The root cause of Pakistan's economic instability

1. CURRENT ISSUE PRESENTATION
By: FARHAN
PAKISTAN’S TAX REFORMS
A CRITICAL ANALYSIS
Image sources: www UBIQUITOUSORPERVASIVE@GMAIL.COM

2. 2
OUTLINE
• Glossary
• Introduction
– Need for Tax Reforms
– Tax Reforms in Pakistan
• Outcomes
• Critique
• Discussion
• Recommendations
• References

3. 3
THE CONTEXT
• Pakistan faces severe budget deficits even by
imposing high taxes on Masses

4. 4
GLOSSARY
• Federal Board of Revenue (FBR)
• Standby Arrangement (SBA)
• Extended Fund Facility (EFF)

5. 5

6. Charles E. McLure, Jr. "Taxation". Britannica.; https://fbr.gov.pk/Categ/Income-Tax-Ordinance/326; https://www.fbr.gov.pk/Categ/Sales-Tax-Act-1990/301
6
INTRODUCTION
1/4
Tax (from the Latin word ‘taxo’) which means “access.”
A compulsory financial charge imposed upon a legal entity by the government
to fund public expenditures: pay salaries, build dams, roads, bridges (…)
Failure to pay tax or tax evasion is punishable by law
(Sales Tax Act 1990)
Types:
• direct (Income Tax Ordinance 2001)
• indirect (Sales Tax Act 1990)
To create: income effect by reducing purchasing power to taxpayers
substitution effect by changing price of goods vs demand
https://newint.org/features/2008/10/01/tax-history
1/8

7. Rao, S. (2014). Tax reform: Topic guide. Birmingham, UK: GSDRC, University of the Birmingham 7
NEED FOR TAX REFORMS
1/4
• Usually undertaken to:
₋ improve tax administration by making the tax system more:
o Cohesive
o Accountable
₋ provide socio-economic development
When the Government Spending outweighs its Production
2/8

8. Published in Dawn, The Business and Finance Weekly, August 27th, 2018 8
DAUNTING SITUATION UP TO 2018
1/4
3/8

9. 9
COLLECT MAXIMUM REVENUE
₋ Reduce Budget Deficit
₋ Reduce Foreign Debt
₋ Increase Tax Payer Net
₋ Accountability
₋ Documentation
TAX REFORMS 2019-20
Key Considerations
4/8

10. https://mettisglobal.news/prime-minister-announces-amnesty-scheme-to-bring-in-foreign-funds; https://www.dawn.com/news/1487726 10
TAX REFORMS 2019-20
Government Rehabilitated Taxation System
₋ Cuts development spending (Rs1.813 trillion to Rs1.586-trillion)
₋ Increases taxes
Failure to pay tax or tax evasion has penalties …
(Finance Bill 2019, under section 182 of the Income Tax Ordinance 2001)
 concealment of income (Rs 100,000 - minimum)
 non-filing of return (Rs 40,000 - minimum)
 erroneous calculation in return (Rs 30,000 - minimum)
September 28, 2019
5/8

11. 11
TAX REFORMS 2019-20
• Sweeping withdrawal - discriminatory concessions and
exemptions worth Rs: 300 billion discontinued
• Salaried or non-salaried, contributes the largest share of
revenues, equal to Rs: 53 billion in total
• Gift scheme wiped out except for close relatives
• Withholding taxes on property
• Hikes in FBR valuations of real estate
6/8

12. 12
TAX REFORMS 2019-20 7/8
• Higher taxes and lower spending helps
government to:
₋ reduce budget deficit
₋ save enough money to reduce Foreign
debts

13. 13
TAX REFORMS 2019-20
• Higher inflation slows down economic
growth, which
₋ brings down the demand for imports
₋ stops the dollar drain
₋ reduce the trade gap
8/8

14. 14

15. https://tradingeconomics.com/pakistan/balance-of-trade 15
OUTCOME
The amount by
which the cost of
imports exceeds
the value of
country’s exports
1/3
Pakistan recorded a trade deficit of
284361 PKR Million in August of 2019

