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Sales Tax on Services and Value Added Tax

Burki, S. J. et al. (2013).The Economics of Tobacco and Tobacco Taxation in Pakistan.

This paper analyzes the changes brought about by the 2013 tax structure, which resulted in a two- tiered cigarette tax structure. A tax of either 880 or 2335 Rupees per 1000 sticks was levied depending on whether retail price (price before the addition of value added tax) was less than or greater than Rs2286 per 1000 sticks. The system replaced an even more complicated structure that imposed a specific excise tax on low-priced cigarettes, an ad valorem excise tax on high priced brands, and a combination of specific and ad valorem taxes on mid-priced brands. Tax on cigarette in Pakistan is below the level in countries that have taken a comprehensive approach to reducing tobacco use, where taxes account for 70% or more. Other factors for the low pricing of cigarettes are also identified. Existing evidence as well as new estimates produced for this report reiterate the finding that falling cigarette prices lead to increases in smoking, while rising prices reduce smoking, all else constant. The report goes on to model the impact of changes in the existing tax structure and rates. The authors end the report with several recommendations.

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Ahmad, E. & Best, M. (2012). Financing Social Policy in the Presence of Informality. 

This paper attempts to provide a framework for the analysis of tax and benefit policy in countries with significant informality. The authors examine how various forms of taxation affect incentives for informality of workers and firms and how these feed into the overall labor productivity, efficiency and output of the economy. The authors suggest that payroll taxes give rise to particularly unfavorable incentives for formality and they depress incentives for participation in the modern sector labor force and reduce labor productivity and output. They also find that a uniform VAT preserves production efficiency, though it provides incentives to under report sales and incentives to under report sales depends on both the corporate income tax rate and the VAT rate and on their interaction. However, a properly designed VAT helps tighten administration. The balance across taxes depends on country circumstances and revenue needs, raising the VAT indefinitely will not be a sensible approach in the presence of informality. The authors propose inclusion of income taxation and labor informality in the context of a developing country with an informal labor market. In developing countries the existence of complex eligibility criteria makes it possible for rent seeking to arise by officials who can manipulate eligibility scores in order to extract rents from recipients. They propose information sharing by the various tax departments and optimally capturing and using the information from tax returns.

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Ahmad, E. (2010). Why is it so difficult to implement a GST in Pakistan? 

The author points out that Pakistan has received more advice on tax reforms from academics and international agencies than most developing countries. An IMF technical assistance mission broached the issue of VAT in 1970s. In 1980s the analytics were further refined with the GST featuring as the main innovation to address efficiency and incentive effects while also addressing distributional concerns. This should have been supplemented by a strengthened income tax with a reformed land tax assigned to the local levels of government. Despite the reforms in the last decade, at the end of it, the tax to GDP ratio was under 9 percent. The author analyzes the policy prescriptions and explains reasons for the outcomes of these policies. The author also discusses the role of special incentive groups- in particular for a rent seeking bureaucracy as well as the role of informality and the constraints faced within the context of a weakened center and resurgent provinces keen to score points in maximizing access to resources.

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Ahmed, S. Abbas, A. & Ahmed, V. (2007). Taxation Reforms: A CGE- micro simulation analysis for Pakistan.

In this paper authors provide an assessment of the taxation reforms being considered in Pakistan to tackle the existing weaknesses namely the narrow tax base of the country and the rate structure of different taxes. The study also analyzes the revolution of the tax structure in Pakistan. The authors analyze the general equilibrium effects of existing taxes by removing them one at a time from the system and study the micro- macro impact of 4 policy experiments: non-uniform VAT, changing direct-indirect tax mix in favor of VAT and ensuring revenue neutrality, doubling of existing VAT rate and introduction of a 7 percent agricultural income tax. The authors decompose the personal income tax system in order to obtain the contribution of rate, allowances, deductions, exemptions and credits towards progressivity. Results from the study show that non-uniform VAT deteriorates investment, distorts consumption, and increases wage inequality. Doubling of VAT rates showed similar results in the study except a greater decline in investment. The results of the study show that a flat agricultural income tax results in a decline in consumption level of farmers, rural workers and urban poor. The study stresses on the need to look at both the macroeconomic considerations i.e. level and composition of tax revenue and the macroeconomic aspect of design.

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