Illicit Trade in Pakistan: The Twin Task of Combating Illicit Trade and Boosting Economic Growth
TRACIT warns Pakistan that counterfeiting and illicit trade stifle growth, economic development
TRACIT warns Pakistan that counterfeiting and illicit trade stifle growth, economic development
- 6 May 2024, Islamabad – Today, the Transnational Alliance to Combat Illicit Trade (TRACIT) presented policy recommendations to government officials and industry stakeholders participating in a forum hosted by Pakistani think tank, the Policy Research Institute of Market Economy (PRIME). The report highlights the impact of Pakistan’s ongoing economic problems with a staggering 25 percent inflation rate. High levels of inflation have had a disastrous impact on consumer purchasing power and product affordability, which is widely regarded as the primary driver for illicit trade.
“Record high inflation is perhaps the most pressing problem,” said TRACIT Director-General Jeff Hardy. “When prices rise faster than incomes, illicit and black-market products become more tempting to consumers desperately cheaper alternatives.”
Speaking on this occasion, Executive Director of PRIME, Dr Ali Salman explained that “the 68 Billion Dollar black and gray markets are fueled by high taxes, tariffs and duties, because in these times of crippling inflation, citizens have nowhere else to go”.
According to Dr Salman, “Unless we minimize barriers to legal trade, the government of Pakistan has no chance of generating enough growth to raise required tax revenues and is set on a clear path towards bankruptcy”.
In Pakistan, the shadow economy is already equal to about 40 percent of GDP and significant levels of illicit trade can be found in many key economic sectors, including food fraud, illicit petroleum pesticides, counterfeiting, and trade in falsified and substandard pharmaceuticals. Discussants at the forum delineated the challenges faced in tackling illicit trade across sectors.
- It is estimated that 40 percent of the medicines sold in the country are counterfeit or substandard. Illicit trade in pharmaceuticals will need to be addressed from different angles, including amending the existing regulatory framework and undertaking aggressive law enforcement measures.
- Manufacturers of illicit pesticides have recently been the target of government investigations, with recent seizures of large quantities of illicit pesticides and fertilizers worth millions of rupees. Efforts by the Department of Plant Protection (DPP) to establish a special anti-pesticide adulteration campaign can usefully shut down the production and distribution of illicit pesticides and can also improve agricultural production and economic development.
- More than half of the cigarettes consumed in Pakistan are sold without the payment of taxes, leading to annual losses of tax revenues of around USD 860 million. Since the recent imposition of federal excise taxes, the share of illicit cigarettes has jumped to about 67 percent of the market. Government efforts to implement track and trace systems have been somewhat effective but have only captured a fraction of the tobacco market. Greater enforcement of the track and trace system can help ensure that tax revenues due to the government will be collected.
- While historically most of the fast-moving consumer goods purchased in Pakistan were imported from China, there has been a noticeable increase in local manufacturing of counterfeits in Pakistan. This makes counterfeiting far easier and has increased the magnitude of counterfeit products in the market. Pakistan needs to look at counterfeiting and illicit trade as a serious criminal issue. And, unless the circumstances are dealt with, counterfeiting and illicit trade will continue to be the biggest hurdle in the revival of the Pakistan economy.
“These illicit markets have plagued the country for years – perpetuating a vicious circle of associated money laundering, organized crime, corruption, and tax evasion,” said Mr. Hardy. “We are pleased that the government is stepping up law enforcement against smuggling, money laundering and black marketers.”
Tax evasion is also a major problem in Pakistan, undermining its capacity for fiscal resource mobilization, especially when it amounts to as much as 6 percent of GDP. Tax evasion related to illicit trade in tea, tires and auto lubricants, and pharmaceuticals has grown to about PKR160 billion per year. The unregulated, untaxed illicit trade in cigarettes, which had increased about 10 percent over the last few years, now drains PKR 240 billion from fiscal revenue collections.
“Improving enforcement and tax collections can help mobilize domestic revenues without the need to raise taxes, which could stifle growth and the fragile economic recovery,” said Mr. Hardy. “Additional revenues resulting from tighter compliance with existing taxes and track and trace systems can help preserve economic stability and enhance debt sustainability.”
TRACIT and the Prime Institute also signed a Memorandum of Understanding establishing a framework for cooperation to mitigate illicit trade in Pakistan. Among the agreed areas for collaboration will be the development of a new, in-depth investigation of the size, scope and associated negative impacts of illicit trade on the Pakistan economy.
“One of the main takeaways from today’s meeting is the urgent need for more information and a better understanding of the drivers of illicit trade in Pakistan,” said Dr Ali Salman, Executive Director of the Prime Institute.
“We look forward to working with the Pakistan government and will leverage on the international expertise of TRACIT to start a research and advocacy agenda to implement comprehensive policies that consider the potential impact on all sectors of the economy and work to reduce the incentives for criminals to engage in illegal activities.”
Dr Ali Salman highlighted that “Smuggling is growing faster than legal trade and presently stands at 20% of GDP, indicating that formal markets are unable to meet the increasing demand of the Pakistani middle class. who are willing to take high risks to avoid the excessive cost of taxes and tariffs.
About TRACIT: The Transnational Alliance to Combat Illicit Trade (TRACIT) is an independent, private sector initiative to mitigate the economic and social damages of illicit trade by strengthening government enforcement mechanisms and mobilizing businesses across industry sectors most impacted by illicit trade.
About PRIME: The Policy Research Institute of Market Economy (PRIME) is an independent economic policy think tank based in Islamabad.
Contact: Cindy Braddon, Head of Communications and Public Policy, TRACIT, Tel: +1 571-365-6885 / cindy.braddon@TRACIT.org / X: @TRACIT_org. The full report and associated content are available at www.TRACIT.org.
