evidence of wealth, for example frequent foreign travel.

Meanwhile, the country’s ruling elite show few signs of backing reform, according to western economists in Islamabad. “The political system is controlled by people who neither consider tax collection a big priority nor want to do anything beyond lip service,” says one.
Back in Karachi, the industrialist does not expect his own tax practices to change in the near future. “Using a farm income to avoid paying your dues is a common practice,” he says. “Pakistan’s ruling class must first change its behaviour before they expect the public to follow.”


Riaz Haq said...

Loopholes in Pakistani law that facilitate tax evasion and undocumented economy, according to Haroon Akhtar Khan on Dunya News with Kmran Khan:

1. Prize bonds are bearer's certificates....can be used to launder money on which taxes have not been paid.

2. Overseas remittances are considered legitimate tax-free income.

3. Income can be labeled "agriculture income" which is exempt from income tax

4. Anyone with foreign passport or residency permits like iqama can falsely claim to be non-resident (Law says they must spend over 180 days abroad) whose income in exempt from taxes.

Riaz Haq said...

Pakistan amnesty draws 100,000 new tax filers, $450 million


Pakistan’s government, struggling to lift revenues and cut ballooning public debt, registered around 100,000 new tax filers and expects to have raised about $450 million from a tax amnesty on hidden assets, the finance chief said on Thursday.

The announcement came a day after the International Monetary Fund gave final approval to a $6 billion loan package designed to shore up the economy while the government cuts debt and builds up dwindling foreign currency reserves.

Finance chief Abdul Hafeez Shaikh said nearly 137,000 people had registered at the closure of the amnesty this week, of whom nearly 100,000 were first-time filers.

That was a significant total in a nation where less than 1% of the 208 million population file tax returns.

In total, around 3 trillion rupees ($19.25 billion) of assets were declared and tax revenue worth around 70 billion rupees ($449.15 million) was collected.

Prime Minister Imran Khan introduced the amnesty on undeclared assets, part of a broader drive to widen Pakistan’s notoriously narrow tax base, in a bid to identify high earners for more efficient tax collection.

The move represented a turnaround for Khan who had accused previous governments of using amnesties to legitimise illegally acquired wealth hidden inside Pakistan and abroad.

Under the IMF agreement, approved on Wednesday, Pakistan has undertaken to drastically increase revenue mobilization by 4-5% of GDP at federal and provincial level over three years.

There have already been protests by opposition parties at the squeeze on household revenues.

Hafeez Shaikh said the IMF agreement would open up more funds from other lending agencies and help the broader economy.

“Pakistan’s economy will stabilize, and we will take on the path of progress,” he said.

The government has set a target of raising 5.55 trillion rupees ($35.6 billion) in tax this year, an ambitious goal given that it missed a previous target of 4.4 trillion Pakistani rupees ($28.2 billion) by over 500 billion rupees ($3.2 billion).