Introduction
The persistence of a low tax to GDP ratio has been frequently mentioned as a key reason underlying an unimpressive development trajectory; successive governments in Pakistan, both elected and militarily appointed, have struggled to gain the fiscal space necessary to drive inclusive and durable economic growth. . Though a number of remedial measures are suggested in the literature, these tend to operate on the assumption that the issue in Pakistan is one of under-taxation, rather than over-taxation. This paper will argue the focus of tax reform in Pakistan has disproportionately fallen on the former, rather than the latter.
The limited extent of the academic output on tax policy in a Pakistan specific context is surprising and has allowed for the proliferation of a flawed understanding of the issue. This tends to be fixated with selected aspects of the present regime; primarily the ratio of indirect to direct taxes, the conspicuously narrow tax base, and the related issue of regressivity. This simplistic focus has obscured the debate and crowded out scholarly expertise in an area that is generally, as evident from the material on other countries, addressed by a substantial literature.
A contribution that this paper will make is to present an overview of the current state of understanding on taxation in the context of a developing country. This will provide a more relevant framework for understanding the issue of a low tax to GDP ratio in Pakistan. It will be argued that the ascendancy of indirect taxation, a narrow tax base, and a large informal economy are all an outcome of poor administration, which has lead to dependence on a small number of contributors. As a result, those contributing to revenue collection in Pakistan may be considered over-taxed, rather than under-taxed, as a low tax to GDP ratio might imply.
The remainder of the paper is organized as follows; the subsequent section addresses the issue of indirect taxes, arguing that it is the circumstances that are associated with developing countries in general, rather than Pakistan in specific, that are responsible for the ascendancy of indirect taxation. Dependence on this as a source of revenue is unlikely to change unless there is a dramatic shift in the way that tax administration and compliance is approached. Following that, there is a discussion on the issue of the narrow tax base and the suggestions that it can easily be overcome. As a result, the role of administration is once again emphasized. The next section discusses a central point of this paper; that the nature of the informal economy is such that recommendations for simply widening the tax base must be taken with a pinch of salt and that the focus of policy should be on facilitating the formal, rather than restricting the informal sector. The final section concludes and offers recommendations.