SOEs continue to strain public finance; privatization is inevitable
SOEs continue to strain public finance; privatization is inevitable
The government provided financial support of Rs. 1.93 trillion to SOEs during FY 2019-22 to keep them operational. The power sector posted a loss of Rs. 321 billion, while the infrastructure, transport, and communication sector posted a loss of Rs. 295 billion.
PRIME has published its quarterly assessment report, Prime Plus April 2024, which analyzes the financial performance of State-Owned Enterprises (SOEs) in Pakistan. The report evaluated the financial performance of SOEs and the private firms operating in the oil and gas marketing sector, banking sector, steel sector, and power generation sector.
The Power Sector and Infrastructure, Transport and Communication (ITC) Sector were the major contributors to the overall loss, incurring losses of Rs. 321 billion and Rs. 295 billion, respectively, during the fiscal year 2022. On the loss-making side, seven out of the ten largest loss-making SOEs are DISCOs, while the remaining three entities belong to the ITC sector. The combined losses of DISCOs amounted to Rs. 375.81 billion in FY 2022 alone. Pakistan Steel Mills incurred a loss of Rs. 206 billion from 2019 to 2022. In contrast, the Oil and Gas sector, a highly regulated sector, stands out as the most profitable segment within the SOE portfolio.
The report highlights vulnerability to external shocks emanating from wars. The continuity of the Russia-Ukraine war and unbated Gaza genocide may promote uncertainty throughout the world. These wars have affected trade in the Mediterranean Sea, which could result in disrupting the supply chain. Externally, the financial obligations due to debt and imports will keep the exchange rate under stress as the foreign exchange reserves are merely sufficient for two months’ imports. It is pertinent to highlight that a market-based exchange rate is the only way to promote economic sustainability.
Domestically, public finance is under pressure due to higher expenditures and lower revenue collection. FBR collected Rs. 2,241 billion in the third quarter of FY 2024. During the first nine months of FY 2024 (July-March), FBR collected Rs. 6.710 trillion, beating the Rs. 6.707 trillion target by Rs. 3 billion. Compared to revenues, the total government expenditure increased by 49 percent to Rs. 7,532 billion against Rs. 5,058 billion in the first seven months of FY 2023.
In the third quarter of FY 2024, total government borrowing increased by Rs. 2,490 billion compared to an increase of Rs. 1,959 billion last year. At the end of the third quarter of FY 2024, total government borrowing was cloaked at Rs. 28.2 trillion. The government borrowing from the scheduled banks increased by Rs. 1,405 billion in the third quarter of FY 2024. The central government’s total debt stood at Rs. 64.8 trillion, out of which domestic debt is Rs. 42.7 trillion and external debt is Rs. 22.1 trillion.
Inflation remains a challenge for the government. People face continuous declines in their purchasing power. In the third quarter of FY 2024, the average CPI inflation stood at 24 percent compared to 31.5 percent in FY 2023. The inflation in the first nine months of FY 2024 stood at 27.06 percent. The underlying cause of inflation is the higher growth in the money supply compared to the growth in the supply of goods.
The government needs to ensure efficient allocation of resources and reevaluate its spending patterns. The government cannot continue to support loss-making SOEs and should prioritize the privatization of the highest loss-making enterprises. An increase in revenue generation has been observed, but the government should refrain from increasing tax rates and focus on broadening the tax base. This could be accomplished through a flat, low-rate, and broad-based taxation system.
The report is available on PRIME’s website and can be accessed by clicking here
For further information, contact our communications officer Mr. Farhan Zahid at farhan@primeinstitute.org or call +92 331 522 6825.
Sound money needed for stability
Sound money needed for stability
Economy is struggling with low growth as it lacks prerequisites for prosperity
Author: Dr Ali Salman & Dr Wasim Shahid
In his 2011 article, Dr Muhammad Yaqub, the former governor of the State Bank of Pakistan (SBP), emphasised the need for controlling money supply to maintain its soundness.
PRIME’s report on Sound Money, which evaluates Pakistan’s monetary stability and analyses macroeconomic policies that have shaped its current state, echoes the same.
Pakistan’s economy is struggling with low growth due to a lack of necessary prerequisites for economic prosperity. The path towards prosperity is determined by the functioning of markets, which requires economic freedom for its agents.
Economic freedom is defined as the degree to which individuals’ property rights are respected in society. Money is a property held by almost all individuals, as market transactions now take place in exchange for money.
To ensure property rights over money, macroeconomic policies must maintain its soundness. In the modern world, a country’s money is sound if its value remains stable against domestic and foreign goods, services, real and other financial assets.
The Fraser Institute of Canada uses the Economic Freedom Index to evaluate and rank countries based on their economic freedom. The index consists of five categories, including sound money.
According to the latest annual report, Pakistan ranks 123rd out of 165 countries with a score of 5.98/10. Unfortunately, Pakistan’s rank for sound money is even worse, standing at 150th out of 165 countries with a score of 6.37/10.
Pakistan has maintained an average score of 6.22 for sound money from 2001 to 2023, with the highest score of 6.83 observed in 2002 and the lowest score of 4.60 in 2023.
From 1974 to 2023, the purchasing power of money for the goods and services included in the Consumer Price Index (CPI) basket decreased by a factor of 68. Similarly, the value of one US dollar went up from less than Rs10 in 1974 to Rs248 in 2023, leading to a 25-fold loss in the rupee value.
This monetary fragility can be attributed to excessive monetary growth, where broad money (M2) has grown significantly faster than the real and nominal gross domestic product (GDP).
Over the past 50 years, the real GDP increased by 10 times and the nominal GDP increased by 644 times, while money supply expanded by over 1,000 times.
The report reveals that the government is mainly responsible for the unsoundness of money due to the inefficient mix of monetary, fiscal, and exchange rate policies. Specifically, the rate of monetary expansion has been out of sync with economic fundamentals.
