Governance – Page 4

February 21, 2017

Challenges to Pakistan’s fledgling local democracy

By Asad Liaqat, Ali Cheema and Jacob N. Shapiro

In late 2015, party-based local elections under a democratically elected government were held for the first time in Punjab. The elections saw high voter turnout, with 61 percent of eligible voters casting a ballot. This was an increase from the 58 percent of Punjab voters who turned out in the 2013 national government elections.

This could mark the first of repeated cycles of stable elections and transfers of power, which many argue are enough to strengthen democratic institutions. However, strong local democracies also depend on the stability and coherence of party structures as well as the institutional framework within which parties operate and elections take place. In this regard, local democracy in Pakistan remains weak.

It is important to recognize that local politicians are not only vital conduits for service delivery, but are also important mediators between citizens and higher tier politicians. In Punjab, the provincial government wields considerable authority in the assignment of functions and finances to local governments. This implies that local politicians have tremendous scope to connect people to their government and ensure their needs are represented.

Based on the results and original survey data from the November 2015 elections in the Sargodha district of Punjab, we identify major problems within the democratic process and offer insights into what institutions and political parties can do to strengthen local democracy.[1]

Where opposition is weak, so is democracy

One of the fundamental, constitutive elements of a well-functioning democracy is the existence of meaningful competition between parties for elected positions. If strong opposition parties exist and maintain links with voters, they can keep the incumbent party in check by incentivizing them to perform better through the threat of electoral defeat in subsequent elections.

Local democracy in rural Punjab falls short in this regard, as seen in the opposition’s inability to field candidates. In Sargodha, the main opposition party, Pakistan Tehreek-e-Insaaf (PTI), could only field candidates for the office of union council (UC) chairperson (a directly elected local government office) in 64 out of the 164 rural UCs that comprise the district council. Other opposition parties failed even more miserably: Pakistan People’s Party (PPP) fielded candidates in a mere eight union councils, and the Pakistan Muslim League-Quaid and Jamaat-e-Islami only fielded two candidates each.

Unsurprisingly, this results in lackluster electoral performance for opposition parties. Among the union councils where PTI did field a candidate, it managed a vote share higher than 30 percent in only half of them, winning a total of 12 union council chairman seats. The only other opposition party that won any seats was PPP, which succeeded in four out of the eight seats it contested. In total, opposition parties only won 16 out of the 164 union council chairmen seats in Sargodha. Opposition parties held less than 10 percent of the seats in the district council of Sargodha at the time of these elections.

The real opposition that emerged to fill this vacuum was independent candidates. In a staggering 84 percent of union councils, at least one independent candidate contested. Independents won the chairman position in 68 out of 164 union councils. Put differently, independents won 49 percent of the seats where at least one independent was contesting. This phenomenon is worrying since it represents a corrosion of party-based accountability, weakens the relationship between local and national democracy and reduces political ownership for the system among opposition parties.

Politicians need to be vetted for honesty, competence and motivation

Another key element of a well-functioning democracy is the ability of political parties to select the “right” candidates. Democratic theorists have emphasized the critical role parties play in vetting potentially elected officials. Sargodha’s local government election, with weak opposition parties, presents an ideal setting for analyzing the robustness of candidate selection by the provincial ruling party, Pakistan Muslim League-Nawaz (PMN-N).

PML-N party officials clearly played this gate-keeping role. Field observations suggest that a majority of candidates who ran as independents were jockeying vigorously for endorsement by the ruling party prior to the allocation of tickets.

Evidence suggests that the ruling party’s selection process isn’t very robust. In a third of union councils where there was consensus within PML-N over a candidate’s endorsement, voters rejected the ruling party candidate in favor of an independent. The current process of candidate selection, which is influenced by district-level caucuses, may work for party bosses but it isn’t getting selection right in the eyes of the voters. An important feature of local elections is that they reveal this disconnect.

Solutions

Clearly much work needs be done to strengthen the local democratic project in Pakistan. A good starting point would be a public report on the state of local democracy generated by the Election Commission that rates the strength of democracy on defined metrics across Pakistan’s different rural and urban local councils and governments. The report should point out failures at the level of the ruling and opposition parties in order to create public pressure on these organizations to modernize processes (such as selection) and take actions (fielding candidates) that will help build the foundations of a strong local democracy.

