International Journal of Business and Social Science Vol. 2 No.

20; November 2011 186

TAX REFORMS IN PAKISTAN (1990-2010)
Saeed Ahmed and Saeed Ahmed Sheikh* Abstract Pakistan is one of te develo!in"
countries #it ver$ lo# ta% to &'P ratio. (a% s$stem in Pakistan is considered to be
com!le%) inelastic) non*neutral and inefficient. Since 1+,0 man$ attem!ts ave been
made to im!rove ta% s$stem in Pakistan #it te assistance of academicians and
international donor a"encies like -orld Bank and International .onetar$ /und
0I./1.(e !ur!ose of tis !a!er is to !rovide an overvie# of te ta% reforms tat ave
been im!lemented over te !ast t#o decades in Pakistan. (ese reforms basicall$ aimed
at broadenin" te ta% base) rationali2in" ta% rates) sim!lif$in" !rocedures and
stren"tenin" ta% administration. 3ur stud$ finds tat te e%!ectations of increasin"
!ublic revenue) im!rovin" ta% structure and !romotin" ta% culture in Pakistan lar"el$
remained unmet. Bot te !olitical*econom$ reasons and te administrative reasons can
be eld res!onsible for unsuccessful im!lementation of ta% reforms. 1. IN(43'56(I3N
Governments need revenue to meet the spending needs to maintain an adequate level of
investment and more effective public services (Ahmed and Stern, 11!" #a$es are the
main source of raising revenue in developed as %ell as developing countries" #a$ policies
in practice differ dramaticall& bet%een richer and poorer countries" 'icher countries rel&
primaril& on broad(based income and consumption ta$es and make little use of tariffs as
source of revenue" )oorer countries, in contrast, make much less use of broad(based
ta$es, rel&ing on e$cise ta$es and tariffs" *orruption and red tape are also more common
in poorer countries (Gordon and +i, ,--.!" #he formation of the state and its capacit& to
gro% and survive is intimatel& related to its abilit& to ta$" #he role pla&ed b& the political
organi/ations that link state and civil societ& is ver& critical in promoting ta$ culture in a
countr&" )olitical(econom& problems in developing countries are %orse leading to %orst
polic& choices" *olonial legacies also have differentiated impact on ta$ structures in
developing countries" Administrative constraints are also identified as the main
constraints to the abilit& of state to collect revenues in general and income ta$ in
particular (Grossman and 0elpman, 11!" 2or achieving sustainable economic
development, macroeconomic stabilit& is important and the role of fiscal reforms takes a
central place in achieving macroeconomic stabilit&" Generall&, ta$ reforms aim at
reducing comple$it&, improving fairness and promoting gro%th" *hoices among ta$
s&stem design issues have ma3or consequences for efficienc&, fairness, equit& and
comple$it&" #argeted ta$ benefits to a fe% ta$ pa&ers create comple$it&, impose large
compliance cost and can lead to an inefficient use of resources" 4ncentives make a ta$
s&stem less fair and encourage corruption" #he determinantal factors commonl& identified
in developing countries ta$ s&stem are5 insufficient staff %ith appropriate skills, lack of
up(to(date equipment, comple$ ta$ la%s, poor enforcement of penalties for ta$ evasion
and corruption, poor information collection and identification of ta$ pa&ers, and so on
(6ird, 18!" )akistan is one of the developing countries %ith ver& lo% ta$ to G7) ratio"
#his is mainl& attributable to narro% ta$ base, inelastic ta$ s&stem, comple$ ta$ la%s,
comple$ net%ork of e$emptions and ta$ incentives, %eak ta$ administration and %eak
mobili/ation of provincial ta$es" #he large si/e of )akistan8s ta$ gap suggests that
increasing the countr&8s ta$ effort in an equitable and efficient %a& requires reforms of
both ta$ polic& and ta$ administration (9ark and 'oubina, ,--8!" #he efficienc& of ta$
administration is constrained b& insufficient staff %ith appropriate skills, lack of
appropriate equipment, comple$ ta$ la%s, poor enforcement of penalties for ta$ evasion
and corruption, poor information collection and identification of ta$ pa&ers, and so on"
#hree basic maladies identified b& the :ational #a$ation 'eform *ommission (186!,
from %hich )akistan is suffering are ta$ aversion, smuggling and corruption" #he purpose
of this paper is to evaluate ta$ reforms that
* Saeed Ahmed is Senior 'esearch 2ello% at the 7epartment of ;lectronics, <uaid(e(
A/am =niversit&, 4slamabad, )akistan" Saeed Ahmed Sheikh is former 7ean 2acult& of
Administrative Sciences, the =niversit& of A/ad >ammu and ?ashmir, 9u/affarabad,
)akistan"