16. October 12, 2019 https://tradingeconomics.com/pakistan/current-account 16
OUTCOME
Indicates that a
country is
importing more
than it is
exporting
2/3
Pakistan recorded a Current Account
deficit of 3242 USD Million in the
second quarter of 2019

17. 17
NET EFFECT
Economic Situation 2019
The economy has slowed down:
• Rupee has been devalued
• Interest rates have gone up
• Increase in the rate of inflation
DEFICITS ARE PILING UP
https://tradingeconomics.com/pakistan/interest-rate
https://tradingeconomics.com/pakistan/inflation-cpi
3/3

18. 18
CRITIQUE
REFORMS

19. October 12, 2019 https://www.dawn.com/news/1487341 19
Gross domestic product (GDP)
CRITIQUE

20. https://www.dawn.com/news/1487341 20
Sources: Ministry of Finance (Table 1.3, Appendix: Pakistan Economic Survey 17-18), PBS, Planning Commission, PES 2018-19
Sector-wise growth 2013-19
CRITIQUE

21. https://www.dawn.com/news/1487432 21
CRITIQUE
Economic Growth 2018-19

22. 22
Federal Government VACANT POSTS
CRITIQUE
100,000 families economic well being by creating 100,000 jobs per year
Description Total Strength
Employees in BS 17-22
Sanctioned Posts 39,330
Filled in Posts 28,937
Vacant Posts 10,393
Employees in BS 1-16
Sanctioned Posts 621,327
Filled in Posts 552,303
Vacant Posts 69,024
79,417
Tax Evasion
Source: Annual Statistical Bulletin – 2017-18 Establishment Division, Islamabad

23. 23
CRITIQUE
Source: Annual Statistical Bulletin – 2017-18 Establishment Division, Islamabad
Year of Retirement No. of Retirements
2018 7,713
2019 8,782
2020 10,352
2021 10,504
2022 9,339
2023 11,083
Vacant
Posts
Equate to
Tax Evasion
Federal Government VACANT POSTS

24. 24
Financial Year
Non-Developmental (Regular)
budget (million)
Development budget
(million)
2014-15 33.77 57.00
2015-16 36.19 57.00
2016-17 46.99 57.00
2017-18 49.90 56.90
2018-19 108.91 37.00
2019-20 124.822 40.00
KP - Environmental Protection Agency (EPA)
CRITIQUE

25. http://www.pbs.gov.pk/content/population-5-
year-age-group-pakistan
25
0 - 4 5 - 9 10 - 14 15 - 19 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70 - 74 75 -
Total 14.8 15.65 12.95 10.37 8.97 7.37 6.22 4.77 4.44 3.53 3.21 2.15 2.04 1.2 1.09 1.21
Rular 15.7 16.48 12.88 9.92 8.58 7.06 5.89 4.46 4.24 3.47 3.22 2.16 2.13 1.25 1.21 1.35
Urban 13 13.98 13.11 11.28 9.75 7.98 6.88 5.4 4.86 3.65 3.2 2.12 1.86 1.11 0.9 0.93
0
2
4
6
8
10
12
14
16
18
20
MILLIONS
AGE GROUP
POPULATION DISTRIBUTION
Total Rular Urban Expon. (Total)
CRITIQUE
19.34%

26. 26
a. total population of 217,558,825
b. life expectancy of 67.79 years
c. fertility rate of 3.73
d. infant mortality rate of 55.8 per
1,000 live births
e. median age of 22
f. 4 million young people between
the ages of 15-24 years
• constituting 19.34% of the entire
population are unwaged
g. by the year 2020 the number is
anticipated to increase to 8.6
million
CRITIQUE
Unemployment Among Youth
This “youth bulge” or the “demographic dividend,” is likely
to drain down without exploitation to its full
Pakistan’s Demography

27. 27
CRITIQUE - SDPI Survey, 2013
https://www.slideshare.net/SalimUllah2/history-of-tax-reforms-in-pakistan