At a legislative level, the issue of independent candidates needs to be seriously debated. It is misleading to call a system party-based if the main opposition party is only able to field candidates in a fraction of constituencies. The current system will be subject to accusations of political capture by opposition parties and is likely to weaken political ownership. There is also a need to create rule-based separation of functions and finances between local and provincial governments that are enforced through bipartisan institutions. The recent action by the Government of Punjab in announcing a rule-based fiscal transfer award for local governments through the Provincial Finance Commission (PFC) Award is a step in the right direction.

Finally, it is important for the provincial government to recognize that weak political accountability at the local level creates real risks for poor service delivery and corruption. These problems are likely to damage its reputation in the 2018 general election. Given weak party-based competition and the resulting weak performance incentives for local politicians, it is critical to enforce the Punjab PFC’s recommendation of instituting administrative accountability mechanisms such as third-party and citizen audits. This is important to ensure that local governments deliver to the voters.

Asad Liaqat is a PhD candidate in public policy at Harvard University.

Ali Cheema is a senior research fellow at the Institute of Development and Economic Alternatives (IDEAS) and Associate Professor of Economics at the Lahore University of Management Sciences (LUMS).

Jacob N. Shaprio is Professor of Politics and International Affairs at Princeton University and an associate fellow at IDEAS.

[1] The larger research project being conducted by the Institute of Development and Economic Alternatives (IDEAS) examines how voters make choices broadly and the relative weight they give to party performance vs. candidates’ political and bureaucratic connections. Along with the authors of this blog, research was conducted by Michael Callen (Assistant Professor of Economics and Strategic Management at the University of California San Diego), Adnan Khan (Research and Policy Director at the International Growth Centre) and Farooq Naseer (Assistant Professor of Economics at the Lahore School of Management Sciences).

February 1, 2017April 26, 2023

What President Trump means for Pakistan

By Shehryar Nabi

What does the Trump administration mean for Pakistan? Here are the key issues to watch:

Relations with the United States

The American foreign policy establishment has held an increasingly critical view of Pakistan. Despite being a U.S. ally in fighting terrorism, Pakistan has been accused of distinguishing between “good and bad” terrorists and supporting militant groups that threaten U.S. interests. Former President Barack Obama even questioned why Pakistan should remain an ally. Pakistan currently relies on the U.S. for $850 million worth of economic and military aid, which has declined over the past few years.

At his confirmation hearing, Secretary of Defense James Mattis said he will incentivize Pakistan to eliminate terrorists within its borders. He also said he would encourage collaboration between Pakistan and Afghanistan to combat terrorism. Mattis has in the past stressed the importance of maintaining an alliance with Pakistan despite frustration with its anti-terror efforts.

National Security Advisor Michael Flynn has taken a tougher position. In his recent book, The Field of Fight, he wrote that Pakistan must choose between helping extremists or receiving harsh treatment from the United States. If this translates into less aid or more trade restrictions, sectors of Pakistan’s economy that depend on American money could suffer.

Pakistan’s tightening geopolitical relationship with China may put it in an awkward position if the U.S.-China relationship starts to deteriorate. Trump talked disparagingly about China’s effect on the American economy during the presidential campaign. Trump’s pick for secretary of state said that he would block China’s access to artificial islands it built in the South China Sea. China responded with aggressive statements. But hostilities could be checked by Trump’s pick for ambassador to China, whom the Chinese government has praised as “an old friend”.

Continued expansion of America’s relationship with India could also strain U.S.-Pakistan relations. In August, the U.S. and India signed an agreement that relaxed institutional impediments to military logistics-sharing between the two countries. In December, the U.S. also officially recognized India as a “Major Defense Partner”, guaranteeing future military collaboration. Secretary of Defense Mattis has said he would continue strengthening U.S.-India ties.

These actions are perceived as an attempt by the U.S. to check China’s influence in Asia. If China takes issue with a militarily empowered India, it might find an even stronger ally in Pakistan, which is likely to be alarmed by the situation. This would only add to the awkwardness of Pakistan’s position with the U.S.

Climate change

Rising sea levels and drought induced by climate change threaten to create tens of millions of climate refugees in Pakistan. But Pakistan alone can’t do much about it beyond trying to adapt, because the main contributors to global warming are the United States, Europe and China.