have taken place over the past t%o decades1 %ith main emphasis on broadening the ta$
base, improving ta$ compliance, minimi/ing the level of corruption, streamlining the ta$
la%s and strengthening the ta$ administration" 6entre for Promotin" Ideas) 5SA
###.i7bssnet.com 18@
1 #he stud& period stretches over t%o decades prior to adoption of the Seventh :ational
2inance *ommission A%ard and the approval of the18th amendment bill b& the :ational
Assembl& of )akistan" After these t%o historical events the allocation of resources
bet%een the 2ederal Government and the )rovinces are e$pected to change considerabl&"
, Aealth ta$ %as abolished in the fiscal &ear ,---(-1"
Section(, e$amines the ta$ reforms implemented in )akistan since 1-s, Section(B is
devoted to empirical evidence and evaluation of the outcome of ta$ reforms and in
Section(1 %e dra% some conclusions based on findings of this paper" 2. TAX REFORMS
IN PAKISTAN A :ational #a$ 'eforms *ommission %as setup in 18. b& the
government of )akistan to present recommendations for improving the ta$ation s&stem in
)akistan" #he *ommission submitted its final report in 7ecember 186" A brief summar&
of the recommendations made b& the *ommission %ith respect to direct ta$es, indirect
ta$es and administrative reforms is presented belo%" 2.1 DIRECT TAXES
7irect ta$es include the personal income ta$, the corporate income ta$ and the %ealth
ta$", As regards direct ta$es some of the recommendations made b& the *ommission are
as follo%s"
1" :o interference be made in e$isting rate structure for personal income ta$"
," #he basic rate of ta$ for private companies should be reduced from ..C to 1.C"
B" #he e$isting pattern of e$clusion from the %ealth ta$ base should be revie%ed so as to
remove the e$isting anomalies"
1" ;$isting pattern of ta$ incentives should be revie%ed and the e$emptions that favor
specific entities should be discontinued"
." Salaried )ersons be required to file the standard return of total income under Self
Assessment Scheme"
6" All business income of charitable and religious trusts and %elfare foundations ma& be
made sub3ect to ta$"
@" Small retailers %ithout account books and %ith annual turnover not e$ceeding
's"B.-,---DE be made sub3ect to an annual ta$ of 's"6--DE"
8" #a$ pa&ers maintaining regular books of account for their business or profession be
eligible for self assessment scheme"
" 4n order to enable ta$pa&ers to discharge their liabilities %ith convenience, authori/ed
branches of all nationali/ed banks ma& be allo%ed to collect government dues"
1-" Accounting records of the 4ncome #a$ 7epartment should be computeri/ed"
11" #he *6' should assign onl& gross revenue targets to its officers and the e$isting
s&stem of advice notes in respect of refunds be discontinued"
1," A time limit be stipulated in statutes for disposal of appeals on the pattern of the time(
limit specified for assessment purposes"
1B" All authorities engaged in vigilanceDsurve& also be directed to identif& the defaulting
officials, determining their responsibilit& and recommend suitable action so %arranted"
11" 0igh dignitaries in the state hierarch& ma& create a demonstrative effect in respect of
legal and social responsibilit& to%ards the national e$chequer b& filing their o%n ta$
returns regularl&"
1." #a$ evaders ma& be isolated and sub3ected to social re3ection b& debarring them from
holding social and political positions"
16" 4nformation net%ork be strengthened and the administrative set(up for utili/ation of
information collected from various sources be streamlined"
,", 4:74';*# #AF;S 9a3or indirect ta$es in )akistan include the custom duties, the
sales ta$es and the central e$cise dut&" #he recommendations of the :ational #a$ation
'eform *ommission %ith respect to indirect ta$es are as follo%s" ,","1 *ustom duties
1" *ustom duties should not be used as the principal source of revenue generation"
," #he base of custom tariff should be broadened and there should be no dut& e$empt
items at all"
B" 'eliance on customs tariff as tool to provide fiscal incentives should be reduced
International Journal of Business and Social Science Vol. 2 No. 20; November 2011 188
1" #he rates of duties should be kept as lo% as possible because high tariff is responsible
for inducing smuggling and under(invoicing"
." Ad valorem duties should be preferred over specific duties"
6" #here should be a thorough re(e$amination of the standard rates of rebate and issue of
notification in individual cases should be stopped"
