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This blog builds on three presentations from a webinar cohosted by CGD and the Consortium for Development Policy Research (CDPR) on September 22, 2020. You can view the webinar here.

When the COVID-19 pandemic reached Pakistan in late February, it was expected to hit the country badly. The concern was that with poor health and nutrition indicators and the fiscal restraints imposed by an ongoing International Monetary Fund (IMF) stabilization program, Pakistan would be unprepared to respond. The health fears were stoked further in late May when Pakistan’s R0 value (a measure of contagious disease that indicates an epidemic for values greater than one) surpassed two and the positivity ratio (the percentage of those tested found to be infected) peaked at 22 percent in mid-June.

When the COVID-19 pandemic reached Pakistan in late February, it was expected to hit the country badly. The concern was that with poor health and nutrition indicators and the fiscal restraints imposed by an ongoing International Monetary Fund (IMF) stabilization program, Pakistan would be unprepared to respond. The health fears were stoked further in late May when Pakistan’s R0 value (a measure of contagious disease that indicates an epidemic for values greater than one) surpassed two and the positivity ratio (the percentage of those tested found to be infected) peaked at 22 percent in mid-June.

In response, Pakistan intensified its lockdown. Despite the limitations, the government also rolled out a spate of health, income support, and business financing interventions to mitigate the economic hardships. By mid-August, the virus was under control, as seen in the sharp decline in daily cases and deaths. Civil unrest, feared in the early stages when the country faced a generalized lockdown and a severe income shock to low-income urban households (nearly half the population), did not materialize. Importantly, despite the fiscally demanding coping interventions, Pakistan remains on the pre-COVID-19 macro-stabilization trajectory.

COVID-19, of course, is not behind us—it may return and may again severely test the government’s management capacity. To prepare for this, the lessons learnt from coping with the crisis as it has unfolded thus far will be valuable both to Pakistan to manage a possible second wave, as well as to other countries.

Assets on the eve of the crisis

The country’s poor health outcomes are reflective of the underlying inadequate health infrastructure. The 2010 devolution of health services to the provinces would also pose coordination challenges. Even more worrisome was the widely held perception of a weak implementation capacity enfeebled further by the tight fiscal space. On the assets side of the balance sheet, there was a world-class digital highway to deliver cash support to the poor, the Benazir Income Support Program (BISP) and widespread mobile phone and internet connectivity. Large and regular household and business surveys had created data banks that would facilitate micro-lockdowns. Importantly, while there were misgivings about governance in general, the government and civil society had a track record of meeting catastrophic emergencies with resilience and order (for example, the 2005 earthquake, floods in 2010, and the 2014 military operation against terrorists). Pakistan Center for philanthropy estimates that Pakistanis give 1.2 percent of GDP in charity which equals charity contributions in the United Kingdom (1.3 percent of GDP) and Canada (1.2 percent of GDP), and around twice India’s.

Although fiscal policy was tight in March, the overall macroeconomic position had improved over the previous eight months. The government had eliminated the current account deficit of US$2 billion a month inherited from the previous government. Reserves were building up and the previous two quarters’ fiscal adjustment had resulted in a primary surplus. Significantly, the government was gaining confidence in its economic management capabilities that would be important in pumping much needed liquidity into the economy to cope with COVID-19.

With these assets, the government embarked on a three-pronged program focusing on virus containment, cash transfers, and business support.

Virus containment 

Given the uncertainty surrounding the spread and duration of the virus and the fiscal realities, it was decided early on that the containment strategy would strike the right balance between lives and livelihood.

The next step, learning from previous emergencies, was to set up a centralized National Coordination Center (NCC) chaired by the prime minister, with all provincial chief ministers and key federal ministers as members to facilitate coordination. To operationalize decisions of the NCC, a National Command and Operational Center (NCOC) was established in late March, chaired by the minister for planning and with representation of military and federal agencies. NCOC met daily, tracked the virus round the clock, and implemented containment measures.

Virus containment was built on South Korea’s model of testing, tracking, and quarantine. It rested on two platforms: at the grassroots level, thousands of personnel of provincial health departments and civil administration services were mobilized; and a technology platform was set up to identify positive cases and track them to isolate hot spots. The objective was to move from broad to micro lockdowns. By mid-June, 5 percent of the country’s 212 million people was locked down, capturing 43 percent of total active cases, the threshold for tolerable economic disruption.

Several measures show the impact of the strategy: R0 fell from greater than two in mid-May to under one (indicating that the disease was dying down) at end-June (the country’s contact tracing factor of  1 to 15 meets world standards); the positivity ratio fell from 22 percent in mid-June to under 2 percent in mid-August; daily deaths fell from 144 to single digits; compared to Pakistan, mortality per capita in India is a multiple of 17, a multiple of 46 in Iran, and a multiple of 5.5 in Bangladesh. Correlates such as hospitalization and utilization of PPE (all monitored by NCOC) corroborate these trends.