There are clear signs that Donald Trump’s presidency would diminish America’s vital role in upholding global commitments to reduce greenhouse gases. As part of the Paris Agreement, the Obama administration vowed to shut down coal-fired power plants, which would lower U.S. carbon dioxide emissions by up to 28 percent. The Trump administration intends to withdraw the U.S. from the agreement and lift Obama-era regulations that limit the extraction of fossil fuels. He tweeted in the past that climate change was “created by and for the Chinese”, and he picked a climate skeptic to head the U.S. Environmental Protection Agency.

Without America’s cooperation in global pledges to reduce greenhouse gases, the world will move faster towards an atmospheric temperature of 2 degrees Celsius – widely considered the climate “danger zone”.

Remittances

Remittances – money sent by migrants to their countries of origin – make up seven percent of Pakistan’s GDP. 13 percent of those remittances ($1.3 billion) come from the United States. Remittances play a crucial role in making poorer families resilient during natural disasters and periods of economic uncertainty, and they can even spur entrepreneurship.

Pakistan could see a sharp increase in remittances from the United States in the near term if Pakistanis living there fear prejudice and send money back in case they have to return. This is precisely what happened after the September 11^th attacks in 2001 led to a rise in in anti-Muslim sentiment. From 2001 to 2002, remittances to Pakistan from the United States nearly tripled.

Why would Pakistanis fear prejudice? Trump’s campaign was marked by controversial statements about Muslims such as his proposed temporary ban on all Muslim travel to the United States, the notion that Islam hates America and the establishment of a Muslim registry. Hate crimes against Muslims also increased by 67 percent from 2014 to 2015, and there is concern that perpetrators of these crimes are empowered by Trump. However, recent polling data showing that overall American favorability of Muslims increased (mainly driven by members of the Democratic and Independent parties) during Trump’s campaign suggests growing prejudice and support for Muslims are parallel trends.

On Friday, Trump signed an executive order barring all immigration from seven Muslim-majority countries, and the White House hinted that Pakistan could be included in the future. However, there is room in the order for exempting immigrants on a case-by-case basis, and the order won’t apply to green card holders.

If these factors combine to foster anxiety among Pakistanis living in the U.S., remittances could rise in the near term. But if more Pakistanis leave the U.S. and fewer choose to migrate there, there will likely be a long-term slump in remittances.

Human capital

Thousands of Pakistanis go to the United States to study and work every year. Many of them stay in America and find employment in high-skilled jobs. This has contributed to a “brain drain”: Pakistan is missing out on the contribution of highly educated citizens who choose to work abroad.

But at the same time, many Pakistanis come back and make a real impact with the advanced knowledge acquired in other countries. This knowledge makes them great “human capital”.

If the Trump administration fosters the hostile environment described above, would Pakistan benefit from a “reverse brain drain” – when highly educated Pakistanis decide to come back? It might, but those Pakistanis may prefer to work in another country with organizations that reward advanced skills and talent. Pakistan lacks enough of those organizations.

If Trump’s presidency marks a longer-term decline in Pakistani access to American institutions, high-achieving Pakistanis who want to bring back global knowledge and experience will have a harder time doing so.

Exports

Exports are a key driver of economic growth in Pakistan. The United States is Pakistan’s top export destination with $3.7 billion worth of exports in 2015.

86 percent of those exports are from textiles, which dominate Pakistan’s manufacturing sector. Invigorating this currently struggling sector will lead to mass job creation that will reduce poverty and help prevent a future unemployment crisis.

Anger over the loss of manufacturing jobs in America was decisive for Trump’s election victory. He touted protectionist trade policies during his campaign to bring outsourced manufacturing jobs back to the United States.

He pledged to withdraw from the North American Free Trade Agreement (NAFTA) if it isn’t renegotiated in America’s favor, he killed the Trans-Pacific Partnership (TPP) and vowed to impose a 45 percent tariff on goods from China. While it’s unclear whether Trump’s top officials on trade would advocate these exact policies, they hold a similar, skeptical outlook on America’s trade deals.

This protectionism, if applied to Pakistan, will make it more expensive for Americans to buy Pakistani goods and may reduce export earnings from the United States.

Multilateral engagement with Pakistan

Pakistan receives billions of dollars from multilateral organizations such as the World Bank and the International Monetary Fund, both of which receive more funding from the United States than any other country.

