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The Problem: According to conservative estimates, 63% of the poor in Pakistan are in the transitory poor.

The rest of 32% and 5% of the population subsisting below the poverty line are chronic and extremely poor. Chronic and extremely poor are those households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13% and 21% of total non-poor (above the poverty line) have been classified as transitory vulnerable and transitory non-poor, respectively. This portrays an alarming situation as more and more people are moving from transitory category to chronic category, courtesy regressive taxation leading to inequitable distribution of income and wealth, monopoly over assets by a few and wasteful expending by the Government. The tax system has a pervasive impact on poverty, both directly through its role in the distribution of societys resources and indirectly through its effects on the incentives for economic decisions like working and saving. Attention to the impact of tax reform on lowincome families is especially important in light of the persistence of poverty, wage stagnation at the bottom, and the growth of income inequality. Poverty varies across Pakistan. The most deprived parts include rural areas, followed by Balochistan and the Pakhtunkhwa, which border Afghanistan. Rural Pakhtunkhwa is the worst hit by privation. The Federally Administered Tribal Areas (FATAs), 97% of which are rural, are little better off. According to the World Food Program, the entirety of the FATAs are foodinsecure. Poverty among 3.3 million residents of the tribal areas is as high as 90%. The condition of labour in Pakistan is arguably worse than the rest of the world. It struggles to gain basic rights from employers. Although Pakistan is a signatory to 35 conventions of the International Labour Organisation (ILO), progress made on their implementation in years past has since unraveled. Reasonable wages and better working conditions remain a distant dream. Loss of jobs due to the energy crisis and global economic recession have compounded the problems of the working class, as fewer jobs have opened the doors of more intensive exploitation of labour by industry owners. Recent studies show that income inequality in Pakistan in 2000-2007 has been the maximum as compared to the any time period in the history of Pakistan. The poorest 30% lost their share, while the richest 20% gained in both the urban and rural areas during Musharraf-Shaukat era. According to UN official report, from 1987-99, the Gini coefficient for Pakistan was in the range of 0.33-0.43, which deteriorated to 0.68 in 2006, yet Musharraf and his technocrat team kept on claiming wonderful economic turnaround during the same years the PML-Q regime. The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Incidence of tax on the poor since 1991 when regressive taxes replaced

progressive levies has increased substantially (35%), while the rich are paying no tax on their colossal income and wealth in their case the tax burden has decreased by 18% for the same period. The Reasons: We find that the state and the balance of class power are central determinants of redistribution. When states spend more of their financial resources on citizen welfare, poverty is reduced. Poverty is reduced further when these resources are devoted to child, family and maternity allowances, as opposed to means-tested benefits. If governments want to attack poverty directly, they must invest in these more effective programs. Corruption in fiscal management and collection also militates against the poorest, because they have less power and influence to evade both direct and indirect tax burdens. It may be argued that the really poor may not be taxpayers per se, but they bear a disproportionate share of the burden of indirect taxes and of the inflationary impacts of fiscal profligacy. In many ways, the poor actually subsidize the rich. Pakistan needs $50 billion nationwide - $5 billion a year for 10 years - to make a meaningful dent in the existing level of poverty. To raise this kind of money, the country has to mobilize its own resources by having taxable income-earners (individuals and companies) pay their fair share. Yet Pakistan has been grossly under taxed, largely thanks to military regimes - of Ayub Khan, Zia ul-Haq and Musharraf. These regimes did not rely on tax revenue to stay afloat. Instead, they traded in their geopolitical utility to keep them in cash. They each, therefore, went easy on the urban-industrial elite and large landholders in exchange for their support in grabbing power. As a result, the tax-GDP ratio under these governments hovered around 10%. Pakistan has been financing the fiscal deficit with external and internal borrowings. In 2008, the fiscal deficit climbed to almost $9 billion (722.5 billion rupees), which came to 5% of Pakistan's gross domestic product (GDP) of $160 billion. The financing of this gap drains the government of every ounce of its fiscal energy. The result is extensive cuts in its public expenditure, at a time when governments around the world are stoking public spending to keep afloat. One source of foreign exchange is remittances by Pakistani expatriates, which stood at close to $1 billion in 2001, and have now risen to $12 billion a year. Yet these benefits are vertical in growth, which hardly trickle down to the average Pakistani. What makes this vertical accumulation even worse is its immunity to taxation. As a result, it does little to help the government escape from the trap of an enduring fiscal deficit - a gap between the government's

