Foreign Aid

Pakistan needs taxation with representation, not U.S. aid, says Finance Minister

Brady Yauch
Probe International
November 3, 2009

If Pakistan’s government fixed the nation’s broken tax system, it would not be forced to accept foreign aid from Western countries, says the country’s Federal Minister for Finance and Revenues, Shaukat Tareen. His remarks [PDF] come in the wake of street protests [PDF] by citizens and heated debates by lawmakers in the country against a $7.5-billion aid package, known as the Kerry-Lugar bill.

Tareen’s statements were presented on Wednesday in a meeting with Pakistan’s Senate Standing Committee on Finance. According to Tareen, tax authorities have discovered more than 2 million individuals that have yet to file their tax returns.

He believes that if the government were able to increase revenues from tax collection, contentious foreign aid packages such as the Kerry-Lugar bill would be unnecessary. He said the current 8.8 percent tax-to-GDP is unacceptable and that the government is currently looking to increase this ratio to 10.6 percent. According to the Heritage Foundation [PDF] , an 8.8 percent tax-to-GDP ratio puts the country in the bottom 15% in global rankings.

Tax-to-GDP ratio is the ratio of tax revenues to gross domestic product, and is widely used as a measure of the state involvement in national economies. A very low tax-to-GDP can make it difficult for countries to pay for infrastructure and other large projects internally, hampering development needed for further economic growth and potentially forcing them to rely on outside financial assistance such as aid.

Tareen also said the government should increase its ability to prevent smuggling and under-declarations of invoices by the country’s importers, noting that recent revisions to the Afghan Transit Trade Agreement should help address issues of smuggling between the two countries.

But this is not the first time the Ministry of Finance and Revenues has brought attention to the country’s poor tax-collection system. In its most recent Fiscal Policy Statement, the agency said Pakistan’s current tax system makes it impossible to generate the necessary resources to meet development needs.

“The principal reason (for poor revenue collection) lies in the structural weaknesses of Pakistan’s tax system which is complex, that is, difficult to administer and comply with; it is inelastic, that is, unresponsive to growth and discretionary policy measures; it is inefficient because it raises little revenue but introduces serious economic distortion; it is inequitable as it treats individual and business in similar circumstances differently; and it is unfair because tax enforcement is selective and skewed in favour of those who have the ability to defeat the system.”

The report stated bluntly that there is mounting evidence that the present tax system is no longer capable of serving the needs of the country. But it noted that the political will to change this system was present and should be acted upon by legislators.

Tareen’s attack of Pakistan’s weak tax system comes on the back of street protests and criticism from the country’s military over the $7.5-billion US aid package. Many of the opponents of the bill have questioned stipulations in the aid package [PDF] , saying it will provide the U.S. government with an unacceptable level of intrusion into the country’s internal affairs

American lawmakers say a large chunk of the money in the aid package will go to building schools, roads, hospitals and microfinance schemes. The U.S. hopes that the money will initiate development projects and help curb the appeal of Islamic extremists in a nation that has been gripped by violence.

The U.S. has poured billions in aid dollars into Pakistan over the years, with one report [PDF] estimating that $15-billion has been transferred since 2001. But some critics say this money has been corrupted and never reached its intended target.

“Foreign aid has always been a crutch for corrupt governments to lean on,” says Patricia Adams, Executive Director at Probe International, adding “indeed, it is often foreign aid that spawns that corruption in the first place.”

“Pakistan’s Federal Minister for Finance and Revenues is quite right in arguing that internal policies regarding taxation, rather than increased foreign aid, would be more effective in tackling development issues,” Ms. Adams says.

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