de compiled

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Cooley defines taxation as the process or means by which the sovereign, through its

law-making body, raises income to defray the necessary expenses of government.

Malcolm explains that taxation is the power vested in the legislature to impose burdens

or charges upon persons and property for the purpose of raising revenue for public

purposes.

Much of the Governments financial operations rely on taxation. Also taxation proves to

be a powerful mean to achieve the goals of social progress and the objectives of

economic development. It is an effective instrument that helps in designing the socio-

economic policies of a country, but regrettably it has been overlooked in Pakistan.

The New York Times reports, In Pakistan, the lack of a workable tax system feeds

something more menacing: a festering inequality in Pakistani society, where the wealth

of its most powerful members is never redistributed or put to use for public good. That is

creating conditions that have helped spread an insurgency that is tormenting the

country.

According to a World Bank report, Pakistans taxation system has failed to safeguard

the common interests of taxpayers, policy makers, and tax administrators and boosting

tax collection is necessary to overcome macroeconomic weaknesses and sustain

development. (Pakistans Elite Pay Few Taxes, Widening Gap, 2010)

The low-yield tax system has weakened public services, increased inefficiencies while

unfairness has undermined economic growth and voluntary compliance. The complex

tax system has further made administration and enforcement complicated. Inefficient


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administration and management is one major issues related to taxation in Pakistan.

Other Structural problems, such as a narrow tax base, tax evasion, distrust of taxpayers

and administrative weaknesses, have further damaged the taxation system of the

country. (Tax Evasion, 2009)

Pakistan's tax-to-GDP ratio is about 10 per cent, one of the lowest in the world.

Currently, the government generates only 17 per cent of its total tax revenues from the

services sector. The services sector, which comprises more than 50 per cent of the

economy, should contribute a lot more to revenue-generation than it is currently doing .

Agriculture contributes about one-fifth of GDP, and amounts to no more than one per

cent of FBR revenue. Given the shortfall in agriculture and services, industry carries the

brunt of the tax burden, and its tax share is three-times as high as its GDP share. The

lack of a federal tax on agriculture, an industry that employs nearly half of Pakistans

population and whose profits go largely to the wealthy landowners, is a serious issue.

The Federal Board of Revenue detected 13,000 cases of tax evasion in 2009. The

chairman of FRB reported that in 2009, only 60 per cent of the 2.7 million National Tax

Number certificate holders had paid their taxes. In the same year, the recovery of taxes

amounting to Rs300bn to Rs400bn was blocked due to the referral of cases to courts

and tribunals. In most countries, tax evasion is being taken as a serious crime and tax

dodgers are prosecuted and punished, but in Pakistan no serious attempts have been

made as yet to curb and discourage tax evasion and to apprehend tax dodgers because


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of the existing rules and policies. Strict and efficient measures need to be taken by the

government to ensure tax payment by the eligible populace and tax collection by the

concerned authorities and also penalize people who fail to pay their taxes on time. (WB

sees flaws in Pakistans taxation system, 2009)

The authorities have taken steps to improve the current situation of the country by

expanding the horizons and taxing profits from the stock market and real estate.

However agriculture, a major moneymaker for the elite, remains untaxed.

In order to ensure a healthy long-run economic development, Pakistan needs to

implement significant changes in tax policy aimed at increasing the effectiveness of the

tax system, expanding the tax bases, reducing misrepresentations and phasing out

exemptions. Such tax reforms are also required to deal with the risks arising from

persistent large budget deficits. Failure to address the problem now would result in

instability in the country, raising the probability of fiscal and financial chaos in the future

and the risk of constraining the policy flexibility in the future. (PAKISTAN: Tax Policy

Report, 2008)

In the following sections, we have tried to investigate in detail some of the most

pressing issues/areas responsible for these poor tax results in Pakistan and concluded

the report with some recommendations.


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Liiterature Review

Pakistans economic development is endangered by macroeconomic imbalances. High

growth in the 1960s was followed by low growth in the 1970s and high growth in the

1980s by low growth 1990s as macroeconomic vulnerabilities derailed development.