Pakistani government has historically relied heavily on borrowing from the SBP to finance its budget, leading to an unsustainable monetary expansion. Although the amended SBP Act has limited the government’s ability to issue debt to the central bank, monetary expansion has continued.
The SBP has attempted to control inflation and currency depreciation through a reactionary approach, using interest rate as its policy instrument. However, this approach has been unsuccessful, as keeping market interest rates close to the SBP policy rate makes it difficult to control money supply.
If the government, the lead borrower in the market, does not reduce its demand for funds in response to interest rate hikes, achieving the interest rate target becomes challenging. The SBP has to provide necessary liquidity to the market to achieve short-term interest rate targets, making it impossible to control monetary expansion.
The government’s fiscal branch is often held responsible for monetary expansion, resulting from increased spending without the matching revenue. While this argument holds, the federal government is currently caught in a cycle of debt accumulation.
The seventh NFC Award increased the share of provinces compared to the federation, which may be desirable but has made the federal government vulnerable to shocks. The delay in implementing reforms to reduce the size of the federal government in accordance with the 18th Constitutional Amendment exacerbated the problem.
After paying the provinces their due share, the federal government is left with limited resources that are hardly sufficient to service its debt. Debt servicing being charged expenditure is paid first, leaving the government with no room to provide public goods.
Moreover, the government has to borrow more to service its debt when the SBP raises interest rates to control inflation. This borrowing strains the market for loanable funds, prompting the SBP to inject liquidity. Hence, the money supply expands despite the government being barred from directly borrowing from the SBP.
A comprehensive reform agenda is required to improve Pakistan’s money stability. This includes reducing the size of the government, coordinating fiscal and monetary policies more effectively, managing debt efficiently, and creating an environment that promotes sustained and inclusive economic growth.
Reviewing the current monetary-fiscal policy mix and determining an appropriate operating instrument for the State Bank to limit monetary expansion and maintain its autonomy is crucial.
The practice of expanding money supply in response to government borrowing from scheduled banks while setting the policy rate to contain inflation is not productive.
The government has to comply with the Fiscal Responsibility and Debt Limitation Act, and an accountability mechanism should be in place for non-compliance..Dr Ali Salman is the Executive Director of PRIME and Dr Wasim Shahid Malik is a PRIME fellow. He is the author of the report “Pakistan Economic Freedom Audit: Sound Money as a Case Study”
The article was originally published in "The Express Tribune" on April 15, 2024.
Pakistan Economic Freedom Audit – Report Launch
Pakistan Economic Freedom Audit -Report Launch
The Policy Research Institute of Market Economy (PRIME), in collaboration with the Atlas Network, hosted a report launch event for the ‘Pakistan Economic Freedom Audit: Sound Money as a Case Study.‘ on 29th, March 2024.
The event featured speakers including Dr. Ali Salman, Executive Director of PRIME, Dr. Wasim Shahid, the report author, and Dr. Nadia Tahir, Economist. The audience included a diverse group of professionals from academia, government, media, and field experts.
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PRIME Report: Assessing Pakistan’s Economic Freedom with a Focus on Sound Money
Report: Assessing Pakistan's Economic Freedom with a Focus on Sound Money
The Policy Research Institute of Market Economy (PRIME), in collaboration with the Atlas Network, has published a report titled “Pakistan Economic Freedom Audit: Sound Money as a Case Study,” delving into Pakistan’s economic freedom with a focus on monetary stability.
Authored by economist Dr Wasim Shahid Malik, a fellow at PRIME, this study thoroughly explores Pakistan’s financial system, emphasizing the stability of its money. It also evaluates the effectiveness of the Sound Money sub-index in measuring economic freedom, using the Fraser Institute’s Economic Freedom Index. The report finds that Pakistan’s sound money rating has consistently been low and has further decreased due to high inflation in 2023, resulting in its lowest rating to date. Over the past 50 years, the Pakistani currency has lost 68 times its value against a typical consumer’s basket and has depreciated 25 times its value against the US dollar.
“Recent assessments reveal that Pakistan’s sound money rating for 2023 is 4.60, which is the lowest in Pakistan’s history, primarily due to exceptionally high inflation during the year,” says the report.
According to the report, monetary fragility is primarily caused by excessive monetary growth that exceeds GDP growth. This growth in the money supply is due to a lack of fiscal discipline, as the government has been borrowing heavily from the State Bank of Pakistan. Despite the amendment to the SBP Act, the government continues to borrow heavily from commercial banks due to a high fiscal deficit and higher interest rates. This, in turn, crowds out the private sector, limits economic activity and lowers the value of money. Maintaining the money market interest rate close to the SBP policy rate, while the government continues to borrow and spend, SBP provides liquidity to commercial banks who lend it to the government. Additionally, the report identifies exchange rate overvaluation as another contributing factor to monetary fragility. Historically, the exchange rate has been kept overvalued, leading to unsustainable trade deficits and continuous reliance on external borrowing. This has resulted in recent exchange rate depreciation, which has made the country’s currency value unstable against foreign currencies.
The report recommends improvements in the methodology used to measure the Sound Money Sub-index of the Economic Freedom Index. It also proposes a comprehensive reform plan to maintain the stability of the country’s money value. The report suggests a number of measures, including rationalizing the size of the government, implementing an efficient and fair revenue mobilization system, adopting an effective monetary policy to control inflation, ensuring effective coordination between monetary and fiscal policy, demonstrating a strong commitment to the Fiscal Responsibility and Debt Limitation Act, setting up an accountability mechanism for fiscal authorities not adhering to the FRDL Act and for monetary authorities not controlling inflation, and limiting the government’s intention to keep the exchange rate overvalued.
The report is available on PRIME’s website and can be accessed by clicking here
For further information, contact our communications officer Mr. Farhan Zahid at farhan@primeinstitute.org or call +92 331 522 6825.
