THE passage of the integrated Goods and Services Tax (GST) legislation in the Indian Rajya Sabha is a landmark measure. Years in the making, it has taken a clear-headed determination by prime minister Modi’s government to steer it through both houses of parliament. By reducing the complexity of the Indian tax system, this reform will decrease the cost of compliance for Indian businesses and lead to a reduction in their overall costs. It also moves India closer to being a true “common market”, hence unlocking economies of scale for its businesses. The resulting improvement in their competitiveness is estimated to add between 1 to 2 percentage points a year to India’s economic growth.

This is a big move, a bold measure by the Modi-led government — but not the only one. It follows on the heels of the successful launch of the “Make in India” campaign, spearheaded by the Indian prime minister himself. That initiative, just within its first year, has attracted US$ 65 billion in “greenfield” (i.e. into new projects) foreign direct investment into India, helping it leapfrog China by a big margin as the top FDI destination in emerging markets in 2015. (What a difference leadership can make. While Mr. Modi has been busy constructing policies for taking India to the next level, and travelling the world to attract investment (and isolate Pakistan), our “Metro-vision” prime minister has been busy buying Rolexes and suits in London).

India is, of course, playing catch up with China. China’s economic reforms, while weak in certain areas such as the financial sector, have produced some stellar overall results over a four decade period. One of its most recent big moves has also been the integration of the value added tax. China’s tax reforms have yielded additional revenue equivalent of 11 percentage points of GDP between 2008 and 2014 — increasing the tax-GDP ratio from 18pc to over 29pc. More than revenue considerations, the Chinese also appear to understand the demands of the global marketplace and have responded via their policy framework.

Pakistan’s vision and appetite for reform is too limited

No such compulsions or considerations appear to clutter the minds of Pakistani policymakers. While some “big moves” (by Pakistani standards) have been made of recent on the tax front, most notable being the re-valuation of real estate – for which the finance minister and his team deserve kudos and full praise — the primary motivation appears to be revenue-generation. Since the revenue measures taken since 2013 have been without an over-arching design, nested within a growth strategy and framework, the cumulative result has been that the cost of doing business for formal firms (documented businesses) has increased significantly. As a result, Pakistan’s global ranking on the World Bank’s Cost of Doing Business index has slipped 10 places since 2013 to 138. On the “ease of paying taxes” the country’s rank is now 171st in the world — virtually at rock bottom. On the measures of “number of tax payments” and “number of hours spent on tax matters”, Pakistan’s latest global rank is 168 and 177 respectively.

More perniciously, the “tax arbitrage” — the difference between what a documented business has to pay in taxes and the advantage accruing to a non-tax paying firm — has widened to the point where the informal economy is growing at the expense of the formal economy. Clearly this is not an intended or beneficial outcome of the current policy framework. Hence, one of the foremost reform areas that needs to be addressed to improve Pakistan’s international competitiveness and to re-invigorate economic growth, is tax policy and administration.

At the core of this reform should be a vision for a modern, independent, professional, IT-enabled FBR administering an integrated (covering goods as well as services) Value Added Tax across Pakistan. The fragmentation of the tax bases and split assignments is creating distortions and coordination issues. Pakistan has moved from a position of strength to weakness relative to China and India in terms of how growth-supportive its tax framework is.

Pulling off big-ticket economic reform requires vision, understanding, commitment, patience and the willingness to expend time, effort and political capital. Fortunately, the China-Pakistan Economic Corridor (CPEC) provides a mega-opportunity and an entry point into the kind of meaningful, wide-ranging internal reform of economic governance and management that Pakistan so desperately needs. These reforms encompass the financial sector, logistics and transport, overall competition in the economy, tax policy as well as administration, among a host of others.

Beyond these specific areas, over-arching reform is required in one aspect of economic governance without which CPEC or any other initiative relating to the economy will not be able to succeed: overhauling and modernising Pakistan’s civil service.

The most anti-reform constituency in Pakistan, contrary to popular perception, is not the politicians but the bureaucracy. Barring occasional, individual reform champions, the bulk of Pakistan’s civil service has become an entrenched vested interest that is protecting unimaginably huge rents, and for whom serious and meaningful reform that will alter the status quo for the better is anathema. While the FBR bureaucracy is the most obvious example, it is not an outlier: the entire civil service has over the years appeared to align itself to protecting its “empire of rents”. This empire straddles everything from public procurement to land allotment to tax-exempt or concessionary plots, perks and privileges, to re-employment on contract.

With the politicians becoming wiser since 2008, these rents are being shared — but the pie appears to have grown to accommodate new demands. Hence, any reform effort that attempts to ignore the “elephant in the room” — institutional reform – will have little chance of succeeding. And if institutional reform is the elephant in the room, the 700-pound gorilla sitting in the corner is civil service reform. Without slaying these dragons, Pakistan’s quest for a modern, vibrant, globally-connected and inclusive economy will remain a pipe dream, CPEC notwithstanding.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, August 5th, 2016