The crisis response underscores the importance of reliable health data. Preparing for a possible second round, several data shortcomings need to be addressed. These include lack of publicly available data on death, widespread diseases such as tuberculosis to assess collateral damage, and public attitudes towards vaccination. COVID-19 testing also needs to be ramped up. Good data will help assess the impact of interventions given that demographic features may have contributed to the low incidence of infections, such as the youth of the population, reduced mobility, and exposure to other diseases—factors that might have strengthened immunity.

Cash transfer

Ehsaas (Pakistan’s social protection program that incorporates the BISP) was assigned the responsibility of providing cash support to poor households to cope with the economic shock of the crisis. Ehsaas data shows that 24 million daily wage earners support 160 million people—some two-thirds of Pakistan’s population—and there was widespread anecdotal evidence of huge suffering because of the lockdown-associated income shock.

The macroeconomic discipline leading up to March created the fiscal space to cope with the income shock. The government allocated Rs 144 billion for income support to 16.9 million families ($75 per family over two months), later increased to Rs 200 billion (0.48 percent of GDP). Three categories of recipients were identified. The digital highway to transfer cash to category 1 families (4.5 million with asset score of 16.17 identified in the BISP program) already existed. Utilizing available data, it was extended to category 2 (4 million families with asset score between 16.16 and 26—the asset score measures the value of assets a household owns).

Identifying category 3 was more demanding. Endemic poverty in Pakistan is largely rural.  COVID-19-related income shocks were mainly in the urban areas so the BISP digital platform had to be extended to include deserving urban households. An SMS campaign was launched to capture urban wage earners suffering the income shock; 139 million messages were received of which 66 million were unique as identified via the National Database & Registration Authority (NADRA) card. These were then cross checked with other data linked to the card, such as large expenses, tax payments, and so on. Due diligence by union council (local government) representatives in the locked down areas (working closely with NCOC), a time-consuming process to be certain, helped identify an additional 3.5 million families.

Ehsaas has responded well in providing income support during the crisis. Overall, the program has a good conversion rate measured as the ratio of the amount withdrawn to the amount disbursed to the banks for payments to beneficiaries. Payments to category 3 is a challenge because of the complex verification process. The capacity to carry out rapid assessments of continued COVID-19 related disruption will need to be developed and the digital highway of cash transfers to the urban poor, currently not captured systematically on Ehsaas platforms, will need to be constructed and evaluated for impact.

Ijaz Nabi is the Country Director at IGC Pakistan and Chairperson at CDPR. He is also a Non-Resident Fellow at the Center for Global Development (CGD) and this article originally appeared on the CGD website here.  

For more information, watch the full session of the webinar on which this blog is based.

In many developing countries like Pakistan, the state’s capability to implement reform initiatives has been constrained by ‘capability traps’, where the government has failed to achieve sustained improvements in performance because there has been greater focus on changing what policies and organisational structures look like rather than what they actually do. This has created a growing need to identify locally-nominated problems and actively engage with agents on ground, instead of importing pre-packaged best practice solutions from other countries.

In Pakistan, ever since the 18^th amendment, provinces now have greater autonomy to direct resources and capabilities by adopting a more adaptive policy making approach for strengthening public service delivery. The Consortium for Development Policy Research in partnership with the International Growth Center (IGC) and the Sustainable Energy and Economic Development (SEED) organized a Policy Exchange talk, focused on ‘Adaptive Policy Making,’ bringing together a panel of experts to discuss Harvard University’s latest research on state building capacity, known as the Problem Driven Iterative Adaptation (PDIA), and understand how it can transform policy making in Pakistan, particularly in the province of Khyber Pakhtunkhwa (KP).

What is Problem Driven Iterative Adaptation (PDIA)?

Problem Driven Iterative Adaptation (PDIA) is a decision-making process that emphasizes on defining the problem first, rather than seeking solutions, to enable policymakers to cumulatively take steps in the right direction. It can be differentiated from the dominant paradigms of building state capability in three essential ways:

PDIA is an organisational process

PDIA undertakes an organizational approach, where it assumes that the government is an organisation, in contrast to other dominant state capability building approaches, which respond through a policy process, independent of the organizational structure. Hence, PDIA’s main focus is on enhancing organizational rather than the individual agent’s capacity because it assumes that if individuals are better embedded in the organizational processes and practices then their individual capacities will also be brought out.

PDIA is a purpose-driven approach

It is also important to note that previously dominant state capacity building approaches were more inclined towards a process compliance-driven decision-making process, which assumes that employees already understand the organization’s culture and only require capacity enhancement to solve problems. However, this approach has resulted in delays in apt decision making as agents in the organisation are not able to effectively articulate the organisational purpose, and are overly bound by regulations, waiting for directions from higher ups. PDIA, on the other hand, opts for a more problem-driven or purpose-driven approach for organisational capability enhancement. It focuses on first defining the organisation’s purpose, identifying the problem and then proceeding towards capacity building. This sets clear direction for where the organisation needs to build capacity to fulfil its purposes, and articulates what needs to be learned by the agents to gear up and tackle the problem; in other words, everyone’s role in the organisation becomes clear, leading to greater empowerment.