Pakistan Economic Freedom Audit: Sound Money as a Case Study
This study presents an economic freedom audit of Pakistan, focusing on sound money as a case study. The success of free market capitalism is contingent upon protecting individual property rights. The Fraser Institute's Annual Report on Economic Freedom of the World assesses countries based on their economic freedom index, which comprises five areas, including sound money. This economic freedom audit report aims to evaluate Pakistan's monetary stability and analyze the macroeconomic policies that have shaped its current state. Furthermore, the report critically evaluates the methodology of the sound money sub-index to determine its efficacy in measuring economic freedom.
Pakistan's rating for monetary stability has been consistently low for the past two
decades and has further declined in 2023. Historically, Pakistan has had a sound
money rating of less than seven due to restrictions on residents having foreign
currency accounts and monetary expansion exceeding real GDP growth. Fluctuations in the sound money rating were driven by recent inflation, its volatility, and monetary growth in the near past, as the score on foreign currency accounts remained stable. Pakistan's historical data reveals that sound money rating has typically risen during economic recessions caused by demand contraction but has fallen during periods of cost-push inflation. Recent assessments reveal that Pakistan's sound money rating for 2023 is 4.60, which is the lowest in history, primarily due to exceptionally high inflation during the year.
Throughout history, the fragility of money has been a persistent concern in Pakistan.
The value of money has consistently depreciated over time, with a decline in its
purchasing power for goods and services included in the CPI basket by one-tenth
from 1974 to 2001 and one-sixty-eighths from 1974 to 2023. The Pakistani rupee (PKR)
has also experienced a similar decline in value against foreign currencies. For instance, the value of one US dollar in Pakistani rupees increased from less than 10 in 1974 to 248 in 2023, resulting in a 25-fold cumulative loss.
Monetary fragility can be attributed to excessive monetary growth. The growth rate of broad money (M2) has consistently exceeded that of real GDP by a significant margin and has even surpassed nominal GDP growth. Real GDP has increased ten-fold over the past five decades, while nominal GDP has increased 644-fold. However, monetary growth during this period exceeded 1000 times, indicating inefficiencies in both monetary and fiscal policies that have contributed to this expansion and, ultimately, the devaluation of money. Since its inception, the Pakistani government has heavily relied on borrowing from the State Bank of Pakistan (SBP) to finance its budget, leading to an unsustainable monetary expansion. Although the amended SBP Act has limited the government's ability to issue its debt to the SBP, monetary expansion has continued. The SBP has provided the necessary liquidity to banks, which have, in turn, lent it to the government
Over the last five decades, the monetary value has been fragile and unstable, resulting from the misguided and ineffective implementation of monetary, fiscal, and exchange rate policies. Particularly, the short-term real interest rate has remained marginally negative and has shown poor responsiveness to rising inflation, exacerbating the problem. The State Bank of Pakistan has recently adopted a reactionary stance in response to inflation and currency depreciation. However, this approach proved to be ineffective as well. The interest rate, which serves as the SBP's monetary policy instrument, has yielded little success in controlling inflation and exchange rates. Furthermore, interest rate changes hurt economic activity, particularly in large-scale manufacturing. On the other hand, fiscal slippages emanating from increased spending without matching revenue have led to domestic debt accumulation. At the same time, the overvaluation of the exchange rate has caused a trade deficit, contributing to external debt accumulation. Both of these debts are responsible for the monetary fragility that Pakistan is currently facing.
The methodology used to rate sound money requires revision, particularly for
developing countries. The rating scheme awards countries with the highest score for
inflation and money growth components if they adhere to a zero inflation or
deflationary policy. However, these policies are not preferred by any central bank
globally; rather, they aim to maintain positive inflation. Additionally, inflation
persistence may exhibit positive or negative trends over brief periods, making the
standard deviation of five years’ inflation an inadequate indicator of the solidity of
money.
This is because the standard deviation is a measure of variation that applies equally to both rising and declining inflation. Finally, there are limited options available for scores related to restrictions on foreign currency accounts within the country and overseas. For example, the State Bank of Pakistan permits foreign cu rrency bank accounts in Pakistan but restricts the flow of some types of funds into these accounts. Moreover, certain restrictions may sometimes hurt economic freedom, but their imposition can lead to more stable and sound money.While different countries may have varying degrees of restrictions, the current rating scheme fails to assign scores based on the severity of such restrictions.
A comprehensive reform agenda is needed to improve the solidity of money in
Pakistan. The rationalization of government size, effective coordination between fiscal and monetary policies, efficient debt management, and establishment of an enabling environment for continuous economic growth, which provides equal opportunities to all, are pivotal requisites. It is crucial to re-evaluate the existing monetary-fiscal policy mix and ascertain the appropriate operating instrument for the State Bank of Pakistan to restrict monetary expansion and exercise its autonomy. Setting the policy rate to contain inflation while expanding the money supply as a response to government borrowing from scheduled banks is unproductive. A suitable monetary-fiscal coordination mechanism can be designed to overcome the high inflation and excessive debt predicament. Fiscal policy must adhere to the Fiscal Responsibility and Debt Limitation Act, and there is a need to put in place an accountability mechanism for the government's non-compliance, which can help limit the budget deficit and financing obligations. The government's economic intrusion must be reduced through reforms while simultaneously rendering tax policy more efficient. An Act of Parliament can restrict the deliberate overvaluation of the exchange rate, for which a suitable indicator needs to be developed
HISTORIC SEMINAR ON SECTION 7E OF THE INCOME TAX ORDINANCE, 2001
HISTORIC SEMINAR ON SECTION 7E OF THE INCOME TAX ORDINANCE, 2001:
TAX PAYERS ALLIANCE PAKISTAN (TPAP) AND LAW & POLICY CHAMBERS CALL FOR
ABOLISHMENT OF DEEMED RENTAL INCOME TAX IN PAKISTAN
Tax Payers Alliance Pakistan (TPAP), an initiative of economic think tank PRIME (Policy Research Institute of Market Economy), in collaboration with Law & Policy Chambers organized historic seminar on 9th March 2024 in Islamabad, shedding light on the contentious issue of the Deemed Rental Income Tax levied under section 7E of the Income Tax Ordinance, 2001 vide Finance Act, 2022.