Later due to support by favorable global environment, Pakistan maintained a strong

development record in this decade. Growth accelerated and fiscal and social indicators

improved. But, as in the past, the steps proved unsustainable, as economic policies

adjusted too little and too late to deterioration in the external environment. The alarming

crisis is frightening to unfasten much of the recent development progress. (Taxation:

Why is It Important?, 2010)

Strengthening tax collections is a central part of the necessary policy

adjustments to overcome Pakistan macroeconomic weaknesses and sustain

development. The problem with high fiscal deficit high current account deficit and high

inflation are linked in one way or the other to Pakistans weak tax revenue.

Following are the major sources of tax revenues for Pakistan and policy issues that

hinder proper collection of these taxes. (Taxation Structure Task, 2005)

Individual Income Tax: The individual income tax schedule is complicated with tax

brackets ranging from 14-21 furthermore the income tax threshold is too high with

respect to the incomes of individuals. It fails to generate adequate amount of revenues

due to tax evasion by individuals. The marginal tax rate for high income individuals is

applied to the complete income which creates a negative incentive to evade taxes. The


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number of tax exemptions and concessionary rates are far more than the optimum

number.

Reforms

Improvements can be made to the income tax system by lowering the threshold and

reducing the range of tax brackets. Additionally progressive taxation should be

introduced to tax slices of income with higher rates for high income individuals.

Corporate Income Tax: Overall a well designed structure but compliance to the

corporate income tax is not up to acceptable levels. Does not tax small businesses on

the incremental basis of their size of operations and exempts them completely from any

withholding obligations. Another major issue is the ill-treatment in terms of taxes a small

enterprise faces if its turnover grows over the threshold of an SME.

Reforms

The government should take measures to assure enforceability of the corporate taxes.

And taxation of small firms should be introduced as well to broaden the tax net.

Sales Tax: There are many gaps in the Sales Tax Act, allowing the Federal Board of

revenue the authority to determine its application with its own discretions. This results in

destabilizing the system.

Reforms

The activities of the administration should be constrained and provided guidance with

proper reforms by filling the gaps in the system.


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Excise Tax: There is a wide array of different tax rates for petroleum and its derivatives

complicating the system. Another major issue is the presence of few tax exemptions,

which has opened the door for a wide scale of tax evasions.

Reforms

The government needs to simplify the taxation system of oil and fuel products, by

creating broad categories and more standard rates.

Custom Duties: The issue with the custom duties is much similar to the excise taxes.

The system has become very complicated due to administrative problems and a wide

spectrum of rates applied.

Reforms

Again there is a need to simplify the system and introduction of a uniform tax rate on all

imports is needed. (Wallace & Kangan)


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Methodology

The methodology we used to define and explain the issues regarding the taxation in

Pakistan is through

y Research articles

y Taxation websites

y The figures and facts as stated by the Government of Pakistan.

Combining all these sources we drew analytical conclusions on 5 themes or variables

in the economy of Pakistan.

y The limited tax collections due to tax umbrella in the Agricultural Sector

y The issues related to the indirect taxes

y Tax evasion practices in Pakistan

y The narrow tax base in Pakistan

y Tariff structures, their implications and issues.

y Large informal sector and their tax liability

Moreover we studied how these variables individually and collectively created the cycle

of problems and issues that has raised the phenomenon of problematical taxation

procedures in Pakistan.


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Findings

While studies and researches conducted by economists worldwide show that globally

tax reforms can deliver ambitious targets set by the government, Pakistan may first

need to identify what it is that it seeks to achieve from those tax reforms as the

problem with Pakistans tax system includes but is not limited to tax revenue

generation.

Taxation on agriculture in Pakistan had initially faced a major dilemma. The question

was to whether to tax agricultural income and wealth at all. Once it was established

that there was no enthralling economic reason that could support the notion to exempt

agricultural incomes, the issue became how agricultural producers should be taxed. In

Pakistan, it is extremely difficult to tax agriculture and administrative constraints have

further worsened the matter.

The current agricultural tax policy and structure has loopholes with regards to its

revenue generation capacity, efficiency, equity and economic stability. (Khan & Khan,

1998)

Although agriculture is one of the largest sectors of the Pakistani economy, the taxes it

yields provide very little support to the provincial budgets. According to researches

carried out, it has been realized that the tax revenue potential of Pakistans agricultural

sector is far greater than what it currently produces.