annual revenue and its expenditure - and increase what little it has to invest in what Clinton calls "public services". The untaxed vertical growth, a severe fiscal deficit, and reduced public expenditures are what fuels poverty in Pakistan. As of 2009, 40% of the national population lives below the poverty line, which in Pakistan is liberally defined as a food intake that is equivalent of the daily need of an adult's caloric consumption. In other words, if a person secures the daily diet of required calories, she/he is "unpoor;" if they fall short, they are "poor". Even by this liberal definition, 72 million Pakistanis, according to the Pakistan Planning Commission, still live below the poverty line. Some independent observers, such as banker and economist Shahid Hasan Siddiqi, believe that 50% of the national population (that is, 87 million Pakistanis) is at risk of slipping below the poverty threshold. The Mahbubul Haq Development Center counts 73% of the population living below the poverty line. Many blame the regime of former president Pervez Musharraf for reducing the definition of poverty to make it appear there were fewer people than there actually were. Prior to October 2006, the Musharraf government reported 33.6% of the population as poor; as of that month, it claimed the rate was down to 23%. The ratio increased to 14% in the 1990s, when democratically elected governments of the Pakistan People's Party (PPP) and Pakistan Muslim League (PML) were at the helm. The late prime minister, Benazir Bhutto, during her second term in office (1993-1996), took the national housekeeping far more seriously. She went after the "untouchables", such as the All Pakistan Textile Mills Association (APTMA), to persuade them to open their checkbooks to the treasury. She would use chalk and board, according to Mirza Ikhtiar Baig, an aide to Bhutto, to convince naysayers among textile barons to contribute to the national till. Yet the textile sector, which had a projected income of $11 billion in 2007-08, has almost been tax-exempt. Many believe that textile tycoons constituted some of the power behind Bhutto's ouster in 1996. In general, those who form the top of the economic pyramid in Pakistan are resistant to paying their fair share in taxes. Large landholders are especially notorious in evading the taxman. In the 1990s, the government took on the landowning classes and had legislation passed to tax their income, the first time the taboo on taxing farm income was broken. Although the legislation was toothless, it was symbolically potent. The landowning classes, who ride on their landownership into the legislative chambers, were thus cut down by their own power after for so long taking tax-exemption as their entitlement. A case in point is Sardar Farooq Legari, whose estates extend from the Punjab to the Pakhtunkhwa. In 1994-95, he reported "zero income" while he was still the sitting president of

Pakistan. Imran Khan, leader of the Pakistan Tehrik-e-Insaf (Pakistan's Justice Movement) shamed the entire landed class by revealing that a practicing lawyer, Khalid Ishaq, paid more in taxes in 1992-93 than all 273 members of the National Assembly combined - 85% of whom were large landholders. This shaming, however, did not work on lawmakers who kept evading taxes. In 1994-95, celebrated journalist-writer M Ziauddin conducted a thorough investigation into the taxable farm income and tax-paying behavior of wealthy farmers. He found that all landlords in the country pitched in just chump change of 2 million rupees in taxes in 1996 against their annual income of 600 billion rupees. On this scale, Ziauddin concluded that the landowning classes had been evading taxes of 100 billion rupees a year. This is a blatant case of tax theft, which has spawned its own vicious knock-offs, one of which is "black money" (that is, totally untaxed wealth). In 1996, an economist estimated that black money in Pakistan grew as large as to form 40% of GDP. If left alone, tax evasion in the aboveground economy or underground economy increases the budget deficit and forces governments to shift the tax burden to consumers or to increase money supply.

The Impact of VAT The general success of the VAT in Europe established it as an effective means of increasing revenue and improving efficiency. However, its success in developing countries has been mixed at best. VAT can be a regressive tax, especially when implemented at a single rate, as the IMF usually advises. This can worsen already-high inequality in developing countries, cut the tax base and cause a decrease in overall tax revenues. In addition, the 'complex' record keeping of VAT has been the source of problems: small businesses can be pushed into the informal sector, while governments may not have the administrative capacity to implement the VAT and its refund system. A quantitative study of IMF surveillance highlights some interesting trends in the IMF's domestic tax advice. This research looked at a random sample of 54 of the IMF's most recent (after 2005) Article IV reports, ending with a final sample of 10 low-income and 10 lowermiddle-income countries. Supporting the 'standardized advice' theory, the IMF recommended or endorsed VAT in 90 per cent of the sample, and told countries to broaden their tax base 80 per cent of the time. Eighty percent of the Article IVs recommended a decrease in tax exemptions, but in only 25 per cent of the total sample were the distributional consequences of abolishing tax exemptions addressed. The improved administration of VAT refunds was addressed only 15 per cent of the time, despite the fact that the 'Achilles heel' of VAT for governments is the refund system.