The event brought together a diverse group of experts including economists, lawyers, tax professionals, civil society activists, and academia – attended by huge audience both in person and online - to discuss the detrimental impacts of this tax on the public.
Mr. Umer Ijaz Gilani, Advocate Supreme Court, elucidated the legal intricacies surrounding this tax, while discussing in detail its background and repercussions. He very nicely described the difference between “deemed income” and “non-existent/hypothetical income” to make it easily understandable to even a layman. Mr. Ali Salman, Executive Director PRIME, highlighted the sheer violation of fair taxation principles and the need to protect property rights. Mr. Mahmood Khalid, Senior Research Economist, Pakistan Institute of Development Economics (PIDE) provided insights from a tax policy perspective, and Barrister Junaid Ahmed, joining virtually from Karachi, contributed invaluable insights regarding the implications of this tax for inheritance cases.
The Deemed Rental Income Tax, introduced vide Finance Act 2022, has been under scrutiny for its constitutionality and alignment with public policy. Notably, both the Islamabad High Court (IHC) and Peshawar High Court (PHC) have already declared it unconstitutional, with the matter currently sub judice before the Supreme Court of Pakistan.
The overwhelming consensus among the participants was that the deemed rental income tax, as stipulated under Section 7E of the Income Tax Ordinance, 2001, is not only unconstitutional and ultra vires but also runs contrary to public policy. The arguments put forth during the seminar highlighted the adverse effects of this tax provision on fair taxation principles, property rights protection, and the overall welfare of taxpayers.
Given the compelling evidence presented at the seminar, Tax Payers Alliance Pakistan (TPAP) unequivocally calls for the immediate abolishment of the deemed rental income tax, void ab-initio. TPAP firmly believes that this tax not only violates the fundamental rights of taxpayers but also undermines the principles of fairness and hampers economic growth.
According to Mr. Anas Farhan, Convener Tax Payers Alliance Pakistan (TPAP), this seminar marks a significant step towards advocating for fair and just taxation policies in Pakistan. TPAP has also strongly urged the Government for abolishment of Section 7E, while submitting budgetary proposals to Revenue Division/Federal Board of Revenue (FBR) for the year 2024-25, he said.
Tax Payers Alliance Pakistan (TPAP) is a potent pressure group, comprising citizens of Pakistan from all walks of life to advise, educate and influence the Government and Public Policy in Pakistan to lowering the taxes on businesses and individuals, simplify the taxation regime, and to urge the government to eliminate undue and wasteful expenditures. PRIME Institute (Policy Research Institute of Market Economy) serves as its Secretariat in Islamabad.
TPAP Submitted Sales Tax Proposals 2024-25
TPAP Submitted Sales Tax Proposal 2024-25
Tax Payers Alliance Pakistan (TPAP), an initiative of economic think tank PRIME, submitted budgetary sales tax proposals to the Revenue Division/Federal Board of Revenue (FBR) in Pakistan for the upcoming Finance Bill 2024.
The proposal was developed by TPAP Team: Mr. Anas Farhan, Vice President ZTBL & PRIME Research Fellow from Islamabad, Mr. Usman Azmat, Advocate High Court from Lahore and Ms. Sehrish Naz, Economic Analyst FPCCI from Karachi, in consultation with the TPAP’s members comprising of a group of tax experts from across Pakistan, including representatives of Salaried Class Alliance (SCA) Mr. Shameer Muhammad Haroon, Member ICAP and Mr. Amer Sharif, Assistant Manager Treasury KAPCO. Subject proposal is aimed at simplifying tax regulations and reducing the compliance burden on taxpayers. This proposal aims to create a fairer and more efficient tax system in Pakistan that can provide sustainable funding for public expenditures.
According to experts, existing sales tax rate of eighteen percent is too much high and Government must consider to bring it down to single digit. Therefore, they have proposed a rate of nine percent for Budget 2024-25. Adjustment of input tax by some sectors of economy has also become complex and challenging, therefore it should also be simplified. Experts have proposed zero-rate sales tax on medicines. According to them, these life-saving items are out of reach of common man due to extraordinary sales tax thereon. Tax experts also highlighted to implement automated refund processing across the board instead of this facility to only few sectors, giving rise to discriminatory treatment. Existing sales tax withholding regime is also creating nuisance and distortion, therefore experts have proposed revamping it altogether.
Overall, TPAP’s proposal is a crucial contribution to the ongoing debate on sales tax reform in Pakistan. It provides a well-argued and clear case for a simpler, fairer, and more efficient tax system that could benefit both taxpayers and the wider economy initiative.
Incredible things happen when taxpayers unite and raise their voice to advocate for positive change in the taxation system.
Revolutionizing Taxation: TPAP submitted Income Tax Proposals 2024-25 for Reduced and Uniform Tax Rates ensuing a Fairer and Simpler Tax System
Revolutionizing Taxation: TPAP Submitted Income Tax Proposal 2024-25 for Reduced and Uniform Tax Rates Ensuring a Fairer and Simpler Tax System
Tax Payers Alliance Pakistan (TPAP), an initiative of economic think tank PRIME, submitted budgetary proposal to the Revenue Division/Federal Board of Revenue (FBR) in Pakistan, aimed at reforming the income tax system to promote simplicity, transparency, and compliance. The proposal generated in response to the FBR’s solicitation of ideas for the upcoming Finance Bill 2024.
