Political Economy of Tax and Digital Transformations in Pakistan (Special Invited Lecture)

Abstract

1. THE NEED FOR A COORDINATED TAX AND SUSTAINABLE GROWTH STRATEGY I The 1985 National Tax Reform Commission (NTC) recommended a coordinated set of policies on tax policy, administration, and digital transformation to take the tax/GDP ratio from around 14 percent as it was then, to 20 percent by 1990, to underpin a sustainable growth path. The interim report of the NTC called the CBR “the most corrupt of Pakistani institutions.” The final report paid a great deal of attention to the interrelationships between tax evasion, smuggling and corruption. 1 The report emphasised a coordinated approach to reforming all taxes and administration, and that a tax-by-tax approach with tax administration determined separately would not do. Unfortunately, the report was shelved as Pakistan extracted geographic rents from the war against the Soviets in Afghanistan. While the NTC could not have imagined that the tax/GDP ratio would decline after three decades of interactions and support from the IFIs, that the country would find itself on the brink of default consequently, or the depths to which rent-seeking and corruption might plumb. A coordinated approach to multilevel tax policy and administration should also address key political economy challenges if Pakistan is to overcome the current economic crisis and move towards resilient and sustainable growth in the medium term. This is especially critical given the unprecedented “perfect storm” of the pandemic, climate shocks and once in a century floods, and ongoing disruptions in global value chains. The contrast with India is striking. With a general government tax/GDP ratio well above “the tipping point” of around 15 percent, India has been able to run a greater general deficit and much higher overall debt level than Pakistan (see Table 1 and Chart 1), without running into a potential debt crisis. It is important to stress that India by a Constitutional Amendment to harmonise the VAT across subnational jurisdictions has begun to address faults inherited from the pernicious 1935 Government of India Act, that still influences revenue assignments in Pakistan. The increasing geo-political importance of India, and the country’s greater resilience and attractiveness for FDI provide important contrasts and lessons for policy makers in Pakistan.