The tax revenue shortfalls that Pakistan faces in its tax base are due to exemptions.


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The relative compliance rate and administrative costs for small and large farms are not

the same which further aggravates the problem. There is a dire need for the

implementation of a uniform progressive tax rate on marketed output that is primarily

dealt by large famers. Small farmers who have little marketable and more farm surplus

would be automatically exempted from tax. Thus in this way there would be no tax

evasion due to subdivision of holdings. The issues of administrative weaknesses,

compliance and evasion are larger in magnitude than anticipated.

The present tax structure does not take into account crop viability and how lucrative

they are. For example: sugar canes net yield per acre is far greater than some of the

other crops and thus in this way, the current tax policy is unfair.

There are various administration weaknesses that plague the tax system. Despite

being properly documented in law, the administration system is not enforced in the

country. Neither the revenue officials nor the agricultural tax payers have the complete

information and are not sufficiently accustomed to and familiar with the legal

requirements. Holdings and crop values are not current and updated because proper

records are not maintained and an ad hoc system is used to determine gross income.

Economists seem to agree on the increment of the agricultural income tax. Since

agricultural income is not taxed, agricultural households face a low tax burden than

households that are not dependent on agriculture for their income. Also agriculture is

one of the largest sectors of Pakistan and saving it from taxation would mean exposing

the other sectors to a higher tax rate to offset the effect. This higher tax rate leads to

the non agricultural households to look for ways to avoid taxes and this results in the


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problem of tax evasion.

The agricultural sector of Pakistan benefits from low interest rates on loans, public

research and development and subsidies on fertilizers, etc. Hence it is only rational

that the support provided by the government in this way is made use of by taxing

agricultural income, on the basis of efficiency and equity.

The inaccessibility to rural areas hinders the effective implementation of taxation

policies and thus recovery and revenue generation. Farmers could be contacted and

met with at the marketplace for tax assessment. (Chaudary, 2001)


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Discussion:

Agriculture Income Tax:

Implicit taxes are much higher in agricultural sector than any another sector in the

Pakistani economy. Thus, it is difficult to introduce the desired progression in

agricultural taxation with the extension of general income tax to agriculture.

In agriculture, there is tax evasion because of disparity in the tax treatment of different

types of income. There is false reporting of income therefore and there is also a lot of

complexity in maintaining the disparity and the rules, so there is more corruption then.

Collections costs become higher and cover a significant portion of the revenue

collected. The governments however, might not be aware of the collection costs

because these are borne by the taxpayers themselves in the form of compliance costs

(accounting, record keeping) or in interactions with the tax administration (rent seeking).

Administrative costs are also high because generally the staff is untrained and paid

poorly.

This exemption of the agricultural sector from normal income tax laws has led large

industrialists and feudal landowners to buy large fields and hide their real income and

block direct taxation of agricultural income using their power. Landowners form alliances

with the military to hide their incomes. These inequities need to be removed.


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Social backwardness is a direct outcome of the power of these landowners in the rural

areas of the country. There is no human capital accumulation through education and

training. Furthermore, surveys indicate that large landowners have little incentive to tax

themselves to pay for schooling for the masses.

The tax net does not include significant portions of the total agricultural income. Only

standard crops are taxed. The non-crop income like livestock farming and forestry is not

included in this portion even though it contributes a lot to the agricultural income of the

rural households. The taxes on the other hand are only levied on the landowners. The

income of the tenants through cultivation is excluded totally.

Indirect taxes:

Income tax in Pakistan comes under the category of direct taxes. These are taxes to be

paid by an individual personally and directly. Indirect taxes are those that are shifted to

the consumers such as customs duty, sales tax and federal excise. Like most

developing countries Pakistan has the same framing of the indirect taxes versus direct

taxes. That is, Pakistan also has more revenue generation through indirect taxes

compared to direct taxes. In the total tax revenue it is about 75 percent.