The proposal was developed by TPAP Team: Mr. Anas Farhan, Vice President ZTBL & PRIME Research Fellow from Islamabad, Mr. Usman Azmat, Advocate High Court from Lahore and Ms. Sehrish Naz, Economic Analyst FPCCI from Karachi, in consultation with the TPAP’s members comprising of a group of tax experts from across Pakistan, including representatives of Salaried Class Alliance (SCA) Mr. Shameer Muhammad Haroon, Member ICAP and Mr. Amer Sharif, Assistant Manager Treasury KAPCO. Subject proposal is aimed at simplifying tax regulations and reducing the compliance burden on taxpayers. The focus of the proposed tax reforms is to eliminate taxes that are unjustified, discriminatory, do not contribute to the national exchequer, and have become redundant. This proposal aims to create a fairer and more efficient tax system in Pakistan that can provide sustainable funding for public expenditures.
The proposed reforms are imperative for the promotion of compliance and broadening of the tax base. The prevalent ambiguities, complexities and distortions from discriminatory application of taxes are the underlying reasons for suboptimal performance of tax administration and low revenue collection. The government needs to move away from regressive and discriminatory tax regime towards flat, low rate and predictable taxes for transparency, compliance and broadening of tax base.
TPAP’s proposal emphasizes the significance of streamlining the tax system and lessening the compliance burden on taxpayers. They argued that a flat and low-rate taxation system would accomplish these objectives while also promoting economic growth and reducing inequality. The proposal would eliminate the current complex system of tax brackets and exemptions, reducing the need for expensive tax planning and compliance.
Overall, TPAP’s proposal is a crucial contribution to the ongoing debate on tax reform in Pakistan. It provides a well-argued and clear case for a simpler, fairer, and more efficient tax system that could benefit both taxpayers and the wider economy initiative.
Incredible transformations unfold when taxpayers unite and amplify their voice to advocate for positive change in the taxation system.
Same old govt, new economic path?
Same old govt, new economic path?
Proposing four key reforms to transform the nation’s economic landscape
Author: Zeeshan Hashim
Pakistan held a general election on February 8th, 2024, and the Pakistan Muslim League-Nawaz (PML-N) formed its government on March 4th, 2024. Mian Shehbaz Sharif, who led the previous government under the Pakistan Democratic Movement (PDM) coalition, is the current prime minister.
However, according to major macroeconomic indicators like inflation, growth rate, and unemployment, the performance of the PDM government hasn’t been impressive.
When PDM assumed office in April 2022, the economy was not functioning well. Rather than pursuing structural reforms that could bring long-term gains, the government decided to maintain the status quo and stabilise the economy using conventional tools that have a long history of failure. As a result, almost two years have passed, and the economic situation remains dire.
The new government may repeat past mistakes, but good hope remains for economic reforms. In this article, I propose four major reforms that can benefit the economy in the long run.
Firstly, rationalising the current economic model is a complex but necessary task. The model has failed and will only produce the same results if it remains in its present form. It has weak institutions, relies on debts and remittances, has an uncompetitive industrial structure, declining exports, brain drain, a lower tax base, economic uncertainty, regulatory burden, and a large government size.
To survive, the government is raising taxes at the cost of savings, consumption, and citizens’ welfare.
It is necessary to audit the entire economic structure, analysing what works and what does not, and removing all inefficiencies.
Without it, no policy is effective since these inefficiencies are deeply embedded in the present model. This long, continuous process needs improvement at each stage but must be done as soon as possible.
Secondly, creating state institutions that ensure the rule of law and accountability.
It also requires a strong political commitment despite high political costs to the dominant state institutions that maintain the status quo. They may prefer to keep their present position. But if they are concerned about the country’s development, they must not create barriers to institutional reforms.
Thirdly, we require market-led reforms that facilitate the growth of the private sector in the market. The private sector is the main driving force behind economic development, job creation, tax revenue, lower inflation, and an improved standard of living for the citizens. A stronger market paves the way for a stronger economy.
Unfortunately, doing business in Pakistan is not easy due to various factors. Some are institutional, such as corruption and regulatory burdens, while others are structural, such as a lower comparative advantage in the competitive market. To address these issues, we need institutional reforms to tackle the former and industrial policy to address the latter.
My fourth suggestion is about industrial policy. It doesn’t involve creating a further government footprint in the market while eliminating some. Its economic justification is simple: internalising externalities to capture learning and innovation and offsetting those externalities that cause market failure. Its objective is to promote industrial development to improve productive capacity and diversification in the economy and to facilitate some industries to gain a comparative advantage in the local and international markets. It will ultimately increase the market size and boost the export sector.
Regarding industrial policy, the most influential economist, Dani Rodrik, warns, “The kind of discipline that’s required is the discipline of monitoring, figuring out whether what you’re doing is working, and being able to move away from mistakes when things aren’t working. Successful industrial policy is not about picking winners; it’s about letting the losers go. Some of the worst cases of industrial policy are when you keep putting good money after bad.”
Therefore, before starting the industrial policy, Pakistan must ensure its policymakers and political economy are efficient enough to maintain that discipline Rodrik advises. Otherwise, a new industrial policy will create new evils.
Almost all industrialised countries, including East Asian economies, have achieved economic success due to the abovementioned factors. These are not easy to implement and require strong political commitment, which is why not all countries are successful economically.
However, the evidence confirms that these policies work and have contributed to the economic success of many countries.
