The 1985 “Qamar-ul Islam” Taxation Reforms Commission (to which my London School of Economics colleague, Lord Stern, and I had the privilege of giving evidence) proposed enhancing the tax/GDP ratio from around 14 per cent to 20pc, to ensure economic independence, laying the basis for sustainable growth while reducing corruption in the then Central Board of Revenue (CBR) and the body politic.

The Commission’s report was shelved in the wake of aid flows following the Afghan war against the Soviets. The rest is history: the tax/GDP ratio today is significantly lower than in 1985, as the country became addicted to manna from Washington, both from successive US governments and the International Financial Institutions (IFIs).

The problem is not just in the tax administration design and pay-scales, although that has a role to play (Qamar-ul Islam would have a hard time imagining the depths to which the transformation from CBR to the Federal Board of Revenue (FBR) has fallen). A fundamental problem is that successive governments have used the tax administration to make ‘friends’ and punish opponents, and more importantly, support the now 70-year-old infant industries that are also the basis for financing political campaigns and more direct kickbacks. Each ad hoc intervention and Statutory Regulatory Order makes it harder to do business, or ensure prompt refunds for exporters, and creates a potential bonanza for the tax officials.

This problem cannot be solved by redesignating officials and departments, much less by duplicating inefficient tax administration structures across levels of government, creating a nightmare for the private sector and general public.

Addressing Covid-19 and climate change (of which the flooding in Karachi is a timely reminder) will require coordinated national-provincial-local responses with the role of different levels of government clarified

Just as in Pakistan, Mexico had a non-oil tax/GDP ratio of 10pc in 2012, and significant rent-seeking. The country undertook a major fiscal reform in 2013-14, largely simplifying and expanding the value-added tax (VAT) base to generate information on the full value-chain, making it harder to cheat on income taxes. This had the advantage of improving the business climate, effectively making the whole country a Special Economic Zone (SEZ), while attracting significant foreign direct investment beyond the maquiladoras (SEZs) along the US border. The tax/GDP increased to 15pc by 2016.

China also used the introduction of the VAT and reform of the system of intergovernmental transfers in 1993-4 to establish a modern tax administration; the tax/GDP ratio increased from 10pc to over 20pc today. In 2015, China’s provincial/local business tax on services was integrated with the national VAT on goods to reduce the cost of doing business and improve domestic linkages. The border around the celebrated Shenzhen SEZ was removed to facilitate the transformation.

Each major tax reform generates gainers and losers. China addressed these issues in the VAT through the offsetting changes in transfers. Mexico did so by calibrating different taxes in the package of reforms. India tried to do the same with a Constitutional Amendment, but relied on the Goods and Services Tax (GST) mainly for compensation, while maintaining colonial assignments under the 1935 Government of India Act. This resulted in a complex and unwieldy structure of the GST that generates neither information nor additional revenues.

The objective of Pakistan’s 18th Amendment was correct: to ensure that the provinces (and local governments) have clear responsibilities with well defined own-source revenues (i.e., over which they exercise control at the margin) and in line with best practice for “accountable” governance. However, splitting the GST base was an unfortunate mistake that has not led to an improvement in local public services. Stagnating overall revenue collections have led to the third International Monetary Fund program in a decade, begging bowl in hand!!

Pakistan’s successful response to the pandemic has highlighted the importance of local and provincial actions together with federal coordination, support and financing. But the global economic fallout persists. Countries with tax/GDP ratios of 10pc that cannot even cover basic public services and debt service are extremely vulnerable and face existential pressures.

In the post-pandemic era, the next tax reform must entail more than just a reform of the FBR administration. If the intention is to offset the 18th Amendment splitting of the GST base through the standardisation of the base, rate structure, rules, processes and procedures (as India is attempting, unsuccessfully), it might seem that creating a virtual single administration is an improvement; however, it is not enough on its own.

While harmonisation helps, it does not reduce the burden on taxpayers of multiple filings and cross-jurisdictional offsets — these complicate policy design. And whenever there is complexity of design, there is room for interpretation and rent-seeking. This also vitiates the generation of information needed to expand the base of the income taxes and facilitate export refunds. It probably also means that the expected revenue increases are not likely to materialise (just look across the eastern border, and then contrast with the Mexican and Chinese reforms).

If there is an effectively coordinated set of rules and regulations across provincial administrations and a uniform policy framework, this defeats the objective of the 18th Amendment, which was to give provinces a tax base that they could use at the margin, and which is theoretically needed for sub-national accountability. A more appropriate assignment would have been an integration of the income tax base, or a carbon tax, with a provincial/local ‘piggy back’ to generate significant additional revenues without the need for parallel administrations.

It is not possible to carry out a major reform of a tax or its administration without addressing gainers and losers across subnational jurisdictions. This involves not just a single tax, but offsetting tax and transfer design changes, as well as reconsideration of what the resources are being used for.

Addressing Covid-19 and climate change (of which the flooding in Karachi is a timely reminder) will require coordinated national-provincial-local responses and breaking the begging-bowl. The role of different levels of government must be clarified, using the VAT to create a unified economic space, while developing beneficial local taxes for financing investment for sustainable employment generation in vibrant cities. These issues should be considered in the National Finance Commission.

Published in Dawn, The Business and Finance Weekly, September 21st, 2020