The Trump administration has drafted, but not yet implemented, two executive orders that could lower U.S. commitment to these and other international organizations.

The first order cuts funding for any United Nations agency or other international body that, among other criteria, grants membership to the Palestinian Authority or Palestine Liberation Organization, funds abortion or receives money from any state that sponsors terror or violates human rights. The order further mandates a minimum 40 percent decrease in spending toward international organizations.

The second order requires a review of America’s current multilateral treaties and withdraws from those that are not directly related to national security, extradition or international trade.

The fact that the order has been delayed could mean it will be amended. But it signals that the Trump administration is serious about rolling back U.S. global engagements in the development sector. Resources for organizations that support healthcare, education, infrastructure development, energy and other sectors will likely be reduced. Indeed, the effectiveness of international donor money for development is subject to debate. But if the orders result in decreased global support for Pakistan’s development goals, achieving them will be a greater challenge.

Shehryar Nabi works in communications for the Consortium for Development Policy Research and the Institute of Development and Economic Alternatives.

January 10, 2017April 26, 2023

The six biggest challenges facing Pakistan’s urban future

Hina Shaikh and Ijaz Nabi

Pakistan is among the most urbanized countries of South Asia. As challenges mount, urban planning is gradually finding space in the policy discourse. This is the first of three blog posts on Pakistan’s rapid urbanization. It discusses the pace of urbanization and the major problems associated with it. This will be followed by posts on how the government is responding to the challenges and how and whether the research community is engaged in seeking solutions.
Continue reading “The six biggest challenges facing Pakistan’s urban future”

December 29, 2016April 26, 2023

15 changes in 2016 that shaped Pakistan’s development path

(Image: Flickr user junaidrao, CC BY-NC-ND 2.0)

Shehryar Nabi

Whether you are a pessimist or an optimist about the future, 2016 was indisputably a pivotal year for the world. Here’s a recap of the changes both in and out of Pakistan in 2016 that will affect its development path:

1. Poverty was re-defined

The poverty rate increased significantly this year after the government updated its own methodology for determining poverty, and found that 30 percent of Pakistanis are poor.

The United Nations Development Programme also released Pakistan’s first-ever multidimensional poverty index, which uses non-wealth indicators such as education and health to measure poverty. Using this method, Pakistan’s poverty rate comes to 39 percent.

The good news is that no matter the measure, the poverty rate has been declining overtime, albeit unevenly across different regions.

As argued here, efforts to re-define poverty indicate a willingness to adapt the measure for better anti-poverty interventions. This means that more poor people living above the official poverty line can be targeted by poverty reduction efforts.

2. The China-Pakistan Economic Corridor became functional

The first Chinese ship docked at Gwadar port to receive goods transported along the China-Pakistan Economic Corridor (CPEC) for sale in global markets, opening CPEC to international trade. The government estimates that the $54 billion Chinese investment in infrastructure and energy will create 800,000 jobs and boost Pakistan’s GDP growth rate from its current 4.7 percent to 7 percent in 2018.

But CPEC enthusiasts shouldn’t express their jubilation at the initial investment alone. The transformative effects of CPEC will only be felt if regions adopt policies to accommodate it, and local entrepreneurs seize the opportunity.

CPEC is also tightening Pakistan and China’s military relationship, raising eyebrows in India.

3. More protections for women were legislated

Two bills giving women greater legal protection from physical and sexual violence were passed in 2016.

In February, the Punjab assembly passed the Protection of Women Against Violence Act, which expands the kinds of actions women can report as violence and establishes a process for reporting abuse, protecting victims and bringing cases to court.

In October, parliament passed anti-honor killing and anti-rape bills. The new laws prevent the victim’s family from forgiving the perpetrator of an “honor killing” (unless the perpetrator is sentenced to a capital punishment) and, for rape cases, set a three-month time limit for determining verdicts, require DNA testing as evidence and impose a minimum prison sentence of 25 years for the offender.

The Protection of Women Against Violence Act was criticized by the Council of Islamic Ideology as being un-Islamic and unconstitutional.

Activists praised the bills as a step in the right direction, but there is concern that the laws do not go far enough and lack proper implementation.

4. The International Monetary Fund ended its stabilization program

The International Monetary Fund (IMF) ended its US $6.7 billion, three year stabilization program that increased Pakistan’s foreign reserves enough for four months of imports, reduced its deficit from 8 to 4.3 percent and maintained a steady outlook for economic growth.