PDIA is a capacity building approach

With regards to capacity building, governments in Pakistan have traditionally undertaken an individual capacity building direction, where initiatives like training programs, start with the presumption that agents within the organization do not have capacity. This is different from the PDIA approach, which is based on the idea that capability cannot be built without understanding the purpose or problem behind it. For instance, before investing in training programs for police officers in KP, it is important to identify the key problems the police system encounters in the provinces. Hence, the problem identification stage in PDIA is essential for defining the purpose, and the problem should be carefully constructed to then identify what capabilities need to be enhanced. In this way the purpose of the organization is internalized by the agents of the organization as well as outlined beyond the organization to the supportive infrastructure, consisting of the governmental and social forces – leading to acceptance and ownership of the problem as defined by the organization as well as decentralized decision making.

KP’s Experience with PDIA Adoption

Post-18th amendment, provincial governments have enhanced discretion to drive policy and public expenditure decisions. The KP government was also able to spend more on key sectors like education, health and the police. Investments in the education sector increased by 350% to improve monitoring and inspections, while health sector investments also rose by 70%, particularly at the tertiary care level. Furthermore, investments were made to improve the police culture and the overall criminal justice system due to the security concerns emphasized by the previous government and general public in KP; as a result, the police system in KP has been lauded all across the country.

Despite efforts to enhance adaptive policy making in KP, the province still has a long way to go. Hence, it is important to highlight the following challenges and recommendations to improve adoption of PDIA in KP:

Difficulty in Changing the Organizational Culture

The organizational culture in KP is difficult to change, which has led to resistance to the adoption of PDIA as an adaptive policy making approach. As organizations in Pakistan are dealing with decades of low levels of performance, a ‘stick’ approach, where regulatory pressure is applied from the outside, has not been successful in changing organizational culture. Organizational transformation needs to be unleashed from within, where PDIA can be used as an important tool for identifying problems from inside the organization.

Punjab’s experience with the Section 42 companies, particularly the Punjab Skills Development Fund (PSDF) is important to note here, as it allowed the creation of a policy design space, which does not follow the usual rules of business for public sector organisations. This major organizational change enabled the experimentation of different policy designs and innovative skills programs based on evidence on ground. Learning from Punjab’s experience, KP has also allocated resources for the creation of a similar skills development organisation.

Misalignment of Interests between Political Elite and General Public

KP has encountered a mismatch between the problems identified and spent on by the political leadership and the actual on-ground realities of the general public. Results from the recent perception surveys in KP show that the public is more concerned with issues related to unemployment, inflation, electricity and gas, whereas the political elite mainly propose investments in areas of road development, water supply management and irrigation systems. This misalignment between actual needs and provincial spending is a result of a ‘capability-first’ mind-set of the political elite, who focus more on tackling development needs in areas where they already have built capability i.e. spending on logistical tasks that earn political mileage and visibility, but do not require organizational reordering for maximising development outcomes. This sort of logistical spending, though attractive to the political elite, is not aligned with the overall growth agenda of the province and does little to solve complex problems people actually face.

This misalignment of interests can be resolved in two essential ways: firstly, by ensuring the active involvement of all political economy actors in the problem identification process, and secondly, by setting a clear distinction between public spending and actual investment. In the former case, it is important to understand that problem identification in PDIA is a political process, which necessitates the involvement and authorization from all key stakeholders, and accounts for all political economy constraints in the construction of the problem. Hence, effectively using the Triple A framework of the PDIA approach becomes necessary in KP’s reform space to ensure that there is support for building state capacity (authority) , acceptance for this policy change (acceptance), and skills set, time and funding are available to support the proposed intervention (ability). It is interesting to note that KP has already started integrating PDIA in its Annual Development Policy, as it proposes no Chief Minister-directed or constituency-based spending, and aims to take on a sectorial problem identification approach, with close consultation with the elected leadership.

On the other hand, it is also important to prompt policymakers to sequence and sift out development priorities, and give the highest attention to those whose gains translate into an actual increase in social welfare. With this aim, the government will have to empower entire organisational structures – not just its leadership – to work as a synergy that prioritises capability enhancement as and when needed for addressing non-traditional problems.

Mind-set of Civil Servants

Changing the mind-set of civil servants and the manner in which they work is a key challenge in KP, which points to the need to move from a strict accounting-based accountability towards account-based accountability. While improving “accountability” is necessary for improving public sector performance, provincial governments in Pakistan have traditionally followed an accounting-based accountability approach, which is only focused on strengthening top-down managerial control and instilling a control modality into the civil servants’ mind-set. While, this approach is sometimes useful in managing logistical tasks like building a road, it fails to offer much discretion or autonomy to civil servants – losing on the benefits of provincial decentralization and opportunities of engagement with the local government, general public, and frontline organizations and agents.

