role of taxes in the develpment of pakistan

8/6/2019 Role of Taxes in the Develpment of Pakistan

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Fluctuations in the economic activity arethe characteristics of all the economies of theworld. Therefore every developed and underdeveloped economies aspires to certaingoals. These goals include economic development. some polices are devised toachieve these goals and similar other goals. Inthis article we will analyze views & effectivenessof taxation in development of our beloved country Pakistan.

Tax has an extremely long established history. The ancient Egyptians appointed Tax Masters who increased the burden on the childrenof Israel - slaves under Egyptian domination. InIslam the concept of tax was introduced by Hazrat Umer (R.A) Who imposed tax on the extra incomeof fisher man from Umber. Hazrat MUHAMMAD(S.A.W.) said that my companions are like stars if you will follow them you will be successful. AsHazrat Umer (R.A.) was one of the dearly loved

accompanying person, so from Hades we canunderstand that Islam has allowed for tax.

As a general rule, tax is the source that isbest exploited by government. It is imposed onindividuals and companies to finance services that the state is obligated to provide and to meet itsgoals on extremely rare occasions, government has used sources other than tax for instanceincome from natural resources, public debt, deficit financing etc. measured as percentage of GDP it

was 10.1% in 2007-08. On the other hand indeveloping countries like USA and UK it was 25%to 30%. Out of which indirect and direct tax revenue were 98.3% and 31% respectively.However as a common rule most government usethe collection of taxes as the main tool for financing their expenses. Tax is divided in to

two main categories progressive and regressivetaxes. Progressive tax is graduated and its ratevaries according to the taxpayer income, whereasregressive tax is a tax at a fixed rate irrespectiveof the taxpayers income.

One of the most commonly discussed

issues in economics is how tax rates relate to

economic growth. Advocates of tax cuts claim that

a reduction in the tax rate will lead to increased

economic growth and prosperity. Others claim that

if we reduce taxes, almost all of the benefits will

go to the rich, as those are the ones who pay the

most taxes. What does economic theory suggest

about the relationship between economic growth

and taxation? In studying economic policies, it is

always useful to study extreme cases. Extreme

cases are situations such as "What if we had a

100% income tax rate?", or "What if we raised the

minimum wage to 8000 Rs. per month?". While

wholly unrealistic, they do give very stark

examples of what direction key economic

variables will move when we change a

government policy.

First suppose that we lived in a society

without taxation. We'll worry about how the

government finances its programs later on, but for

now we'll assume that they have enough money

to finance all the programs we have today. If there



are no taxes, then the government does not earn

any income from taxation and citizens do not

spend any time worrying about how to evade

taxes. If someone has a wage of 8000 Rs. per

month then they get to keep those 8000 Rs. If

such a society were possible, we can see that

people would be quite productive as any income

they earn, they keep.

Now consider the opposing case. Taxes are now

set to be 100% of income. Any rupee you earn

goes to the government. It may seem that the

government would earn a lot of money this way,

but that's not likely to happen. If I don't get to keep

anything out of what I earn, why would I go to

work? I'd rather spend my time reading my

favorite book or playing cricket. In fact, going to

work would risk my ability to survive. I'd be much

better off spending my time trying to come up with

ways to get the things I need without giving them

to the government. I'd spend a lot of my time

trying to grow food in a hidden garden and

bartering with others for the things I need to

survive. I wouldn't spend any time working for a

company if I didn't get anything from it. Society as

a whole would not be very productive if everybody

spent a large portion of their time trying to evade

taxes. The government would earn very littleincome from taxation, as very few people would

go to work if they did not earn an income from it.

Obviously, government programs are not

self-financing even an ardent supporter of

unrestricted capitalism realizes that there are

necessary functions for the government to

perform these three things a government must

provide

y An Army: To protect against foreign

invaders.y A Police Force: To protect against

domestic criminals.y A Court System: To settle honest

disputes that arise and to punish criminalsaccording to objectively predefined laws.

Without the last two functions of government, it is

easy to see that there would be little economic

activity. Without a police force it would be difficult

to protect anything that you've earned. If peoplecould just come by and take anything you owned,

we'd see three things happen:

1. People would spend a lot more time trying tosteal what they need and a lot less time tryingto produce what they need, as stealingsomething is often easier than producing it yourself. This leads to a reduction ineconomic growth.

2. People who have produced valuable goodswould spend more time and money trying to protect what they've earned. This is not a productive activity; society would be muchbetter off if citizens would spend more time producing productive goods.

3. There would likely be a lot more murders, sothe society would lose a lot of productive people prematurely. This cost, and the costs people incur in trying to prevent their ownmurder greatly diminishes economic activity.

A police force which protects the basic human

rights of citizens is absolutely necessary to insure

economic growth.



Quaid I Azam School of Management SciencesQuaid I Azam University Islamabad

Touqeer Ahmed Shahzad

[email protected]

The role of taxation in the development

strategy of our beloved country Pakistan has to be

viewed in the background of the functions which a

taxation system performs. The primary function of a tax system is to raise revenue for the

government for its public expenditure. So the first

goal in the development strategy as regards

taxation policy is to ensure that this function isdischarged adequately. Second is to reduce

inequalities through a policy of redistribution of

income and wealth. Higher rates of income taxes,

capital transfer taxes and wealth taxes are some

means adopted for achieving these ends. Other

function which taxation system performs is to

ensure economic goals through the ability of the

taxation system to influence the allocation of

resources, and to increase the level of savings

and capital formation in the private sector partly for borrowing by the government and partly for

enhancing investment resources within the private

sector for economic development. Protection of

local industries from foreign competition through

the use of import duties, turnover taxes/VAT and

excises is also one of the main functions of

taxation system. This has the effect of transferring

a certain amount of demand from imported goods

to domestically produced goods.

The phenomenon of tax does not exist in

vacuum or otherwise it isn¶t something that is

abstract. Tax and death are two true of universe.

Since an adequate volume of government

revenue is essential for publie expenditure and

economic growth the ratio of tax revenue to GDP

has been used regularity to measure and judge

the success of a country¶s fiscal management.

Unfortunately, in our dearly loved country

Pakistan unplanned & ad hoc tax holidays &

incentives, narrow tax base & inadequate

coverage, lack of elasticity & buoyancy in tax

system, periodic tax amnesties, administration

weakness, unawareness of tax payer, are the

main reasons for the decline of tax revenue. That

leads to dawdling of development and economic

growth.

Pakistan like all other developing countries

need sustainable growth & development with their

cheapest and most reliable sources of revenue.

Being tax revenue several problems have been

identified with mobilizing tax revenue for

development they must be addressed. Though

there is nothing basically wrong with the tax

system, there are problems with enforcement and

compliance with the tax laws, according to our

point of view if our government takes steps to

overcome these problems we will also be one of

the developed nations of this world.

role of taxes in the develpment of pakistan

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