THE WRITER IS A RESEARCH SCHOLAR AT THE PRIME INSTITUTE, A DOCTORAL RESEARCHER AT BRUNEL UNIVERSITY AND A LECTURER OF ECONOMICS AT THE UNIVERSITY OF BEDFORDSHIRE
The article was originally published in 'The Express Tribune' on March 18, 2024
Harnessing Population Dividends For Growth: The View From The Global South
Harnessing Population Dividends For Growth: The View From The Global South
Instead of fear mongering about large populations causing poverty, countries in the Global South must realize that underdevelopment is a consequence of policy failure. Large populations can provide dividends for growth if the right mix of governance exists
Author: Zafar U. Ahmed
There has long been an ongoing debate about whether a large population of a country or a large global population is a problem or an asset in attaining economic growth and development. More recently, the human population has been blamed as a key reason for the climate crisis by its proponents.
Globally, birth rates have been declining steadily for many decades; the total fertility rate now averages 2.4 children per woman, although high rates of fertility persist in many regions throughout the world. The replacement fertility rate is 2.1, which would maintain the current population number – provided a low child mortality rate.
By 2017, more than half of the world’s couples were producing fewer than 2.1 babies per mother. In the United States, it’s 1.8. In China and the United Kingdom, it’s 1.7. In Canada and Poland, it’s 1.5. In Hong Kong, Japan, and Spain, it’s 1.4. In Italy, Greece, and Portugal, it’s 1.3. In South Korea, it’s 1.1. The only reason population in the US, Canada and Australia is not falling is due to continuing immigration.
Prof B. Hartmann from Hampshire College explains that “the main reason the world population will likely grow by 2 to 3 billion more people before it stabilizes is that a large portion of the population in the Global South is young and approaching child-bearing age. Over time, this ‘demographic momentum’ will peter out as the present large generation of young people gets older and birth rates continue to decline worldwide.”
The fertility rate has to be seen in the context of the prevailing death rate. Where the death rate is high and the expected average length of life is low, the population growth rate will be lower despite a high fertility rate. If current trends continue unabated, sub-Saharan Africa will go from 1 billion people to 3 billion, but that assumes that the population continues to grow linearly by the present rate. This expectation however, may be unrealistic, and death rates have a tendency to decrease as development outcomes improve.
In 2020, Lancet, the medical science journal, published a massive study, giving population scenarios in 195 countries. According to their forecast, the global population will peak in 2064 at 9.79 billion, and gradually decline to 8.79 billion by 2100. By then, the fertility rate will have dropped to only 1.66 globally. The study estimates that the global population will likely peak below the carrying capacity.
Many countries are now investing in controlling falling birth rates to overcome a shortage of workers. For instance, Japan and Russia are struggling to give incentives for population growth.
The average consumption per person in Britain is 25 times what the average consumption per person is in many developing countries, according to Prof M. Connally at Columbia University. The per capita energy consumption in the US is 30 times what it is in many developing countries.
Statistics from the UN Food and Agricultural Organization show that from 1961 to 2002, the available food supply per person went up by 24.4%. Similarly, recent and past reports of the high-level panel of experts on Food Security and Nutrition, and also the UNDP, explain that there is enough food and water to go around (L. Mehta). The largest increase in food production was observed in developing countries, particularly in India and China (Sen, 1998), "
In his 1968 book The Population Bomb, P Ehrlich popularised Malthus’s ideas of impending doom by a growing population and a scarcity of resources – Ehrlich predicted that by the 1980s, famines would be commonplace and global death rates would rise. But like Malthus’ own predictions in the 1800s, this prediction also proved wrong - death rates continue to drop and globally average calorie consumption has increased."From 1980 to 2020, J Simon’s Abundance Index, which calculates the ratio of the price of basic commodities and hourly wages – how much people can buy, rose many times over, showing a much-enhanced purchasing power."
In most developed countries, greenhouse gas emissions per person peaked in the 1970s and where population growth has been low, as in Europe, total emissions have since declined. However, this direct decline in emissions in rich countries is deceptive. Higher impacts per affluent person accentuate the impact of any population increase and the benefits of a population decrease. Moreover, increasing trade means that rich countries consume goods made in other countries, with the emissions associated with making those products assigned to the producing country”, according to Prof. I. Lowe at the Griffith University in Australia.
The top ten economies (by PPP. not nominal GDP) of the world show that a large population is not at all necessarily an economic disadvantage. There is no credible or agreed scientific yardstick to determine an optimum population size. In his 1968 book The Population Bomb, P Ehrlich popularised Malthus’s ideas of impending doom by a growing population and a scarcity of resources – Ehrlich predicted that by the 1980s, famines would be commonplace and global death rates would rise. But like Malthus’ own predictions in the 1800s, this prediction also proved wrong - death rates continue to drop and globally average calorie consumption has increased.
In population literature, carrying capacity refers to the maximum number of organisms that an ecosystem can sustain indefinitely.
What is the carrying capacity of the earth for humans? There is disagreement among scientists on how to calculate that, and estimates vary dramatically. Generally, estimates lie anywhere between 4 billion humans and 16 billion on the higher end. But some pessimists think it’s just 2 billion, and some optimists think it could go as high as 100 billion. Therefore, there is such fundamental disagreement on the method that estimates have no credence.
As discussed above, in the West and most parts of the developed world, the population has been declining for the last few decades. During this century, exponential population growth is projected, primarily in Africa. The continent’s population growth is a result of demographic transition: mortality rates are decreasing faster than birth rates, partly due to new medical solutions that help fight infections.
There is nothing unusual or exclusive about Africa’s demographic transition. For example, in Europe, this transition occurred in the second half of the 19th century, when the population of Europe grew from 224 million in 1820 to 498 million in 1913. At the end of the process, both rates are lower, leading to a population that is stable or shrinking.
In parts of Africa, censuses are conducted rarely and selectively, so the actual population growth rate may be slightly lower than reported. Secondly, the growth rate cannot be endlessly extrapolated at the same rate, it varies dynamically due to many factors.