While Pakistan is safe from an external shock to its economy for now, the IMF may come back if necessary reforms to make Pakistan resilient to global economic shifts are delayed for too long.

5. Relations soured with Afghanistan . . .

Continued criticism from Afghan President Ashraf Ghani that Pakistan has not done enough to prevent cross-border terrorism, skirmishes at the Khyber Pass and plans to deport 3 million Afghan refugees could further slowdown Pakistan and Afghanistan’s trade relationship and hurt regional cooperation.

6. . . . and India

The glimmer of hope for India-Pakistan relations established after Indian Prime Minister Narendra Modi’s surprise visit to Lahore quickly faded when terrorists allegedly based in and supported by Pakistan killed seven Indian soldiers and one civilian at Pathankot air force base, 19 soldiers at Uri and seven soldiers at Nagrota in India-administered Kashmir.

Anti-India sentiment was also inflamed in Pakistan after the Indian army cracked down on Kashmiri protesters, killing 89 and causing eye damage to thousands, many of whom became permanently blind.

Bollywood banned Pakistani actors, and Pakistan banned Bollywood films (until recently). India carried out “surgical strikes” against terrorists in Pakistan – although official and civilian narratives of the strikes differ. There were more cross-border firings between Pakistani and Indian soldiers. The Indus Waters Treaty came under threat.

While improved India-Pakistan relations are desirable for expanding trade, cultural exchanges and preventing war, the events of 2016 do not bode well.

7. Pakistan became Asia’s best-performing stock market

The Karachi, Lahore and Islamabad stock exchanges merged into the Pakistan Stock Exchange (PSX), which became Asia’s best-performing stock market with an increased value of 27 percent.

Recently, a Chinese-led consortium acquired a 40 percent stake in the PSX, with the hopes of drawing more Chinese investment into Pakistan’s economy.

8. The Panama Papers changed politics

The anti-corruption agenda spearheaded by the leading opposition party, Pakistan Tehreek-e-Insaf (PTI), was bolstered by the Panama Papers investigation that revealed Nawaz Sharif’s children as among the global rich and powerful who hold large offshore accounts.

While there is currently no evidence that the money was extracted through corrupt means, the issue has become a thorn in the side of the ruling Pakistan Muslim League-Nawaz (PMLN) for the 2018 election. With a PMLN victory, voters can expect a continuation of the energy-expanding, infrastructure-building focus of development policy. But if the Panama issue remains potent, securing a PTI win, Pakistan may change course.

9. Pakistan became committed to global CO2 reduction targets

In November, Pakistan ratified the Paris Agreement, which commits countries to reduced CO2 emissions targets. Pakistan also passed the Climate Change Bill 2016, which proposes measures for mitigating the effects of climate change. However, having different ministries implement the measures will be a separate, though important challenge given the threats climate change poses to flood risk, food security and the overall economy.

10. Power generation costs continued to fall

Lower global oil prices and the expansion of wind, hydel, coal, solar and nuclear power projects have made power generation much cheaper, as seen by a recent 50 percent cost reduction in November. Energy costs will likely fall even further if more power companies are privatized, and CPEC energy investments are made next year. The government is hoping that by the 2018 election, regular blackouts will end. However, if power losses from transmission and distribution and inefficient energy usage are not addressed, blackouts will likely return.

11. Infrastructure, infrastructure, infrastructure

New highways. Upgraded railroads. Metro lines. Pakistan’s push for modern infrastructure intensified in 2016.

There is a view that the government is giving infrastructure too much focus and, as a consequence, neglecting the education and health sectors. Others argue that better infrastructure is a form of economic justice.

12. Polio moved closer to eradication

In 2014, there were 306 new cases of polio in Pakistan, a significant increase from preceding years. In response, the government began carrying out regular vaccination drives. This year, only 22 new cases of polio were reported.

The final push to complete eradication still poses challenges, as health workers administering vaccines are threatened by attacks and outdated systems for managing anti-polio drives could leave some children unvaccinated.

13. A cure for Hepatitis C became more affordable

According to Pakistan’s health ministry, about 8 million Pakistanis have Hepatitis C, and 80,000 die from the disease every year. The most effective treatment for the disease is the drug sofosbuvir, but unless a local pharmaceutical company has the rights to produce a generic version, it costs US $1,000 per pill.

