News
Tuesday, October 26, 2010
Pakistan faces double bind in raising revenue
* Pakistanis say lack of transparency and accountability on spending encourages tax evasion
* Donors link release of aid to pursuing fiscal reforms to increase tax base
KARACHI: The government’s lack of credibility, both with its own citizens and donor agencies, has placed it in a double bind and hampers efforts to raise critically needed revenue.
Pakistanis say the lack of clarity, transparency and accountability on where the government spends the revenue encourages tax evasion. At the same time, donor and multilateral agencies are linking the release of foreign aid to Pakistan aggressively pursuing fiscal reforms to increase its tax base. “The major concern is the credibility issue,” said Salman Shah, a former finance minister. “The issue is how the government is spending the money it is already raising.”
Pakistan’s tax to gross domestic product ratio is approximately 10 percent, one of the lowest in the world. US Secretary of State Hillary Clinton urged Islamabad this month to include tax improvements in its democratic and economic reforms. The comments come at a crucial time as Pakistan needs billions of dollars for reconstruction and relief after devastating floods caused $9.7 billion in damage.
“Asking donors for cash to reconstruct and rehabilitate the flood-affected areas without looking inwards for relief shows the lack of political courage on the government’s part,” said Asad Iqbal, chief investment officer at Faysal Asset Management Ltd. Pakistan relies heavily on foreign aid. Its balance of payments is still vulnerable and the country is committed to a $11 billion IMF loan programme agreed to in November 2008. “The IMF and World Bank aid is linked to fiscal reforms and bilateral agencies are also joining in. Pakistan at this point simply cannot survive without these external flows,” said Sayem Ali, economist at Standard Chartered Bank Ltd.
The lack of tax revenue means Pakistan, a vital US ally in the war against terrorism, doesn’t have the resources to tackle problems such as security and education, acute energy shortages and poverty – all of which could contribute to a growing militancy. “There are key segments such as agriculture which are almost exempt from taxation,” said Asif Qureshi, director at Invisor Securities Ltd.
Agriculture contributes about one-fifth of country’s $17 billion GDP and employs 45 percent of its labour force. Taxing agriculture could provide the government with badly needed additional revenue but there are political reasons why it has escaped the net. reuters
Courtesy www.dailytimes.com.pk