The affect of the indirect taxes is significant because they affect the price of the

products. Also the raw materials used and their quality and this all has major impact on

the lower strata of the society that buys locally produce goods. Thus, they are exposed

to more tax burden because the prices of the commodities would affect the CPI and

their purchasing power.


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The percentage of GST in the indirect taxes is 63%. After the GST Tax Reform in 1990

a higher proportionate GST tax burden is borne by the poor and the middle classes

compared to the richer segment of the population. Also, the results show that during the

period of 1990-91 to 2000-01 for the richest and the poorest households, the

expenditure reduced by 17 and 13 percent respectively. Tax liability for the poorest

increased by 3.74 and that for the richest increased by 2.41, thus poor households

appeared to be facing a much higher increase in tax incidence coupled with declining

expendituresi. According to these reforms, tax exemptions of consumption items such

as mutton, chicken meat and fruits are benefiting the rich more since these lie more

within the domain of the richer households consumption. Similarly, an additional benefit

to the rich is that most of the services are exempted from the tax net. These services

are more consumed by the rich households than the poor ones. They include financial

services, entertainment and recreation, real estate, lawyers, and dentists. Thus, these

households are benefiting from the failure of government to incorporate these services

within the GST net and so facing a proportionate lower level of GST incidence

compared to what should be according to their expenditure level. Therefore, it can be

seen that the very purpose of taxation to redistribute wealth is being defeated.

(Paksitan's Informal Sector Grows By 20%)

This has all resulted from the constitutional provisions that assign the function of taxing

goods to the federal government and that of taxing services to the provinces. Besides

this, the estimates also indicate that the exemptions under the GST have proved costly


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for the government. Under GST the costs amounted to Rs. 230 billion and Rs. 80 billion

under duty free imports in 2006-07. These costs are in fact loss in the lost revenues.

Tax evasion in Pakistan:

Tax evasion is basically illegal reduction of one's tax liability, by either understating the

value of the income or improperly claiming deductions that are not authorized. The

taxpayers either intentionally or unintentionally fail to take into account certain taxable

activities when filing their tax returns. People are able to evade tax due to lack of

documentation on the business side. The fact that a large part of Pakistans economy is

informal sector, there are no records of transaction that are taking place from the buyers

side so the machines that are used to detect tax evasion cannot detect. The main

sectors that do not pay taxes appropriately include the transporters, traders, and

agriculturists. Transporters earn considerable money but they evade payment of taxes.

Because of no or poor documentation, the traders have a calculated move on their part

not to pay income tax. And lastly, the agricultural sector enjoys tax holidays for ever

under the Income Tax Ordinance, 2001. All these factors contribute to tax evasion. Tax

evasion has many harmful impacts on the economy. It contributes to revenue loss.

According to a news item, the tax evasion has been estimated at Rs 500 billion that is

almost half of the total tax collection of Rs 1,004 billion during the outgoing fiscal year. ii

(Rana, 2008)

Such level of evasion hampers the development of a developing country like Pakistan.

Various entities also avoid tax, as in they engage in tax avoidance. Tax avoidance is

basically interpreting the law in ones own favor and then avoiding the tax. A taxpayer


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may lawfully arrange his/her affairs to minimize taxes by such steps as deferring income

from one year to the next. This is legal and is called as tax avoidance. The corporate

sector in Pakistan actually hire accountants to study and find loopholes in the tax laws

and interpret them in their own favour and perform acts in such a way that is not illegal.

So the corporate sector in general, is involved in tax avoidance and not tax evasion.

They state their business expedience (justified business expense) to avoid the tax.

Comprehensive efforts are needed to tackle the main problem of tax evasion. The

government should be willing to solve this problem and the will on the part of the

government is important. Tax laws should be simplified. Proper education, awareness,

and enlightenment on the publics part are very necessary. Tax machinery is required to

be re-oriented for developing capability, capacity, and credibility.1 Proper documentation

is needed to detect tax evasion so improvement in the documentation is required. A

momentum needs to be built whereby tax rates are reduced and tax base is broadly

widened. This can be made possible by taxing the sectors which are currently enjoying

tax holidays, e.g. Agriculture. These steps should immediately be taken by the

government and the Federal Board of Revenue (FBR), so that the current inefficient

taxation system can be made efficient which will help Pakistan develop.