This year, the Pakistani pharmaceutical Ferozsons acquired those rights and began manufacturing the drug to be sold at a slashed price of $56 for 28 doses. While poor sanitation and dirty needle use will likely keep Hepatitis C prevalence high, the availability of a low-cost treatment will undoubtedly save lives.

14. A program to reduce malnourishment began

With the support of the United Kingdom’s Department for International Development, Pakistan launched a food fortification program to fight malnourishment. 44 percent of Pakistani children under five have stunted growth from malnutrition, slowing their cognitive ability and increasing their susceptibility to disease. The program will add micronutrients to flour and edible oils with the hopes that in five years, they will be consumed by over half of the population.

15. The West saw a historic political shift

Pakistan will likely feel the effects of the major political and economic changes in the West: the election of Donald Trump to the United States presidency, Britain’s exit from the European Union and the rise of political parties that favor less trade, less foreign aid and less immigration.

Pakistan may be caught in an awkward position vis-à-vis relations with China and the US if they engage in a trade war, foreign aid could decline and discouraged Pakistani migrants in the West might cause a drop in remittances.

These possibilities and more will be examined in greater detail for a future post.

Shehryar Nabi works in communications for the Consortium for Development Policy Research (CDPR) and the Institute of Development and Economic Alternatives (IDEAS)

November 15, 2016April 26, 2023

What the data from 2014 reveals about income tax, Part 1: Tax filers and non-filers

Anjum Nasim and Umbreen Fatima

The government of Pakistan collects income tax from both filers and non-filers of income tax returns. In this article, we examine the share of tax collected from filers and non-filers in total federal income tax in tax year 2014 (TY2014).[1] We also comment on the limitations of withholding taxes if the burden of taxes is to be shared equitably across tax filers and non-filers.[2]

The income tax returns filed in TY2014 by companies, association of persons and individuals were in excess of 0.856 million.[3] Tax filers contributed about 63 percent to total federal income tax. The remaining 37 percent was collected from non-filers in the form of withholding taxes.[4]

How income tax revenue breaks down by mode of collection

In TY2014, gross federal income tax collection was Rs 919 billion, of which Rs 64 billion was refunded to taxpayers. Net income tax collection constituted 36 percent of federal tax revenue.

There are three principal modes of federal income tax collection in Pakistan: withholding taxes, voluntary payments by taxpayers and collection “out of demand”: taxes raised by the Federal Board of Revenue (FBR) on the basis of tax audits and from the recovery of outstanding payments.

As seen in the chart below, withholding taxes contributed the most to gross income tax collection (62 percent), followed by voluntary payments (29 percent), and collection “out of demand” (9 percent).[5] These ratios were 51.5 percent, 37.3 percent and 11.2 percent a decade earlier.

Distribution of income tax by mode of collection

(source: FBR Year Book 2014-2015)

Withholding taxes have been instrumental in increasing the share of income tax in total federal taxes from 14.4 percent in 1989/90 to 37.9 percent in 2014/15.[6] However, it is important to note that some withholding taxes may not be different from indirect taxes – such as customs and excises – thus exaggerating the share of income tax in total federal taxes.

The collection “out of demand” has been very erratic over the years. From 2001 to 2014, it was as low as 3.2 percent of gross income tax collection in 2006/07 and peaked at 17.6 percent in 2009/10, with considerable variation over the period.

The share of tax filers and non-filers in income tax

The total income tax declared, as listed in the TD2014, was Rs 491 billion.[7] If we assume that the taxes ‘out of demand’ (Rs 81 billion) and those listed under the category of ‘miscellaneous’ (Rs 4 billion) were raised exclusively from tax filers in 2014, then the tax paid by tax filers in TY2014 was Rs 575 billion. Since gross income tax collection was Rs 919 billion, it follows that Rs 344 billion of gross income tax collection, exclusively in the form of withholding taxes, is attributable to non-filers. The distribution of taxes paid between filers and non-filers is shown below.

