MANY countries view the structural transformation in China and think of computerisation as the ‘magic bullet’ that can solve long-standing ins­titutional and seemingly intractable challen­g­­es, for example, in domestic revenue mobilisation. Un­­­fortunately, computerisation without addressing policies, institutions and processes, pours “con­crete over the digital transformation agenda”. This is seen in Pakistan’s disappointing experien­­ce with successive IFI-supported tax administration reform programmes since 2004, and more recent attempts to enforce e-filing and digital poi­nt of sale registers. The tax-GDP ratio remai­ned stagnant at around 10 per cent for two decades, or considerably lower than the 14pc level of 1985.

Computerisation without policy rationalisation and rethinking institutions reinforces existing processes and procedures, locking in place schisms and rent-seeking opportunities and disincentives dating back to the colonial Government of India Act 1935. The GOI Act, 1935, split the major tax bases to the detriment of elected provincial governments, and Pakistan has staggered back to this colonial dispensation. China and even India, with a constitutional amendment, are moving to integrate major tax bases to take advantage of digital opportunities.

China had a tax-GDP ratio of 10pc in 1993. To achieve greater resilience and lay the basis for sustained growth, reforms were anchored around a VAT on goods, at the import and manufacturing stage, with business taxes on services largely maintained at the provincial and local levels. Distortive taxes were replaced, and provinces benefited from revenue-sharing, special purpose and fiscal equalisation transfers, ensuring that no province would lose revenues. VAT design improved gradually, and by 2010, the tax-GDP ratio had almost doubled, permitting Chinese counter-fiscal measures during 2010-12 to rescue the world economy following the 2008-10 global financial crisis. By 2015, the VAT was integrated by bringing in provincial business taxes on services into the VAT to reduce the cost of doing business and exports, given growing trade frictions. This reform was also designed to leverage the benefits of full information on the value chain as the basis for technological advances that would also underpin the income taxes and excises. In 2018, all tax administrations at the national and subnational levels were rolled into one.

The full implications of this reform, as in Mexico in 2013-14, are that coverage of the full value chain generates information on wages and profits (the components of value added) at each transaction, making it much harder for taxpayers to cheat on income taxes (including in the small-scale sectors). This simplifies administration and the cost of doing business, and helps the integration of SEZs into the broader economy. In China, the full VAT permitted borders around the SEZs, such as Shenzhen and Pudong, to be removed, and is the basis for domestic linkages of high-tech zones, like the Greater Bay Area and Yangtze River Delta Zones that cover several jurisdictions. Similar reform in Mexico facilitated the spread of FDI beyond the designated SEZ zones — effectively making the entire country an SEZ.

Computerisation without policy rationalisation locks in place schisms and rent-seeking opportunities.

The GOI Act, 1935, which governs Pakistan’s revenue assignments today, was designed to protect colonial interests and prevent elected provincial governments from taxing British trade, firms or persons, which is why the main bases were split. Provincial final point sales taxes as well as property and land-based taxes were paid by colonial subjects. Landowners were important in elected provincial assemblies, and unwilling to tax themselves, leading to the collapse of the agricultural land tax that had been the staple revenue source since Mughal times. The most egregious error, however, was to equate the final point sales tax and the VAT/GST as synonymous, even though the net effect is the same if there is full coverage of the GST — a tax on consumption and not on production. This point is not understood by Pakistani firms and retailers, who oppose the tax, whereas full coverage reduces the cost of doing business, making it possible to provide immediate export refunds and create a unified economic space, facilitating better integration of provinces and SEZs into the national economy.

Pakistan’s failure to reform the GST/VAT was the cause for the collapse of IMF programmes sin­ce the 1990s. In 2012, when Pakistan codified and expanded the SRO regime, then IMF mission ch­­i­e­­f Adnan Mazarei stated “No VAT, no money”. More recent programmes have not incorporated the full VAT or fundamental structural reforms to Pakis­tan’s multilevel revenue assignments and have focused on the impossibility of relying on income taxes, including on agriculture. With a base largely of formal sector wage earners, with non-wage incomes hard to tax with information lacunae given a broken GST replete with exemptions, income taxes become regressive, raise no revenues, and increase the complexity of doing business. Retailers, subject to withholdings and lump-sum taxes, see no benefit from the point of sale machines being foisted by IFIs. And the breaks in the value chain make it impossible to give immediate refunds, making it hard to implement an export-led growth strategy and impossible to compete with Chinese firms that enjoy the benefit of greater efficiency and full VAT export refunds.

Can provincial autonomy at the heart of the 18th Amendment be maintained with Chinese-style integration of the major tax bases and administrations? The answer lies in creating an integrated income and excise tax policy framework and administration, allowing provinces to impose ‘piggy-backs’ or surcharges on national bases. Then there is no need for multiple administrations. However, reforms would be needed to the revenue-sharing arrangements, and the creation of a fiscal equalisation transfer mechanism. Further, the ownership-valuation property tax model, in place since British days, has not worked, and options to link local property taxes to public services with a simplified base (area/ size/ occupancy) need to be explored.

These reforms are essential if Pakistan is to have any chance to significantly strengthen dom­estic resource mobilisation to manage risks in an increasingly dangerous neighbourhood and create a more integrated economy, while ensuring provincial and local autonomy and accountability.

The writer has worked at the London School of Economics and IMF, and was special adviser to the Saudi finance minister. He has contributed to fiscal reforms in many countries, including China and Mexico, as well as the GCC.

Published in Dawn, June 11th, 2025