Narrow Tax Base

It is generally said that the tax base in Pakistan is very narrow. In this connection figure

of total taxpayers at 1.7 Million against total population of 157 Million is quoted to

highlight that only 1% of the total population pays tax. However, a large portion of our

1Prof. Dr. Khwaja Amjad Saeed, Understanding and tackling Tax Evasion, available at:

http://www.kamjadsaeed.edu.pk/articles/TaxEvasion.pdf


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population lives in rural areas, primarily engaged in agriculture a sector, which falls

outside the taxable regime. Table 1 in the appendix depicts this situation more

precisely.

As other important fact worth consideration is that on 22% of Pakistani population is

economically active. Out of this, people living in rural areas and not earning taxable

income would need to be excluded.

It needs to be seen, as to what number out of these 11 Million people should be paying

the taxes and how many happen to fall outside the tax regime. For this one has to take

into account the essential exclusions, which tantamount to system constraints which

include 1) Territorial Exclusions, 2) Personal Exclusions and 3) Income Exclusionsiii.

Due to these and inefficiency the Income Tax Department has lost track of a large

population of taxpayers, who have been suffering tax withholdings at source on

numerous types of transactions, in their daily life. Data of Electricity/Gas Consumers,

dividend earners, prize winners and so on can help to be a source of estimate for the

presumptive taxpayers, for the Income Tax Department. (Ghaus, 2008)

The Federal Board of Revenue (FBR) has taken steps to broaden the Tax Base in

Pakistan. These include changes brought about the Income Tax Ordinance 2001, which

cover the Universal Self Assessment Scheme (USAS), Presumptive and Withholding

Tax Regime (PTR), Fixed Tax Scheme for Small Businesses, Reduced Income Tax

Rates, Amnesty Schemes for undisclosed wealth and Phasing Out of tax Holidays.


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The Income Tax Department is now looking to book more and more new Tax Cases

and find out the people who are evading tax, to broaden their tax base and to reduce

the disparity brought about by the tax holidays between the upper and lower income

groups. The new approach by using the latest custom developed system, NEXUS, uses

information such as 1) Property Owners, 2) Motor Car Owners, 3) Telephone Owners,

4)Electricity Connections, 5) Professional Bodies, 6) Expensive Institutions and

Universities Enrolments and 7) Internal Survey (which includes going through the

Wealth Statements, Communication Slips, Business Directories and so on. The division

of Survey Teams is also taking place in which the teams are divided as per the

Geographical location. All these factors are aimed at contributing to the broadening of

the tax base, overall. Though there has been some increase compared to earlier years,

but in the overall macro scene, with growing GDP rate, expanding commercial and

Corporate Sectors, this kind of tax base and its consequential revenue generation is not

considered sufficient system for sustaining the system. Thus, there is a need to change

and broaden the Tax Base.

Tax Administration

Pakistans tax administration has generally been viewed as inefficient and corrupt. The

process of paying taxes has been cumbersome and painful, with massive

documentation, complex and arbitrary tax policy and non helpful tax officials. These

complications along with the general perception of corruption and misappropriation of

funds have been major reasons for the high rates of tax evasion in the country. The

military government led by General Musharraf which came to power in 1999 was

enthusiastic to raise levels of tax revenue and improve the tax-to-GDP ratio. To achieve


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this objective it initiated the Tax Administration Reform Project (TARP). A large chunk

for financing the project came from the World Bank which gave around US$78.5 million

credit and a US$24.4 million loan. iv

An important part of the TARP is to make the tax collection process more efficient and

transparent, by reengineering the entire taxation process. Efforts are being made to

facilitate the process for tax payers. This involved the following measures:

y Improvement in infrastructure facilities. For example, FBR has established a large

taxpayer unit at Karachi and Lahore encompassing all domestic taxes, Model Sales

Tax House at Karachi to test new business and customers services procedure. 2

y Setting up of Taxpayer facilitation and education centers.

y Automation of a number of processes, such as the Sales Tax refund verification

system and the Customs Administration Reform (CARE) which reduced the time

taken to process claims & also helped in reducing the chances of corruption.

y The process has been simplified so as to minimize contact between tax officials and

taxpayers to increases efficiency and reduce corruption.

y Hiring of local and international consultants, to assist with reforming the

administrative setup.

