Project description

Title: Support for good governance in Pakistan
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Country: Pakistan
Lead executing agency: Economic Affairs Division (EAD)
Overall term: 2010 to 2020

Context

One reason why the Government of Pakistan is unable to perform its core tasks and services adequately is the country’s precarious economic situation. The national tax base is not sufficiently mobilised for the government to secure all its potential revenue; as a result, it lacks the financial resources to fulfil its obligations or implement development strategies effectively. Opaque tax policies cause discontent among citizens, which threatens the fiscal social contract. The relationship between government and the administration lacks clarity, so decision-making, accountability and legitimacy remain poorly regulated. Public goods and services are not being delivered according to needs. Raising the tax revenue is therefore important for the government, not least because that is also a condition of the IMF. By international standards, Pakistan’s tax to GDP ratio is very low at less than ten per cent. (The OECD average is approximately 36 %.)

To improve its poor finances, the Government of Pakistan has therefore decided to develop new measures to raise tax revenues. To do so, however, it must first overcome a number of administrative challenges. The capacity of the Ministry of Finance for implementing reforms must improve, because at present the organisational and operational structures for revenue collection are inadequate, and tax officers lack the necessary qualifications. Moreover, the reforms are hampered by a shortfall in information and services for taxpayers, and by corruption within the tax administration. These factors prevent the practical application of the principles of good financial governance (fairness, transparency, equity and simplicity).

Objective

Additional tax revenues have been mobilised, especially from value added tax. The Government of Pakistan is coping better with the public debt and as such is better able to perform its functions. Information management and transparency have improved, and citizens and companies show increased willingness to pay taxes.

Approach

GIZ is working with the Ministry of Finance and the Federal Board of Revenue to improve Pakistan’s tax revenues. It advises its partners on different aspects of taxation, such as improving registration processes and auditing suspicious companies, and the introduction of withholding tax and wealth tax. The project also carries out capacity development measures intended to support the reform of sales tax on goods and services, and raise the level of understanding about federalism and importance of fiscal autonomy.

Tax-related research fosters sound tax policies. The project is therefore collaborating with Pakistani research institutes and the national tax authorities to conduct studies into the macroeconomic impacts of a reformed general sales tax, and the effects of sales tax on services. The empirical results of this research will be fed into the ongoing policy discussion.

Assistance is also given to the Federal Board of Revenue for its taxpayer facilitation activities, such as developing arguments in favour of tax mobilisation, and communicating effectively with taxpayers and the media. Related to this, the project provides training in communication strategies and media handling for tax officers.

The capacity development measures also address the Federal Board of Revenue as well as the Department of Training and Research in Lahore, where the personnel are learning to perform their new tasks more effectively, such as developing curricula and the provision of training on audit and transfer pricing.