,",", Sales ta$es
1" 'ole of revenue generation should be assigned to the sales ta$ %hich should emerge as
the ma3or revenue generation ta$"
," #hough value added ta$ (GA#! ma& not be implemented in )akistan in its ;:#4';#H
at present, it should be vie%ed as our ob3ective in domestic ta$ation"
B" Sales ta$ should be levied across the board on all the imported goods and domestic
production other than agriculture produce and unprocessed food"
1" Standard rates of ad3ustment for different ra% materials ma& be prescribed"
,","B *entral e$cise dut&
1" #he s&stem of self(clearance should be e$tended to industrial units at present under the
supervised s&stem"
," )roper safe(guards such as prescribing detailed accounts for ra% materials and other
items (electricit&, gas, %ater, %ages, social %elfare contributions! involved in the process
of manufacturing should be provided"
B" Services of outside independent accountantsDauditorsDindustrial e$perts should be
utili/ed in determining the presumptive production"
1" Surprise checks ma& continue to be conducted but b& senior officers
." )enalties in the event of violation of rules shall have to be reall& deterrent and the
defaulters prosecuted"
,"B A794:4S#'A#4G; S#'=*#='; Aith respect to administrative structure the
:ational #a$ation 'eform *ommission made the follo%ing recommendations in its final
report"
1" ;stablishment of 7epartmental ombudsman"
," *reation of >udicial #ribunal for indirect ta$es"
B" A ne% 'evenue 7ivision should be created" 'evenue 7ivision %ill have economic
administrators and research scholars %orking around the &ear in evolving a
comprehensive ta$ation polic&"
1" #he e$isting 'e%ard Scheme for ta$ation officials should be made more effective"
." #he possibilit& of improving the emoluments of the ta$ation officials should be
e$amined b& the )a& *ommission"
?eeping in vie% the large fiscal deficits, mounting public debt and debt servicing, narro%
ta$ base and poor compliance, the first phase of ta$ reforms %as initiated in earl& 1-s"
#he main ob3ectives %ere5
I #o increase the share of direct ta$es in total ta$ revenue"
I #o reform GS# and ultimatel& replace GS# b& GA# to minimi/e ta$ e$penditures and
cascading"
I #o reduce the share of trade related ta$es"
I #o reduce the share of central e$cise duties"
#he initial reforms introduced in earl& 1-s %ere follo%ed b& a series of marginal ta$
reforms" A concerted reform effort, ho%ever, %as launched in the earl& ,--- %ith main
focus on5
I 4mproving fiscal transparenc&"
I ;ncouraging documentation"
I Simplif&ing procedures"
I Shifting the incidence of ta$es from imports and investment to consumption and
income"
I 'educing ta$ rates and rationali/ing tariff rates"
I 4mproving the efficienc& of ta$ administration
B" A:A+HS4S J2 #AF ';2J'9S 4: )A?4S#A: #he data for this stud& have been
taken from the )akistan ;conomic Surve&, Government of )akistan, 2inance 7ivision,
;conomic Advisor8s Aing, 4slamabad (Garious 4ssues!" 6entre for Promotin" Ideas)
5SA ###.i7bssnet.com 18
All data on current market prices %ere converted into constant prices and reduced to a
common base (1(--!" G7) deflator %as used to convert all current values into
constant values"B 2igure(1 given belo% sho%s #a$ to G7) ratio for the stud& period, %e
notice that despite a series of ta$ reforms, #a$ to G7) ratio has declined over the last
t%ent& &ears" 4n earl& 1-s ta$ to G7) ratio %as around fourteen percent %hich
declined to around ten percent in the 2H ,--1(-," Source5 6ased on data obtained from
)akistan ;conomic Surve&, Garious 4ssues, 2inance 7ivision, ;conomic Advisor8s Aing,
Government of )akistan, 4slamabad" #he ta$ to G7) ratio further declined to
appro$imatel& nine percent in the 2H ,--(1-" #o maintain an adequate level of
investment and effective public services ta$ to G7) ratio has to be around ,-C for
developing countries like )akistan (Ahmad, ,-1-!" #he composition of )ublic 'evenue in
)akistan is sho%n in 2igure(," Ae notice that ta$es are the main source of public revenue
in )akistan" Around sevent& to eight& percent of public revenue is contributed b& direct
and indirect ta$es and remaining t%ent& to thirt& percent come from non(ta$ sources" #he
share of ta$ revenue in total public revenue overtime sho%s a declining trend %here as
the share of non(ta$ revenue sho%s an up%ard trend during the stud& period" As a result
the gap bet%een the ta$ revenue and the non(ta$ revenue has narro%ed do%n over the
past t%ent& &ears" 24G=';(15 24S*A+ ;22J'# -,168 1- 1, 11 1611 1B 1.