Simplifying tax compliance was never recommended in low-income countries, but was recommended in 40 per cent of the lower-middle income sample. However, simplifying tax administration was advised in 50 per cent and 20 per cent of low- and lower-middle-income countries, respectively. This implies that although the IMF does not address problems the government has in implementing their tax advice often, they rarely advise governments to help people pay their taxes. This is especially important in the context of VAT, because many small firms are either in or on the border of the informal sector, causing revenue loses for the government, yet it seems that the IMF is not considering this. Evidence suggests that the IMF was directly involved in Bolivia's major tax reform of 1986. In the subsequent decades Bolivia's tax system gradually adopted typical features of the Fund's standard tax policy advice, starting with the implementation of a single rated VAT of 10 per cent. At first the reform had a positive impact on the chaotic national tax system, since it reduced the number of different taxes from 150 to a more manageable number, and the VAT generated increased revenues. However, the single rated VAT, which applies to all economic groups of the population equally, lead to compounded inequities over the years, resulting in a highly regressive tax system. By 2006, the wealthiest quintile of the population provided 14 per cent of tax revenues, whereas the poorest quintile shouldered 25 per cent of the tax burden. Additionally, VAT was hampered by extensive fraud and evasion through Bolivia's extensive informal sector. Despite the evident social inequity created by the structure of this tax system, neither the IMF nor the Bank has evaluated the distributional impact of the Fund's advice in the country. The Fund's inability to adapt its advice to the country's changing needs over time has led to regressive policy outcomes. In 1998, Mozambique entered into the Heavily Indebted Poor Country debt relief initiative with the IMF. To qualify for this programme, which entailed $1.4 billion in debt forgiveness and eligibility for badly-needed aid, Mozambique was forced to implement a VAT by June 1999. Many believe the implementation of VAT in Mozambique has led to both increased corruption and pushed more people into the informal sector. A study by USAID found that the manner of VAT refund assessment and severe problems with refund delays have created incentives for corruption among tax officials. The report shows that it has actually increased the prices of "zero-rated items, such as medicines, wheat flour, and mosquito nets." This has obvious implications for the poor. Press briefings and IMF documents indicate that the Fund did not consider the distributional consequences of their advice during the VAT implementation in Mozambique. Despite the government's recommendation of simplified taxation for small firms, which would have helped to formalise the market and address concerns about the VAT's complexity, the IMF consistently pushed for fewer exemptions, as well as wage bill ceilings for government employees, which increased corruption. Mozambique's experience has shown that the VAT and its refund system

can have negative consequences for poor countries without sufficiently evolved administrative systems to implement such a complex tax. The Fund should be advising developing countries on how to tackle the issues of inequity related to fiscal policy recommendations. However, it appears that the IMF had and continues to have little thought about the distributional consequences of rushed VAT implementation, and that consulting with actors outside the government has been neglected. At the very least the Fund needs to be more transparent about their taxation advice, particularly that given through technical assistance. We can expect the same to happen in Pakistan where tax evasion is said to be above 700 billoin rupees per year. Most businesses are small and many are on the border of the informal sector. We fear increased corruption, loss of tax revenue, a decrease in the tax base and increased tax evasion if VAT is introduced in Pakistan at this time, when the IMF is providing minimal guidance in the implementation of the system and the largely uneducated and undocumented state of the economy of Pakistan. Suggestions and Recommendations: The link of taxation with income disparity in Pakistan is two fold: 1) there is simply not enough tax revenue to cater to the marginalized sector. 2) the rich in the country are enjoying tax exemptions and the poor are subsidizing the rich through indirect taxation. The government can close this gap by eliminating tax exemptions. It is unfair for a country like Pakistan to give a two-year tax holiday on capital gains, which, according to Siddiqi, costs the government 112 billion rupees a year. Yet the stock market capitalization has more than doubled from 2,100 billion rupees to 4,600 billion rupees within the past three years. This means that the government's tax holiday is encouraging surplus wealth away from productive enterprises to unproductive ventures such as the stock market. Similarly, agriculture's contribution to GDP (of $160 billion) is 21%; but its share in tax revenue is just 1%. At least an additional 100 billion rupees can be raised by bringing farm income to tax. Siddiqi also lists the most profitable industries such as textile, cement and sugar, which are near tax-exempt or pay very little in taxes. They can be readily targeted for at least another 100 billion rupees. Similarly, the corporate sector is ridiculously under taxed. The country's 768 top corporations posted taxable income as low as 8,300 rupees ($100 at the current rate) a month; while 2,341 corporations claimed to be in the red. Another 1,193 big companies reported 33,400 rupees a month in taxable income.

