The Impact of Global Economic Trends on Pakistani Taxation

The interconnectedness of economies due to globalization, technological advancements, trade policies, and financial market fluctuations have had significant implications on national taxation systems, including Pakistan. The government of Pakistan heavily relies on taxes to finance public goods and services such as infrastructure, healthcare, and education. However, it must navigate the impact of global economic trends on its taxation system to ensure sustainable economic growth and fiscal stability. In this article, we will explore how global economic trends have influenced Pakistani taxation and its effects on stakeholders.

Global Economic Trends and Their Influence on Pakistani Taxation

Global economic trends such as globalization, technological advancements, trade policies, and financial market fluctuations have shaped the Pakistani taxation system. Globalization and advancements in technology have made it easier for businesses to shift their operations to countries with low-tax regimes. Therefore, Pakistan has had to introduce tax incentives and modify its tax laws to compete for foreign investment. According to the World Bank, Pakistan's tax revenue as a percentage of GDP has been consistently below the South Asian average and lags behind member countries of the Organisation for Economic Cooperation and Development (OECD).

In addition, trade policies have impacted tax collection significantly. Since Pakistan is a net importer of goods, its revenue collection is adversely affected by the imposition of tariffs and penalties by trade partners. Lastly, market volatility resulting from natural disasters, political instability, or global economic crises directly or indirectly affects tax collection. For instance, an outbreak of COVID-19 restricted economic activities globally, and Pakistan had to provide tax relief to businesses to ease the pressure on citizens and businesses.

Effects on Pakistani Taxation

a. Tax Revenue Generation

Global economic trends and the country's tax structure have contributed to not reaching the revenue targets expected from businesses and individuals alike. Taxation in Pakistan relies heavily on indirect taxes, such as sales taxes and excise duties, compared to direct taxes such as income tax, resulting in lower overall levels of tax revenue. Additionally, tax exemptions and fraudulent activities, among other factors, have resulted in reduced revenue collection. According to the Pakistan Economic Survey, the country's tax revenue was 10.9% of the GDP in 2020-2021, an increase from the previous year's 10.4%, indicating efforts to raise tax collection.

b. Tax Policy and Legislation

Pakistan has revised its tax policies to align with international standards and adapt to changing economic conditions. The government has introduced reforms such as an extension of tax filer benefits, e-filing of tax returns, and image-based assessment of imports. However, despite these initiatives, Pakistan still faces some structural issues due to outdated tax policies, a cumbersome tax filing process, weak tax administrations, and low tax compliance.

c. Tax Compliance and Evasion

Pakistan continues to face challenges regarding tax compliance and evasion. According to the World Economic Forum's Global Competitiveness Report 2019, Pakistan was ranked 114th out of 141 countries in terms of tax compliance. A survey conducted by the Pakistan Tax Bar Association in 2020 found that tax evasion in the country amounted to PKR 348 billion ($2.1 billion) in 2019-2020.

Perspectives and Stakeholders

a. Government Perspective

The government of Pakistan has been actively pursuing initiatives to reform the country's tax system. It has introduced measures such as the Automatic Exchange of Information (AEOI) with other countries and a simplified tax return process for small businesses. Despite these efforts, the government still faces challenges in implementing tax reforms successfully and improving tax compliance.

b. Business Community

The business community in Pakistan has had varied experiences with the country's taxation system. While some appreciate the introduction of new tax reforms, others have experienced difficulties with tax compliance due to structural issues in the tax system. For instance, the overreliance on indirect taxes has led to an increase in the cost of doing business, which has been a challenge for some businesses in the informal sector.

c. Individuals and Consumers

The average Pakistani citizen bears the burden of taxes, such as indirect taxes like sales and excise duties, which affect the prices of goods and services, thereby impacting their purchasing power. Further, the complex system has led to a lack of trust in the ability of the government to use the revenue collected for the public good.

d. International Organizations

International organizations like the World Bank, the International Monetary Fund (IMF), and the OECD have been assisting the Pakistani government in developing and implementing tax reforms. These organizations provide technical assistance, training, and financial support to Pakistan's tax department to improve its efficiency and effectiveness.

Conclusion

In conclusion, the impact of global economic trends on Pakistani taxation has resulted in a need for continuous adaptation. While the government is taking steps to reform the country's taxation system, it must address structural issues and improve efficiency to enhance tax compliance. The impact on citizens and businesses varies, and it is important to consider a range of perspectives to ensure a well-functioning system. Whatever the changes may be, it is essential to consider the long-term sustainability of the country's fiscal position.