PDIA instead proposes an account-based accountability model, which focuses on understanding what needs to happen to the everyday processes and how, as part of the PDIA process, high performing civil servants can be enabled with a different version of what they could do and achieve greater power and autonomy to innovate. The fundamental idea behind this approach is to provide an account, which is a narrative that explains what happened and why, and how others can form a judgment about whether the actions were appropriate, rather than just follow top-rules and procedures.

Tendency to Focus on Solutions

Preconceived notions of directly looking for solutions, rather than the whole value chain to find actual problems, has also been a key barrier to the adoption of PDIA in KP. The Bus Rapid Transit (BRT) project in KP is also an example where the tendency to expedite the process to achieve solutions or quick recognition was a problem rather than the actual technical design of the project. This indicates that the government’s focus is more on spending rather than the process or the output. Similarly, many departments in KP were also not able to track their progress in terms of output due to lack of data and baseline evidence. Furthermore, in cases where the unit cost of delivery was high, focus on spending has prevented departments from changing their strategy. Hence, it has become increasingly important to identify organizational purposes and divert focus towards output or the process rather than spending.

Need to think local

It is pertinent to recognize the limits to external validity and move away from the tendency to import international best practices, without keeping the local context into consideration. This also applies to the case of federal and provincial power distribution, where PDIA is employed at the provincial level to discover innovation through decentralization, while its implementation continues to be top-down.

Hence, it becomes necessary to embrace a diffusion mentality – where the fusion of success is horizontal, and based on the account of those who are similarly situated and performing well. This entails the adoption of a process which has led to success in for instance, a certain hospital, school or police district, as opposed to adopting its particular practice. This also means that despite greater autonomy and allocation of resources to the provincial governments, there is a need to further delegate at the local level to instill real change. While decentralization at the local government level aids better problem identification and decision making, it also entails a re-imagination of the role of the federal government and ministries in facilitating the provinces.

 

Background

Pakistan has struggled to raise public finances in recent years, a problem which has been made worse due to rapid urbanization. Urbanization has pronounced the need for additional development efforts primarily dependent on revenue generated at the local level. councils. Property taxes stand out as an important instrument to raise local revenue. Throughout OECD countries, a group of predominantly high-income economies, property taxes are equivalent to about 2% of the GDP, while emerging markets collect property taxes equivalent to about 0.6% of their GDP. Pakistan collects just 0.1%, making property tax a severely under-utilized revenue source.

Growing revenue shortfall has led to worsening urban delivery deficits. As an illustration, the latest Pakistan Social and Living Standards Measurement (PSLM) Survey 2018-2019 shows that one in five urban households report not having access to clean drinking water for more than six hours a day. This underlines the importance of property taxes as a means to enhance own source revenue. Being a local tax, it can help mend the broken links between the taxpayer and the state.

           Figure 1: KPK Direct Taxes, Annual Receipts

How Property Taxes work in Pakistan

Pakistan inherited the tax structure of pre-partition India as per the Government of India Act. Since 1958, provinces utilize the Urban Immovable Property Tax (UIPT) to collect tax on both residential and commercial properties in the country. The UIPT remains a local tax and while it should be collected by the urban local governments i.e. the Tehsil Municipal Administration (TMAs), it is currently collected by the provincial government’s Excise & Taxation Departments upon a charge of 15% of collection fee due to institutional incapacity. This is expected to change with the new decentralization laws that give more power to the TMAs in tax collection.

The following figure provides a starting point to explain what constitutes property tax:

Figure 2: What constitutes Property Tax?

The UIPT is currently assessed on the Annual Rental Value (ARV) of the property that is the maximum revenue that can be generated if the property was hypothetically rented out for a year. Currently the UIPT is set at 5% of the ARV. However, valuation can also consist of capital and area-based values.

The number of properties that are taxed is the registered tax base. Tax is collected on the registered properties falling under the tax net. The tax base can be expanded by including more properties under the tax net or contracted by giving out exemptions, according to government policies.

There has also been a policy debate around what should be covered by the UIPT and how to expand its coverage.

The Case for KPK – Major Collection Impediments and Recommendations

For several years, Khyber Pakhtunkhwa (KP) has had low property tax collection and struggled to increase its share. The KP Excise, Taxation & Narcotics Control Department was established as a full-fledged department in 2000, having previously been affiliated with the KP’ Board of Revenue and Finance Department. Some improvements can be seen. In the FY2020, the province collected property tax worth PKR 702 million or 2.2% of the provincial GDP, achieving an 81% recovery rate. The following figure depicts the targets and recoveries of UIPT in KPK over the past 6 fiscal years.