28. https://timesofislamabad.com/03-Aug-2019/number-of-tax-payers-in-pakistan-hit-highest-level-of-history-in-fy-2018-19: August 3, 2019
https://www.ceicdata.com/en/indicator/pakistan/tax-revenue
28
• Number of tax returns rose by 700,000 to a total of 2.154 million
• Tax Revenue was reported at 30.355 USD bn in Jun 2019
(FBR)
Tax Revenue was 38.315 USD bn in Jun 2018
CRITIQUE – FBR TAX COLLECTION

29. https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2019/overall-ranking-and-data-tables.html
29
CRITIQUE - EASE OF PAYING TAXES
Pakistan ranked 172 in ease of paying taxes: study (2014)
https://www.dawn.com/news/1146332

30. https://tradingeconomics.com/pakistan/ease-of-doing-business 30
Ranked 136 / 190 economies
EASE OF DOING
BUSINESS
Previous being 147
World Bank annual ratings
CRITIQUE - EASE OF DOING BUSINESS

31. http://documents.worldbank.org/curated/en/637701556009042302/Project-Information-Document-Pakistan-Revenue-Mobilization-
Project-P165982.docx 31
CRITIQUE
The World Bank's Pakistan Revenue Mobilization Project
(P165982)
Problem is:
No NEW or INCREASED tax
• In Tax Administration

32. 32
BASED ON THE CRITIQUE
Slide#24Slide#257
Slide#26Slide#27
“If our tax collection authority does
not function properly, it could lead to
a security risk. No nation that relies
on loans can maintain its pride and
independence,”
IMRAN KHAN
Prime Minister
ISLAMIC REPUBLIC OF PKISTAN
March 07, 2019

33. CONCLUSION
33
not a new tax
a new tax system
Tax Reform

34. 34

35. https://tradingeconomics.com/pakistan/gdp-growth 35
FORECAST - GDP
WHERE THE ECONOMY IS HEADING? 1/5
GDP Growth Rate in
Pakistan is expected
to be 5.40 percent
by the end of this
quarter

36. https://tradingeconomics.com/pakistan/government-spending 36
FORECAST – GOVERNMENT EXPENDITURES
WHERE THE ECONOMY IS HEADING? 2/5
Spending is expected
to be 1673412.00
PKR Million by the
end of this quarter

37. https://tradingeconomics.com/pakistan/inflation-cpi 37
FORECAST - INFLATION
WHERE THE ECONOMY IS HEADING? 3/5

38. https://tradingeconomics.com/pakistan/inflation-cpi 38
FORECAST - UNEMPLOYMENT
WHERE THE ECONOMY IS HEADING? 4/5
Pakistan’s
Unemployment
Rate is
forecasted to
be 6.140 % in
Dec 2019 as
reported by
International
Monetary Fund
- World Economic Outlook

39. https://tradingeconomics.com/pakistan/government-budget 39
FORECAST-BudgetDeficit
Budget is projected to trend around -6.80 percent of GDP in 2020
WHERE THE ECONOMY IS HEADING?
Government, till PRESENT, has NOT
been able to CURTAIL its spending
5/5

40. 40
THE ROAD AHEAD
DISCUSSION

41. 41
Stagflation – A Case Study (England)
UK - April 1979 inflation was 10.1%
GDP 3.7%
Pak - Sep 2019 inflation was 12.55%
June 2019 GDP 3.3
https://tradingeconomics.com/pakistan/inflation-cpi
https://www.economicshelp.org/macroeconomics/economic-growth/uk-recession-1981/
1/2
https://countryeconomy.com/unemployment/uk?dr=1979-12

42. 42
Stagflation – A Case Study (England)
What UK did (…) Pak - What we did (…)
https://tradingeconomics.com/pakistan/money-supply-m0
https://www.economicshelp.org/macroeconomics/economic-growth/uk-recession-1981/
Money Supply in Pakistan increased to
6469687.31 PKR Million in August from
6446994.08 PKR Million in July of 2019
2/2