Since the population in the West has already been in a decline since the 1970s, population alarmists by implication mean that the population in Africa and parts of Asia and Latin America needs to be reduced significantly to stop what they see as overconsumption and degradation of natural resources and to alleviate the climate crisis.
But the stark reality is that the West and developed countries consume 20 to 30 times more per person than is consumed by people in developing countries. And per capita CO2 emissions are far higher in the West, especially when manufacturing facilities based abroad are counted. So, a reduction in the population of the West and developed countries will be 20-30 times more effective per capita, for the purpose. Rationally then, a population reduction ought to be focussed on the West and in the high-income economies rather than on very low-consuming African, Asian or Latin American countries. Interestingly, the population alarmist Activists often receive funding and training for their activities from the West.
Alarmists about population growth commonly begin with an acknowledgement that it is the combination of such growth and increased consumption that is responsible for what they fear is catastrophic environmental decline. As Prof R. Fletcher at the Wageningen University in Netherlands) puts it, “yet in so doing, they frequently shift quite quickly from a brief nod to the latter to sustained focus on the former, contending that while of course it is overconsumption in a few wealthy countries that is the principal source of environmental degradation currently, imagine how much worse the problem would be if all of the world’s poor end up consuming at similar rates as well… And in the process, inequality itself is actually defended in the interest of sustainability”.
People make decisions in light of realities. In countries without social security for the elderly, children and sons are seen as a support in later years. In poor countries, giving birth to more children is a way to potentially increase incomes. In poor rural areas, more offspring meant more people to do the work. In many cultures, girls go to the other family after marriage. So do their grandchildren.
A study by M. Rubio on fertility decline in developed countries, such as Japan, found that it was more of a function of the rising cost of childcare and children’s educational needs and that of women’s emancipation which resulted in delayed marriages and a rise in the number of people preferring to remain single. In affluent countries, children are a significant financial burden, so people often defer childbearing to establish their career and home, then limit births to ensure they can provide well for their children.
“The demographic transition to low fertility occurred in country after country as parents gained confidence that their first few children would live. Then there was no advantage and plenty of disadvantage to having large families,” according to Sterling & Platt at the University of Pennsylvania. In general, many people can agree that family planning is an appropriate response to unwanted fertility, and that a broader development approach is called for to deal with high desired fertility.
"Large populations offer the advantage of internal economies of scale and are also a highly lucrative and attractive market for external businesses."
Studies by economics Nobel laureate Simon Kuznets have shown that there is no clear link between population growth and economic growth or poverty. “Kuznets explained that the direct relationship between population and growth or poverty is difficult to establish… any ‘direct causal relation’ between them ‘may be quite limited’… [Others], likewise, reasoned that rapid population growth is the consequence and not the cause of economic and social inequalities. Hence, there is a need to address economic development first and the decline in fertility rates will naturally follow… the problem of shortage is caused principally by the inequitable distribution of wealth and resources among the world’s population rather than the increase in numbers… Antonio, et al.(2004) further argued that the Philippine experience proves that higher population densities do not translate to lower personal incomes… Hong Kong, Singapore and Korea have higher population densities than the Philippines, yet they have higher personal incomes as well,” (Rubio, for SEPO, Philippines).
A population number does not tell us whether it is too much or not. It depends upon so many other things. Large populations offer the advantage of internal economies of scale and are also a highly lucrative and attractive market for external businesses.
Lyla Mehta at the IDS at Sussex University emphasizes that “this fixation with overpopulation diverts attention from more crucial issues… we need to link population debates with issues concerning unequal and skewed patterns of consumption, allocation, and distribution… rather than drawing on simplistic universalizing notions of scarcity…There is currently an explosion of food banks in the UK, and about 8% of the population is food insecure. The UK is the fifth richest country in the world by nominal GDP. Malnutrition and hunger in the UK are not because of overpopulation but instead due to government policies of austerity, cuts, and due to rising poverty, and inequality… the scare of scarcity and overpopulation remains a means of diverting attention away from the causes of poverty and inequality that may implicate the politically powerful.”
Population alarmists’ talking points sometimes make vacuous arguments, for instance, that if the world were to have just 1 billion, people there would be so many available jobs for everyone! That fails to understand that with so many fewer people, the world’s economy would also shrink – there would be a massive drop in available jobs. Another argument not thought through is that with fewer people, the total consumption would proportionally go down. That is quite unlikely, since if there are fewer people and the same resources available, the consumption per person would almost certainly go up, and that is often the aim when planning a small family.
"The developing countries of Asia, Africa and Latin America ought to be clear that a growing population is not a burden, but must be fostered into their greatest asset."
Discussing the relationship of population growth, capacity for food production, and the abundance of African land, Allen Kelly’s paper cites Nikos Alexandratos' (1986) study of 38 countries which concludes that "...a country’s capacity to feed its growing population... depends only weakly on its land endowments per se..." Gale Johnson (1984) is unequivocal on this point: “... there is not the slightest shred of evidence that continued poor performance of food and agriculture in most of Africa is in any way related to resource restraint."
Fletcher summarizes “until this obscene inequity, and the economic system driving it, are adequately addressed, all the attention to population growth in the world will do nothing to halt our environmental and poverty [concerns]… in discussions of sustainability, population growth should be the last issue addressed, while instead, it is increasingly becoming the first, if not primary, problem to be identified.”
The developing countries of Asia, Africa and Latin America ought to be clear that a growing population is not a burden, but must be fostered into their greatest asset. The rationale for countries is the welfare of their people. The people are nurtured through proper healthcare, education, social protection and by facilitating their economic enterprise. When individuals in a country get the opportunity and are supported in reaching their potential then those countries flourish. States have to live up to their responsibilities for good governance and equal opportunity for all, as they are entrusted to do by citizens. A large population does not cause poverty, but bad governance and bad policies do.
The article was originally published in Friday Times on February 28, 2024
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