Figure 3: KPK Recovery of UIPT in last 5 years, Source: KPK E&T Department

In the most recent Finance Bill for FY21, the KP Government has introduced specific measures to increase property tax collection. Firstly, the share of property tax revenue released to TMAs has been increased from 50% to 85% to provide more funds for local service delivery. To motivate taxpayers, 20% of the tax amount is to be paid back to those who have paid their tax in advance for the whole year. This amount has increased by 10% since last year. Similarly, outstanding tax payments are now allowed to be paid in 12 installments with a 25% to 30% lump sum discount until June 30, 2021.

Despite these measures, there still exists some deep-lying structural issues that must be addressed to allow KP to leverage this crucial source of revenue.

Low Taxpayer Morale and Accountability

As mentioned earlier, property tax by nature is a local tax and therefore could go a long way in mending broken linkages between the state and taxpayers. However, local service delivery through these taxes is a major issue ignored by the provinces in the past. In Punjab for example, since the devolution of power in Pakistan in 2010, none of the 144 TMAs were able to expand the limits of property tax collection. In KP, even though a greater share at85% was granted to the TMAs, local service delivery remains stymied as most of these funds are consumed by salaries. Overreliance on urban taxation is visible in the Hayatabad area of Peshawar which currently generates 30% of KP’s own-source revenue but these funds have not influenced development expenditures as they are not able to reach local development authorities.

A possible solution to re-establish trust between the taxpayer and state could be through enhanced communication via forums such as local town hall meetings where the citizenry can communicate their preferences and willingness to pay for these goods to the local governments. To expand tax collection in newer areas with fewer services, reduced tax rates could be levied. The new KP Finance Bill has also brought in regulations to ensure smooth transfer of tax receipts from the TMAs to local development authorities to further ease spending on service delivery

Nevertheless, a greater problem lies in the shape of weak taxpayer morale. Albeit Pakistan has seen a surge in the demand for private housing societies in recent years, citizens do not seem to display the same level of enthusiasm for paying for public goods with their taxes. Moreover, political economy brews another challenge as federal and provincial politicians actively give exemptions that deny local governments the resources they need for municipal development.

In this context, measures need to be enacted to stimulate general taxpayer motivation to pay taxes. For example, to ‘jump-start’ the cycle of trust, ‘gateway’ taxes can be especially important and could take the form of small, local taxes with clearly visible service provision returns to re-kindle trust between citizens and the state to increase overall tax compliance. Communication to advertise property taxes as ‘benefit taxes’ that clearly link revenues to services could also play a vital role. I Illustrations of this can be seen in Lagos, Nigeria where billboards had been erected to show where property tax revenue was being spent on as well in Kampala, Uganda where provisions were introduced to ensure that at least 75% of property tax receipts were used for development expenditure.

The KP government in the recent Finance Bill has tried to work on these issues by abolishing around 200 taxes with a high cost-to-revenue ratio and spent substantially towards COVID-19 relief efforts in the province as an experiment of ‘gateway spending’ to boost taxpayer willingness.

Valuation

The method of valuation of property tax in Pakistan poses a number of policy concerns. . Using rental values for property tax calculation estimates tax according to the current instead of the best possible use of the property. This can disincentivize people to invest in buildings. The UIPT also has wide differential rates for owner-occupied versus rented out properties, going as high as 1:10 in Punjab. Long time lags in valuation lead to low tax collections as values are not updated regularly. Currently plots up to 5 marlas are exempted from taxation in Punjab. This leads to a loss of 30% of tax revenues.

Some possible solutions to improve efficiency of this tax could be to a) eliminate the tax differentials between owner occupied and rented property rates, b) revise valuation – the KP government is currently working towards a pilot similar to Punjab’s E-stamping model that uses centralized satellite imagery, to collect market value data and compare the differences in rates between local Deputy Commissioner (DC) and Federal Board of Revenue (FBR)  and c) increase the frequency of valuations in rapidly urbanizing areas to have more recent data on valuations.

Administration and data storage issues abound. Key information on land sizes, location, occupancy status, number of owners, tax liabilities etc. are stored in analog registers making it difficult to retrieve information and hindering evidence-based policy making. In order to address these issues, the KP government has actively promoted a digitization policy via surveying and geocoding properties. Surveys are being designed to identify essential features for a digital billing system under varying tax bases/rates.

Though digitization offers a promising solution to root out collusion and corruption and hence create efficiency and ultimately reduce trust deficit between the citizens and the state, policymakers cannot eliminate the role of actual personnel in the administration of this tax. A study by Khwaja, Khan and Olken in 2014 in Punjab shows that motivating property tax collectors through monetary (performance pay) and non-monetary (merit-based transfers and postings) not only increased tax collection by 40% but also provided a cost-effective alternative for doing so. Therefore, digitization coupled with better incentives can go a long way in improving property tax revenue outcomes in Pakistan.

This article is based on a webinar talk organised by CDPR in partnership with SEED and IGC Pakistan. Watch the full session here.