43. 43

44. 44
RECOMMENDATIONS 1/6
 Tax paying is an individual’s responsibility towards the government
o payback to Motherland
o help create a tax-aware culture
‫والو‬ ‫ایمان‬ ‫اے‬!‫رہو‬ ‫قائم‬ ‫پر‬ ‫انصاف‬‫خواہ‬ ‫دو‬ ‫گواہی‬ ‫سچی‬ ‫لئے‬ ‫کے‬ ‫خدا‬ ‫اور‬(‫میں‬ ‫اس‬)
‫ہو‬ ‫ہی‬ ‫نقصان‬ ‫کا‬ ‫داروں‬ ‫رشتہ‬ ‫اور‬ ‫باپ‬ ‫تمہارےماں‬ ‫یا‬ ‫تمہارا‬
َ‫د‬َ‫ه‬ُ‫ش‬ ِ‫ط‬ۡ‫س‬ِ‫ق‬ۡ‫ال‬ِ‫ب‬ َ‫ن‬ۡ‫ی‬ِ‫ام‬ َّ‫و‬َ‫ق‬ ‫ا‬ ۡ‫و‬ُ‫ن‬ ۡ‫و‬ُ‫ك‬ ‫ا‬ ۡ‫و‬ُ‫ن‬َ‫م‬ٰ‫ا‬ َ‫ن‬ۡ‫ی‬ِ‫ذ‬َّ‫ال‬ ‫ا‬َ‫ه‬ُّ‫ی‬َ‫ا‬ٰٰۤ‫ی‬َ‫د‬ِ‫ل‬‫ا‬ َ‫و‬ۡ‫ال‬ ِ‫و‬َ‫ا‬ ُۡۡ‫ك‬ِ‫س‬ُُۡ‫ن‬َ‫ا‬ ‫ء‬ََٰٰٓ ۡ‫و‬َ‫ل‬ َ‫و‬ ِ ‫ه‬ ِِ ََ‫ء‬‫ا‬َ‫ن‬ۡ‫ی‬ِ‫ب‬ َ‫ر‬ۡ‫ق‬َ ۡۡ‫ا‬ َ‫و‬ ِ‫ن‬ۡ‫ی‬

45. https://www.dawn.com/news/1502012
45
RECOMMENDATIONS 2/6
 The Government to:
o Curtail its Expenditures
o Stop money supply/printing
o Restructure/Right-size Government Institutions to avoid:
 Duplication of Effort
 Resource wastage
 Create employment opportunities
o Expand Tax Ambit by enforcing tax on Business Community

46. 46
RECOMMENDATIONS 3/6
 The Government to:
o Develop tourism
o Stop consumption-lead growth
o Start industrial-lead growth (investment and productivity-
lead)
 more and better paid jobs
 utilize 19.34% - “demographic dividend” - “youth bulge”
 path to future economic growth and stability

47. 47
RECOMMENDATIONS 4/6
 Administrative restructuring of FBR with particular emphasis on the
following:
o BAN on deputation/transfer to FBR
o Performance-Based Postings within FBR
o Alliance with the Center for Economic Research (CER) in
Pakistan and researchers from Harvard, London School of
Economics, and the MIT to:
 identify the root cause of the FBR problems
 computerization of FBR Data (Province inclusive)

48. 48
RECOMMENDATIONS 5/6
o Information sharing between FBR, AGPR, other government
departments, Banks, and such other organizations via a
centralized database
o Auto-update of tax files
o Special tax evasion law courts should be established at the
district level to settle legal disputes between FBR and
taxpayers
o CINC be also made the NTN for all financial and other
transactions

49. 49
RECOMMENDATIONS 6/6
 Service sector's contribution in income-tax is disproportional and
should be frozen (that is, fixing tax slab limits for a certain period) at
the current stage

50.  Miranda, S. M. (2019). "Risk and Failure in Tax Farming: De Bruijn & Cloots of Lisbon and the
Portuguese Tobacco Monopoly, 1722–1727." Itinerario 43(1): 122-145.
REFERENCES
50

51. I am ready to slash down taxes
to widen the tax net but paying
taxes should be considered a
National Duty
October 12, 2019 https://fp.brecorder.com/2019/03/20190313454906/
Prime Minister, PAKISTAN
IMRAN KHAN
Thank You!