1@ 1 ,--1 ,--B ,--. ,--@ ,-- H;A'S #AF;S AS );'*;:# J2 G7)
#a$DG7)
B 2or further details please see Appendi$(4, #able(1"1"
Source5 6ased on data obtained from )akistan ;conomic Surve&, 2inance 7ivision,
;conomic Advisor8s Aing, Government of )akistan, Garious 4ssues" 24G=';(,5
*J9)JS4#4J: J2 )=6+4* ';G;:=; - 1- ,- B- 1- .- 6- @- 8- - 1--11 1B
1. 1@ 1 ,--1 ,--B ,--. ,--@ ,-- H;A'S );'*;:#AG; S0A'; #a$
'evenue :on(#a$ 'ev"International Journal of Business and Social Science Vol. 2 No.
20; November 2011 1-
#he composition of ta$ structure in )akistan is sho%n in 2igure(B" 4ndirect ta$es are the
ma3or source of ta$ revenue" #he share of indirect ta$es %as above 8-C in the 2H1-(
1 and the remaining ,-C %as contributed b& direct ta$es" #he share of direct ta$es in
total ta$ revenue since then has increased graduall& %ith a prominent up%ard change
occurring in the 2H( ,--@(-8" #he increase in the share of direct ta$es from 18C to 1-C,
ho%ever, %as attributed to introduction of %ithholding ta$ regime and not onl& due to the
broadening of ta$ base as envisaged in the ta$ reforms" #he share of indirect ta$es has
registered a decline of ,-C over the past t%o decades" #he gap bet%een the direct and the
indirect ta$es slightl& %idened during 2H ,--6(-@ to 2H ,--8(- but again narro%ed
do%n after 2H( ,--8(-" 24G=';(B5 74';*# A:7 4:74';*# #AF;S - 1- ,- B- 1-
.- 6- @- 8- -11 1B 1. 1@ 1 ,--1 ,--B ,--. ,--@ ,-- H;A'S
);'*;:#AG; S0A'; 7irect 4direct
Source5 6ased on data obtained from )akistan ;conomic Surve&, 2inance 7ivision,
;conomic Advisor8s Aing, Government of )akistan, Garious 4ssues" #rends in current
and development e$penditures are sho%n in 2igure(1" *urrent e$penditure to G7) ratio
has declined from over 1C to around 1.C over the past t%ent& &ears as envisaged in the
ta$ reforms" Source5 6ased on data obtained from )akistan ;conomic Surve&, 2inance
7ivision, ;conomic Advisor8s Aing, Government of )akistan, Garious 4ssues" 24G=';(
15 *='';:# A:7 7;G;+J)9;:# ;F);:74#=';S -"- ."- 1-"- 1."- ,-"-
,."-11 1, 1B 11 1. 16 1@ 18 1 ,--- ,--1 ,--, ,--B ,--1 ,--.
,--6 ,--@ ,--8 ,-- ,-1- H;A'S );'*;:# J2 G7) *urrent ;$p"DG7) 7;G"
;$p"DG7) 6entre for Promotin" Ideas) 5SA ###.i7bssnet.com 11
7evelopment e$penditure to G7) ratio has also declined overtime %hich is contrar& to
the goals set in ta$ reforms" 4t is argued that development e$penditures %ere deliberatel&
kept lo% to curtail deficit in the balance of pa&ments under the pressure from
international funding agencies" 6roadening of ta$ base and rationali/ing of ta$ rates on
one hand and containing the gro%th of unproductive e$penditure on the have been the
critical elements of the ta$ polic& follo%ed in )akistan" #rends in some important fiscal
indicators are sho%n in 2igure(." Ae notice a declining trend in public revenue to G7)
ratio and public e$penditure to G7) ratio up to the 2H ,--,(-B" #he gap bet%een public
revenue to G7) ratio and )ublic e$penditure to G7) ratio narro%ed do%n during this
period but %idened during the 2H ,--B(-1 to the 2H ,--@(-8" After the 2H ,--@(-8 both
revenue to G7) ratio and e$penditure to G7) ratio sho% a declining trend and narro%ing
do%n of the gap bet%een the t%o"
Source5 6ased on data obtained from )akistan ;conomic Surve&, 2inance 7ivision,
;conomic Advisor8s Aing, Government of )akistan, Garious 4ssues" As a result of
narro%ing do%n of the gap bet%een the public revenue and the public e$penditure the
overall fiscal deficit improved and registered a decline from 8"@C of G7) to almost BC
of G7) up to the 2H ,--B(-1" After that the overall fiscal deficit once again started
increasing and reached an alarming level of @"6C of G7) during the 2H( ,--@(-8" #he
overall fiscal deficit once again sho%ed the signs of improvement and moved closer to