Watch the key takeaways in a shorter video here.

With growing concerns regarding provincial revenue generation and complex center-province relations post-18th amendment, the issue of sales tax on services has emerged at the forefront of many discussions between the federation and its four provinces. While, the primary purpose of sales tax on services is to generate revenue for the provinces, there is a growing need to harmonize the sales tax regime in Pakistan, create a distinction between the taxing powers of the Federal Board of Revenue (FBR) and provincial revenue collecting authorities, and devise common rules and definitions for efficient data sharing.

Background

Pakistan inherited the tax structure of pre-partition India as per the Government of India Act and since then Services Sales Tax (SST) has remained a provincial subject – however, Goods Sales Tax (GST) was federalized in March, 1948. Although, this power to levy sales tax on services rests with the provinces, the FBR has been providing institutional support due to limited provincial capacity[1].

After the 7^th NFC Award in 2010, provinces created their own revenue authorities and tax legislations. KP, for example, established the Khyber Pakhtunkhwa Revenue Authority (KPRA) in 2013 to administer and collect sales tax on services in accordance with the KP Finance Act, 2013. However, Value-added Tax (VAT) in Pakistan continues to have a fragmented base, as the sales tax on goods is administered by the federal government and the sales tax on services is collected by the provinces. This fragmentation has led to problems of clearly classifying transactions of goods and services, production inefficiencies, and compliance costs.

Khyber Pakhtunkhwa’s Experience

Provincial taxes play a key role in the overall growth agenda for KP and have had a significant impact on the recent budget, which reflects KP Government’s priorities regarding improving the performance of the sales tax on services. Currently, a total of 92 services are taxable under the Schedule 2 of Sales Tax on Services Act in Khyber Pakhtunkhwa (KP).

It is important to note that despite capacity issues and the COVID-19 crisis, KPRA was able to increase tax collection by 73% and generate PKR 18 billion in total sales tax revenue in 2019-20. Moreover, KPRA was also the largest contributor to provincial tax receipts in KP in 2018-19, as shown in the figure below.

Figure: KPRA’s Contribution in Provincial Tax Receipts

Source: KPRA

In addition to this, sales tax registrations by KPRA have also increased many fold due to inclusion of new services in the tax net, usage of readily available third party data, and departmental efforts to identify and register new taxable businesses. The figure below depicts the increase in KPRA’s sales tax registry over the past few years.

Figure: KPRA’s Contribution in Provincial Tax Receipts

Source: KPRA

Moreover, KPRA has also initiated the use of data in a scientific manner to track geographical and sectorial expansions, and identify pockets of revenue stuck in the system. It also conducts monthly performance reviews and customer satisfaction surveys to understand issues of rent seeking, and duplication of taxation between the provincial and federal governments.

Although, there is a need to expand the tax base to other potential revenue generating sectors, the provincial governments are also cognizant of the fact that the private sector needs space to grow, especially during the COVID-19 crisis. Hence, the KP government in its recent budget has reduced sales tax on services for 27 service categories to help sustain them.

The recent KP budget of 2020-21 has been deemed largely a tax-free budget, with no new tax imposed or rate of tax increased. The new budget has also provided exemptions to hotels on KPRA’s active taxpayers list from hotel tax under Excise & Taxation Department, and also exempted professionals on KPRA’s active taxpayers list from professional taxes.

Tax Reform Challenges

Despite efforts to reform the sales tax on services regime, the federal and provincial governments have encountered several challenges in both tax policy design and implementation.

i) Lack of Harmonization of Sales Tax

There is lack of harmonization of sales tax between the federal and provincial governments in Pakistan, as identified by KPRA and Punjab Revenue Authority (PRA). This has led to production inefficiencies due to denial of input tax adjustments, higher compliance costs for businesses/taxpayers which have to file for multiple tax returns, and adverse effects on Pakistan’s ranking on World Bank’s ‘Cost of Doing Business’ index. Hence, there is an urgent need to create a platform to help develop consensus among revenue collection agencies i.e. FBR, Sindh Revenue Board (SRB), PRA, KPRA and Balochistan Revenue Authority (BRA) on different aspects of the harmonization principle of taxation, tax rates, single return and tax coverage.

ii) Limited Coverage of Services in the Tax Net

The existing Sales Tax on Services Act does not have a clear and comprehensive definition of services, and this leaves services open to interpretations by the FBR. Consequently, a tax gap is created due to limited coverage of services – the yield of sales tax on services is only equal to 0.6% of Pakistan’s GDP, although services contribute approximately 56% to its GDP. Hence, the existing system incentivizes service providers to resort to litigation and evade taxes by claiming that the services they are supplying are slightly different from the schedule of taxable services under the law.