Tariff structures


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Tariffs have an important impact on a countrys trade policy. High tariffs imply a

protectionist policy stressing on import substitution while lower tariffs promote both

increased imports and exports.

Pakistans policy shifted in the 1990s with increased stress on trade liberalization,

which meant lowered tariffs. This policy was further stressed in 2001 under Musharrafs

government. The underlying objectives of this policy are firstly to boost Pakistans

exports. An IMFv study in 2006 showed that lowering tariff barriers results in a boost of

exports. This model when applied to Pakistan indicated that removing import tariffs in

Pakistan will lead to a 16% increase in exports. However despite an increase in exports

since trade liberalization, Pakistans trade deficit has continued to grow, resulting in the

present day balance of payments crisis. As a state bank report reveal: During 2006-07

exports and imports of goods (general merchandise plus repairs of goods and goods

procured in ports by carriers) were $ 17,278 million and $ 26,989 million while the same

in 2005-06 were $ 16,553 million and $ 24,994 million respectivelyvi (Huzaima, 2008)

This situation supports the viewpoint that trade liberalization for developing countries

with developed nations makes the developing countries more vulnerable. This is

because generally developing countries tend to have low priced, primary products as

exports while high priced manufactured products and machinery as imports.

Another objective is that by removing protection there is improved efficiency in the local

industrys which would otherwise not be able to survive. On the surface of it this has

been the case in Pakistan, because during the liberalization phase the revenue of

Pakistans manufacturing sector has grown by 28%.3 (Huzaima, Income Inequality, N.D)


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Another research paper also claims using simulation tools that tariff liberalization results

in greater household income equity. However this appears not to be the case in reality.

According to some sources Pakistans Gini coefficients has increased from 0.33 to 0.68

in the period from 2000-2006 indicating high levels of inequality.vii

As the present balance of payments deficit shows tariff structures have important

impacts on economies of developing countries. Pakistans examples indicates that

lower tariffs ,which encourage export promotion, on its own is not enough and an

eclectic approach .which uses export promotion and import substitution needs to be in

place. (Permanent Mission of Pakistan to the World Trade Organization, 2007)

Large informal sector

The size of the informal sector is not easy to measure due to the lack of registration that

is the characteristic of this industry. Many estimates have been made about the size of

the informal sector. Some officials of the Federal Bureau of Revenue estimate the size

of the informal sector to be around 30-40% of the total economyviii. In 2007, out of the

$160 billion size of country's economy, $32 billion plus was in the informal sectorix. The

size the informal sector and the impressive rate at which it is growing provides

businessmen with opportunities to evade taxes. Pakistans informal sector employs

around 70% of the total labour force of Pakistanx. The informal sector employs a variety

of tradesmen providing employment and various products and services at a low price to

a large and mostly poor section of the society. The businesses use small investments


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and personal skills very efficiently. Some economists estimate that the informal sector is

70% more efficient than the formal sector. (Haq, 2008)

Taxing the informal sector is a daunting task. The nature of the informal sector is such

that it makes taxation difficult. Most of the transactions that take place are done in cash

and there is a general indifference to record keeping. Most businesses in the informal

sector are family-based enterprises that do not disclose all the information regarding

their business in fear of losing control of the business or in fear of excessive regulatory

requirements. Other reasons of not registering in the formal sector are cumbersome

laws and procedures, inhospitable environment, a higher cost of doing business but

most importantly, the general attitude of the people to avoid

Conclusion:

In conclusion what is important to note is that researches from over the developing

world show that tax administrative reforms are critical to revamping the taxation system

of a country. And the real impact of the reforms has to be judged over a long period of

time to ascertain whether they were successful or not. (Review on Pakistans Balance of

Payments, 2007)

Recommendations:

Agriculture:

As we all know, Pakistans policy makers have always faced a great a dilemma in

deciding whether to tax agriculture or not. Our research, however, reveals that the


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country can collect a great amount of money from this sector if the right people are

taxed. A sensible in this regard would be for the government to tax the feudal landlords

who own vast areas of land. The major problem with this strategy is that tax revenue is

pilfered and it allows the feudal landlords to evade taxes. All farmland should be taxed

however, and the rate should be decided according to the area of land in a farm. The

rate for peasants should be lower and for feudal landlords it should be higher.