Distribution of income tax between tax filers and non-filers

(Authors’ calculations)

We next consider withholding tax collection, the main component of gross income tax collection for TY2014. The total withholding income tax collection in TY2014 was Rs 572 billion. Subtracting our estimate of Rs 344 billion as withholding tax payment by non-filers, yields Rs 228 billion as withholding tax payment by tax filers. The figure below shows the relative distribution of withholding taxes between filers and non-filers:

Distribution of withholding income tax between tax filers and non-filers

(Authors’ calculations)

While the withholding tax paid by tax filers was Rs 228 billion, other components of their income tax were voluntary payments (Rs 263 billion), tax “out of demand” (Rs 81 billion) and miscellaneous payments (Rs 4 billion). The figure below depicts the distribution of income tax paid by tax filers between these components. On the aggregate, tax filers paid 39 percent of their income taxes in the form of withholding taxes. This ratio could, however, vary across different categories of tax filers (companies, association of persons, and individuals) and within the same category of tax filers. On the other hand, all non-filers pay 100 percent of their taxes in the form of withholding taxes.

Distribution of income tax for tax-filers

(Authors’ calculations)

Government efforts to increase the tax base

Although random audits of tax filers generated 7.4 percent of income tax collection in TY2014, FBR has not been very successful in recovering unpaid income taxes from non-filers. A project, ‘Broadening of the Tax Base’ that started at FBR in 2013, added 130,000 new tax filers, who filed only Rs 1.8 billion worth of tax returns. An additional tax demand by Rs 36 billion was raised but less than Rs 1 billion was collected as of 2016.[8]

Recently, the government has made it harder for non-filers to remain outside the tax net by imposing higher withholding tax rates. The cost of remaining outside the formal system can be increased further by expanding the withholding tax net and widening the difference in withholding tax rates between non-filers and filers. But even though this creates an incentive for non-filers to file their tax returns, it may not raise income tax collection if non-filers join the ranks of filers but declare their incomes to be below the threshold level of income required to impose an income tax. In this case, there would be no increase in taxes that are not withholding taxes, but the withholding tax revenue would decrease because lower rates would apply to previous non-filers turned filers.

The effort to broaden the tax base should also be intensified by recovering unpaid taxes. Identifying new tax filers and recovering tax from those who have assiduously avoided tax payment can be very challenging. It requires coordination and information sharing across ministries and departments at the federal and provincial levels, rigorous investigative work and data analysis at the FBR, and a robust legal team. Most importantly it requires strong political backing at the highest level of government to take on the economically powerful but rogue elements of society.

Without such a commitment, taxes will continue to be raised through greater indirect taxation or squeezing more taxes from existing tax filers. This will have even graver long-term consequences for social cohesion and the writ of the government.

[1] The analysis in this article is based on Tax Directory for 2014 (provisional edition) (TD2014) and the FBR yearbook 2014-15, both available on the FBR website.

[2] Withholding income taxes are taxes that are collected at source, e.g., by employers at the time of payment of wages and salaries or by companies at the time of payment of dividends. Some withholding taxes in Pakistan are presumptive income taxes, e.g., on electricity and phone bills, or on cash withdrawals from banks, or on imports and exports. Some withholding taxes are adjustable against final tax liability but others are un-adjustable.

[3] We calculated the number of tax filers from TD2014 to be 0.856 million. TD2014 clarifies that a “considerable number of manually filed Returns could not be entered in the system […] due to missing identifiers on the Returns”. If account is taken of the manually filed returns, which have not been entered, the number of tax filers will exceed 0.856 million.

[4] Since our estimates of the shares of tax filers and non-filers in income tax are based on TD2014, the omission of a number of manually filed returns in TD2014 may underestimate the tax share of tax filers and over-estimate the share of non-filers.

[5] Source: FBR Year Book 2014-15, Revenue Division, Ministry of Finance, Government of Pakistan (available at: http://download1.fbr.gov.pk/Docs/20166101364010551RevenueDivisionYearbook2014-15.pdf)

[6] Calculations based on data in ‘Table-1: Federal Tax Receipts’ in FBR Year Book 2014-15.

[7] While the FBR Year Book provides figures for gross income tax collection, the Tax Directory provides the list of all tax filers (companies, association of persons, and individuals) who file their tax returns, as well as the taxes paid by them i.e. the sum of their withholding taxes and voluntary payments.

[8] See Chapter 3 in Revenue Division Year Book 2015-16, FBR, Ministry of Finance.

Anjum Nasim is a senior research fellow at the Institute of Development and Economic Alternatives (IDEAS).

Umbreen Fatima is a research associate with IDEAS.