CONUNDRUM OF PAKISTAN'S TAX SECTOR: REINVIGORATING THE ECONOMY THROUGH TAX REFORMS

Abstract

Tax collection is vital to maintain fiscal sustainability, and the effectiveness of the tax system contributes directly to the potency of a country’s economy. According to a World Bank report, developing economies average 15% of GDP in tax collections, which is lower
than that in advanced economies at around 30%. Pakistan’s tax-to-GDP ratio is among the lowest, even within developing countries, at 9%. This low tax revenue is primarily because of structural deficiencies in Pakistan's tax system, including abundant indirect taxes, a narrow tax base, high tax rates for active taxpayers, and exemptions to several business sectors. These inadequacies in the tax system result in detrimental repercussions for Pakistan's economy. By applying the case study approach, this paper attempts to analyze the reforms adopted by countries, including Georgia, South Korea, and Ukraine, that resulted in the rejuvenation of their economies. Thus, by evaluating their successful reforms, this paper proposes recommendations to revamp Pakistan's tax system, including the enlargement of the tax net, abolition of tax exemptions to the elite class, and enforcement of a progressive tax system. The enforcement of these reforms will result in the amelioration of Pakistan’s tax system and ensure the country's economic security.