(Huzaima, Income Inequality, N.D)

Another recommendation for the agricultural sector is to apply additional taxes on

surplus produce. This is a very practical and progressive approach as it will allow for

progressive taxation. This tax is progressive because it will be greater for farms with a

vast area owned by a feudal landlord and less for farms with a comparatively smaller

area owned by subsistence farmers. Agriculture income taxes will go a long way in

bringing about some much needed frugality in the rich which would help stabilize, and

curb the prices.

It is important to note here, however, that any taxation policy introduced in the

agriculture sector of Pakistan cannot succeed until and unless an audit system is

implemented. An audit of the farm owners and the farm lands would ensure a fair and

development friendly taxation system. It would allow for up to date assessment of land

which would in turn allow for a fair tax rate to be calculated. But the major problem with

this is the fact that land trading has been suspended in interior Sindh since the riots that

occurred when popular leader Benazir Bhutto was murdered. People are now trading


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lands through illegal paperwork and would oppose practices such as audits tooth and

nail.

Another approach could be to ensure a gradual shift from land based taxes to

agriculture income based taxation. The obstacle facing this recommendation is the fact

that many feudal land lords who are also the policy makers of our country oppose such

suggestions whenever they are discussed in the national and provincial assemblies.

Informal Sector:

The informal sector causes great damage to the country not just by evading taxes but

also by demoralizing the honest businesses that do pay their taxes. Seemingly, the only

way for the government to curb this damage is to find a way to include the informal

sector in the formal sector. This can be done by providing incentives to the businesses

and the entrepreneurs who control them. The government should also remind these tax

evaders of the punishments of such a crime. Much like the KESC is doing nowadays.

Another reason why many people choose not to pay their taxes is because they believe

the tax authorities only tax the poor and the government uses this money for the benefit

of the people who are already rich. This can be put right through the use of marketing

and awareness campaigns.

Handling of taxes:


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Another major problem is the fact that local tax authorities very often collude with the

feudal lords. This problem can be rectified by giving more authority to the federal tax

authorites.

Tax burden should also be reduced by including the service sector in the tax base. GST

exemptions should also be reduced and special treatment regimes should be put to an

end.

Administrative Changes:

Also, to make the tax system more effective the government needs to re-orient the tax

machinery towards developing capacity, capability and credibility. The tax base needs

to be broadened and the tax rates should be reduced. The whole burden of the tax

should not fall upon the middle class as is the case right now. The first step in this

direction would be to solve the land trade issue in interior Sindh right now. This will

allow for proper documentation to take place and rich feudal lords who are gaining

unfair advantage because of this will no longer be able to do so. The government also

needs up to date records of the land because many farm owner get away with tax

evasion because their lands are difficult to access. An up to date land record would

allow the government to tax all lands regardless of wherever they may be.

The government also needs to revise the country tariff structure because it has become

extremely important. Lowering tariff structures, it should be kept in mind, is a double

edged sword.


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It is important to bring about administrative changes because it is essential to bring a

sense of transparency and efficiency to the system. Without transparency and efficiency

any government in the world would not be able to win the trust of the tax payers and as

we know if people dont trust the tax machinery they will always look to avoid taxes. The

government also needs to pay attention to taxpayer education as localized solutions

that will emerge as a result of educated tax payers will go a long way in helping the

country raise tax effectively and efficiently.

Bibliography

Chaudary, M. G. (2001). Theory of Optimal Taxation and Current Tax.

Ghaus, S. (2008, November 2nd). Informal sector comes to the rescue. DAWN.

Haq, I. (2008, July 28th). Documentation of Informal Business. DAWN.

Huzaima, H. I. (N.D). Income Inequality. Economy Of Pakistan .

Huzaima, H. I. (2008, October 14). Whither Tax Reforms. Business Recorder.

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(2008). PAKISTAN: Tax Policy Report. December.

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