iii) Reliance on Telecom Taxes

Traditionally, the telecom sector has had the largest share in sales tax collected from services. As this sector consists of well-structured, large corporates, it is comparatively easier to collect taxes from them. In Punjab, for instance, the generation of telecom sector revenue was around 78% to begin with, however, over the years it has been reduced to around 20-25%. This setback in services tax revenue has largely been due to the Supreme Court’s decision to suspend telecom services tax in 2018. Nevertheless, GDP growth patterns indicate that there is also potential for generating sales tax revenue from other services sectors such as transport, storage, travel, wholesale and retail.

iv) Need for Improved Documentation

In addition to increasing the sales tax base, it is also important to make much needed efforts in other areas, such as documentation and tax administration. Although, relief measures are introduced to make the regulatory environment friendlier for small businesses and increase the ease of doing business during COVID-19, businesses operating across provinces still have to undergo long and complicated procedures to file returns. Even though KP and Punjab have launched initiatives to improve documentation by decreasing tax rate to 5% for restaurants that install ‘Point of Sale Software’ and allowing the use of debit and credit cards for tax payments, respectively, it has become increasingly important to move beyond an understanding of services sales tax within provincial silos, but view it more dynamically at the national level.

Lessons from Punjab’s Experience

Punjab Revenue Authority (PRA) is a semi-autonomous organization for collecting and enforcing sales tax on services in Punjab, based on the Punjab Sales Tax on Services Act, 2012. Although PRA still relies heavily on FBR’s borrowed capacity, it has been able to achieve significant milestones with regards to sales tax on services and can offer important lessons for other revenue collecting authorities.

i) Technology Innovations

PRA has prioritized technological innovations as part of its tax reforms. It was the first to introduce a Restaurant Invoice Monitoring System (RIMS) and was also able to extend this to other sectors through the introduction of an overarching Electronic Invoice Monitoring System (E-IMS). Although, initially PRA has mainly focused on Business-to-Customers (B2C) interactions, it is now inching towards Business-to-Business (B2B) invoicing – which will be mandatory with a one-year probation period, starting from 1^st July, 2020. Furthermore, in light of the COVID-19 pandemic, PRA is also moving towards contact-free mass audits from this year onwards, where the contact between tax payers and tax collectors is eliminated and the audit is completed electronically. This is complemented with an e-filing system, which has converted the entire filing process, from the registration to the filing operator, online; other revenue authorities have also followed suit.

ii) Reducing Compliance Costs

PRA is moving towards a uni-return system and currently 80% of the work on this project has been completed by Pakistan Revenue Automation (Pvt.) Ltd (PRAL). The launch of this new system will be complemented by the introduction of quarterly returns to reduce compliance costs in smaller sectors and improve overall tax collection in the province. In addition to this, PRA has also launched a pre-populated returns system through which returns will be automatically filled online on a real time basis.

Cross-country learnings from Pakistan’s provinces have allowed better understanding of sales tax on services in Pakistan, but their design and implementation need to become better aligned to the national growth agenda of increasing revenues. Although, reforms like the introduction of a negative-list based sales tax regime, whereby all services are taxable unless specifically exempted, is one way to broaden the tax base and increase revenues without increasing burden on existing taxpayers, it is also important to develop consultative forums for enhancing capacity and expertise of revenue collecting authorities in Pakistan.

[1] Although, sales tax on services is completely devolved to the provinces, the revenue collecting authorities use FBR’s computerized system with Pakistan Revenue Automation (Pvt) Ltd (PRAL) for outsourcing tax collection.

 

This article is based on a webinar talk organised by CDPR in partnership with SEED and IGC Pakistan. Watch the full session here.

This article also draws on research and comments by Faisal Rashid (Lead Author) and Anjum Nasim (Senior Advisor).

Watch the key takeaways in a shorter video here.

 

This blog is part II of a two-part series, based on the findings from an assessment conducted for UN Women, of how the COVID19 pandemic is likely to impact existing gender inequalities in Pakistan. Part I of this series focused on how COVID-19 has exacerbated gender based economic inequality. This part will focus on the social costs of the pandemic for women in Pakistan.

It has now been over six months since the first confirmed case of COVID-19 in Pakistan. The virus, and resultant efforts to control it, have had significant and far reaching socioeconomic consequences, many of which are only just becoming apparent. As discussed in our previous post, vulnerable communities such as women are most likely to be the hardest hit. As primary caregivers, women and girls face an increased burden of responsibilities within the household. They a) are responsible for household-level disease prevention and response efforts, which puts them at a greater risk of infection, b) carry out most of the household’s chores, c) are subject to emotional, physical, and socioeconomic harm. This post will discuss some of the social consequences of COVID-19 on women. Specifically, it will focus on the how the virus and the resultant lockdown has affected domestic responsibilities and gender-based violence (GBV).