.C of G7) during the 2H ,--(1-" 8. 63N695SI3N Jur anal&sis sho%s that ta$ to
G7) ratio is ver& lo% in )akistan and all efforts to broaden the ta$ base and raising more
ta$ revenue have not materiali/ed" Serious efforts are needed to almost double the ta$ to
G7) ratio for achieving an optimal level of public spending" Since 1-s the share of ta$
revenue in total revenue has declined graduall& from 8-C to almost @-C %hilst the share
of non(ta$ revenues has increased from ,-C to almost B-C" Jne of the ob3ectives of ta$
reforms %as to improve ta$ structure b& reducing the reliance on indirect ta$es like
import duties and central e$cise duties and increase the share of direct ta$es" Jur anal&sis
sho%s that the share of indirect ta$es in total ta$ revenue %as above 8-C in 1- and has
declined continuousl& to a level of 6-C in the 2H ,-1-" Jn the other hand, the share of
direct ta$ has more than doubled over the past t%ent& &ears from18C in 1- to 1-C in
the 2H ,-1-" #his clearl& sho%s that efforts to improve ta$ structure have succeeded to
some e$tent" #he efforts to reform GS# and graduall& moving from GS# to GA#,
ho%ever, have not succeeded" #he efforts to broaden the personal income ta$ base have
also not materiali/ed and reliance on indirect ta$es has further increased" Another
important ob3ective of the ta$ reforms %as to improve the efficienc& of ta$ administration
through transparenc&, training, auditing and up(gradation of information gathering and
processing s&stem" (1.(1-(
.-.1-1.,-,.B-111B1.1@1,--1,--B,--.,--@,--);'*;:# J2
G7)H;A'S24G=';(.5 24S*A+ 4:74*A#J'S
'ev"DG7);$p"DG7)7ef"DG7)International Journal of Business and Social Science Vol.
2 No. 20; November 2011 1,
As a result of administrative reforms, it %as e$pected that ta$ compliance and overall ta$
culture %ill improve but no significant progress seems to have been made in this regard"
#a$ evasion b& elite class and big land lords sho%s the inabilit& of the state to e$tract
resources from upper class" #he si/e of informal sector is still ver& large" *ash
transactions, smuggling and corruption are %ide spread" A strong political and
administrative %ill is needed to improve the ta$ culture and ta$ structure in )akistan"
References Ahmad, ;htisham (,-1-! #he political(econom& of ta$ reforms in )akistan5
the ongoing saga of the GS#, Asia 'esearch *enter, Aorking )aper :o" BB, +ondon
School of ;conomics and )olitical Science, +ondon" Ahmad, ;" and :" Stern (11!
#heor& and )ractice of #a$ 'eforms in 7eveloping *ountries, *ambridge =niversit&
)ress" 6ird, '" 9" (18! Administrative 7imensions of #a$ 'eforms in 7eveloping
*ountries, in Gillis, 9" (ed"! (a% 4eform in 'evelo!in" 6ountries) 7urham5 7uke
=niversit& )ress" Gordon, '" and A" +i (,--.! )u//ling #a$ Structure in 7eveloping
*ountries5 A *omparison of #%o Alternative ;$planations, :6;' Aorking )aper :o"
11661, *ambridge, 9A" Grossman, G" 9" and ;" 0elpman (11! )rotection for Sale,
American ;conomic 'evie% :o" 81, pp" 8BB(.-" 9ark, 9" and A" A" 'oubina (,--8!
)akistan8s #a$ Gap5 ;stimates b& #a$ *alculation and 9ethodolog&, Aorld 6ank and
Georgia State =niversit& 'eport :o" FF(pk" )akistan, Government of (186! :ational
#a$ation 'eform *ommission, 2inal 'eport, *entral 6oard of 'evenue, 4slamabad"
#an/i, G" and 0" 0" Kee (,---! #a$ )olic& for ;merging 9arkets5 7eveloping *ountries,
492 Aorking )aper A)D--DB., Aashington, 7*" Appendix-I #able(1"1 Gross 7omestic
)roduct and G7) 7eflator (Galues in 's" 9illion!
Hears G7) (*urrent! G7)
(*onstant!
G7) 7eflator
1-(1 1-,-6-- ,@1B6B8 B@"@
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,--B(-1 .61-.8- 1.B111 1,,"1
,--1(-. 61@8, 1881@6 1BB"1
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,--8(- 1,@BBB6 .@6@.B8 ,,-"
,--(1- 1.1-,@8B 6--11-. ,.6".