In parallel, the banking industry that has been swimming in profits - with takings of 123.6 billion rupees in 2006 alone - yet have had their tax rate reduced to 35% from 38%. Last but not least, the government needs to widen its tax net to black money. Although it has attempted to net the untaxed and black money in its 2008-09 budget, that is not nearly enough. To have a stolen pile in untaxed wealth laundered white for 2% of giveaways in taxes will only invite public wrath. Given the dire straits in which Pakistan finds itself, such wealth ideally should be confiscated or mercilessly taxed up to 85%. Any of the preceding measures, jointly or severally, can help the government raise $50 billion over the next 10 years to combat the severity of poverty in the country We think the reasons of non-payment of taxes and ignorant attitude are harsh attitude of taxman, literacy rate and lack of tax education, no intention to pay tax from the earnings, afraid of coming into tax net, loopholes tax legislation, competitive corporate tax rate under global tax competition, personal income tax structure and utilization of tax money. CBR is now improving in the area of harsh attitude of taxman only in relation to Income Tax owing to the scheme of Income Tax Ordinance, 2001. However, CBR is now moving towards Sales Tax and the most important step in this regard is the suspension of Sales Tax Audit for six months but this is not a long term solution. Legislators need to improve the basic structure of Sales Tax Act, 1990 to make it taxpayer friendly. Every problem in the Sales Tax Act, 1990 is solved either through a Circular or SRO which complicates the issue. It is suggested that the Sales Tax Act, 1990 need to be revamped right from the scratch bearing the existing Sales Tax Structure, Problems, Organisational Structure of Sales Tax Department, Long/Short term Macro and Micro Economic policies in mind. In furtherance, CBR need to work on Excise Tax and this requires a clear indication from the government either to abolish it and replace it with Sales tax or continue with Excise Tax. Literacy rate and tax education are mutually exclusive in the case of small cities and towns. The problem is not mutually exclusive in the case of main cities like Karachi, Lahore, Peshawar, Islamabad etc. This situation requires two different strategies. In the small towns and cities, Government needs to increase the literacy rate as this is something beyond the ambit of CBR, however, in major cities CBR needs to increase the tax literacy rate. This does not only involve creation of taxpayer facilitation centre and the advertisement in the newspapers and television but something more than that like TV dramas, training by CBR to taxpayer Compliance expected by CBR, Avoid paying additional taxes, Be Safe and Secure in terms of Inadmissible taxes, The Direct/Indirect Tax Regime etc. TV Drama may include normal taxation problems, common misconceptions of peoples, problems normally faced by the ordinary taxpayers etc. The training will serve two purposes for

the tax management purposes. CBR will get first hand information from the taxpayer and their representatives to solve their problem without requiring a middle man. In future, there will be no need to revamp the law after a span of long time as this process will continue to educate the two actors of a process Taxman and Taxpayer. Another common problem is the lack of intention to pay taxes. This lack of intention is based on the loophole in the taxation laws. This argument is based on the concept that when a law requires a person to get itself registered with the respective tax authority. For instance, there is no requirement in Income Tax Ordinance, 2001 for registration of a person under the law; however, the requirement is for filing of Income Tax Return. The Taxation Structure Task committee needs to look at the most common problem, from CBR point of view, of ascertaining the point of time of registration. The most common problem of CBR is that people are afraid of coming into the tax net owing to variety of reasons. People are afraid about their past, this is their prime concern, as they do not know what will be happening to them about their past. However, a number of immunity schemes had been introduced for the taxpayers in the past but nothing specially have been planned for bringing the new taxpayers into the tax net. Tax utilization is the most critical area which needs some thought with the passage of time. This aspect has two aspects, micro and macro level. From micro aspect, what benefits is the existing taxpayers getting? And what benefits may a prospective taxpayer get? These two questions need to be answered in order to increase the tax GDP ratio. From macro aspect, what is the formula and basis of utilization of tax money? Is the Government authorized to use the money for debt servicing of the past loan or it needs to be utilized for the benefits of the citizens These key question are some sort of policy decisions which needs to be taken at the strategic governmental level not at tactical level CBR. Middle and low income earners in particular have been hit hard over the past few years by the introduction of the goods and services tax (GST) and by bracket creep, as demonstrated by a recent OECD report into the taxation on wages. CBR thinks that any new tax credit or deduction from taxable income is a direct loss to the revenue which is just one side of the mirror. This was in part aimed at stimulating the economy by encouraging higher consumer spending. Committee should suggest the induction of medical expense without ceiling and re-introduction of books and children education allowance. To help pay for any reduction in income tax rates for middle and low income earners, the government should firstly examine whether there are inefficiencies in the way it collects tax and monitors compliance. A thorough investigation into how efficient the government really is in collecting tax and identifying tax evaders would no doubt uncover significant additional revenue.

Middle and low income earners should be the ones to benefit from any additional tax revenue identified through this process.