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Tax Efficiency Analysis for Pakistan Tax Structure: Comparison of two Decades.

Ahmed, Qazi Masood and Hyder, Kalim (2005): Tax Efficiency Analysis for Pakistan Tax Structure: Comparison of two Decades.

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Abstract

The tax efficiency in Pakistani tax system remained focal point for the last 25 years. However, despite all efforts the tax to GDP ratio remained constant during this period. This period is very active political period for Pakistan, which had strong impacts on the economy of Pakistan. For example the 1980s was peak period of war in Afghanistan against USSR and Pakistan was a front state. Due to this critical position the government of Pakistan received huge aid, which had very,adverse affected the tax efforts of Pakistan government during this period. This was a military rule and to avoid any wrath from public the government avoided any new taxation and these huge inflows provided well-justified ground for it. After the end of Afghanistan war and the cold war the huge inflows of foreign aids and soft loans ended. This situation got worse when the government of Pakistan had to start repayment and interest payment on loans taken during the 1980s. The era of 1990s was also full of events like drastic reduction in custom duties because of WTO regime, drastic increases in sales tax and income tax due to IMF conditionalities and due to recession in the economy, the tax to GDP ratio remained constant. However during this period pressure were on the tax authorities to increase tax revenue through improved efficiency. Therefore the purpose of this paper is to check the efficiency of tax system during these two periods. This purpose is tried to achieve through two steps regression analysis. In the first step each taxes are regressed on several tax capacity variables like GDP growth, inflation and tax reforms. Where as in second step the residual from the first step are regressed against time. The results shows that in case of sales tax, income tax and total tax in the decade of 1980s when the GDP growth and inflation were high and consequently the natural growth in tax collection were high. This was the period when there was no pressure from IMF and World Bank to keep budget deficit low, so the tax efforts for add ional tax collection was meager and tax efficiency was low. In the second decade 1990s when the GDP growth and inflation were low and so the natural growth in tax collection. However, in this period after the cold war the pressure from IMF and World Bank were very high to keep budget deficit low. Therefore the tax authorities in Pakistan put add ional efforts to increase revenue, which increased tax efficiency.

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