Implications of Changes in Domestic Responsibilities: 

Women tend to lack agency over their decisions, their movements, and even how they use their time. The division of domestic labour is very gendered, and the general expectation is that domestic responsibilities are the purview of women.  According to UN Women, before the pandemic, women globally did nearly three times as much unpaid care and domestic work as men. During the lockdown, this disproportionate burden has increased even further. With entire families at home all day, basic domestic responsibilities – such as cooking and cleaning – have increased, which women are expected to fulfil. Additionally, in households with school going children, the entire burden of home-schooling is being handled by mothers.

This increase in responsibilities will have a long-term impact on women’s physical and mental health. The most direct way this impact manifests is that many women will simply not find the time to go out for even basic health services. Reduced mobility also directly limits access to health care for women, worsening health outcomes in the long run. Increased workloads at home coupled with a reduction or loss in income are likely to raise stress and anxiety levels for women, leading to deteriorating mental health as well.

Female labour force participation will also decline as in the face of increased domestic responsibilities.  Similarly, as their involvement in household work increases, it is possible that fewer girls will return to schools once they reopen, leading to a larger increase in school dropout rates for girls as compared to boys. This will result in a decrease in female education attainment and reduced female labour force participation in the long run as well.

Lastly, increased proximity of households to each other, coupled with decreased mobility and heightened stress, is likely to result in increased domestic gender-based violence. This is discussed in detail below.

Gender-Based Violence (GBV):

According to an April 2020 research conducted by Columbia University, gender-based violence increases during public health emergencies. Since the onset of the COVID-19 pandemic, there has been a distressing trend witnessed globally in the increase in domestic violence against women, or violence perpetrated against women by an intimate partner. In France, for example, cases of domestic violence have increased by 30% since the lockdown on March 17. Helplines in Cyprus and Singapore have registered an increase in calls by 30% and 33%, respectively. In Argentina, emergency calls for domestic violence cases have increased by 25% since the lockdown started (Source: UN Women).

The circumstances created by the pandemic and the prolonged lockdown create – and in existing cases heighten – instability and volatile domestic situations, which are a threat for all vulnerable groups, specifically women and children. Economic pressures and tensions in households have increased, which can often act as triggers for domestic violence. In many cases, with reduction in household incomes and higher living costs, the triggers for short tempers or violent behaviors go up. As these pressure points get aggravated, incidences of verbal and physical abuse also rise.

In Pakistan, up to 90% of women face some form of domestic violence – physical, emotional, or psychological – at the hands of their husbands or families (UNODC 2020). Violence against women, which is generally a taboo topic to talk about in our culture, has increased significantly during the lockdown period. According to helpline data released by the Punjab Unified Communication and Response (PUCAR-15) domestic violence calls have increased by 25% during the lockdown period in Punjab alone.

State responsiveness to reported complaints of violence has reduced even more than before, with the response system burdened or redirected elsewhere. For example, the Ministry of Human Rights created a helpline (1099) for reporting domestic violence incidents during the pandemic, but this helpline is reportedly not fully responsive. Additionally, complete or partial lockdowns reduce informal spaces of safety for vulnerable segments. Options of interim relief time and space (for example when an abusive partner goes to work) dry up as well.

Policy Implications:

With COVID-19 death rates – somewhat unexpectedly – falling, the lockdown throughout the country is being eased, and there is a gradual return to business as usual. However, there is still reason to be cautious, as there is little clarity regarding what has curbed the spread of the virus. The possibility of a resurgence and consequent lockdowns remains on the cards for the foreseeable future.  Realistically, a vaccine will not be available globally for the next 12 to 18 months. As uncertainty and stress remain rife, and people struggle to adjust to this new normal, women will continue to be at a greater risk for violence.

It is therefore imperative for governments and policy makers to prioritize vulnerable groups and their protection. Specifically, as schools look to reopen in September, the government – with the support of the private sector and civil society organizations – needs to ramp up efforts to ensure that girls return to schools. This can be achieved through mass and social media campaigns highlighting the importance of schooling and the long-lasting impact of denying girls their right to a proper education. Additionally, information campaigns coupled with monetary incentives can ensure regular attendance of middle and high school girls, who are most likely to drop out to earn money to offset losses during the lockdown and the peak of the pandemic.

It is also important to change gender norms, and normalize boys and men being equal partners in domestic responsibilities. Equitable division of household labour is critical to reducing the burden on women and protecting their physical and mental health.

Lastly, support systems need to be established and existing systems need to be revitalized for those looking to report or escape a violent domestic situation. There also needs to be more awareness about potential avenues for help for victims of violence, such as the 1099 helpline.

There is tremendous uncertainty around the long-term impacts of COVID19 on the world. As such, policy priorities will remain focused on health and economic impact of the virus for the foreseeable future. While that is understandable, it is also imperative that gender not be considered a periphery of the pandemic. Long term policy responses to the pandemic need to be calibrated through a gender lens, to ensure the protection of women and girls.

Sahar Kamran is a Project Manager and Maheen Saleem Khosa is the Manager Communications at the Institute of Development and Economic Alternatives (IDEAS).