Pakistan has undergone a significant change in tax structure
over the last fifteen years. However, this change is not apparent on the
surface, as there has not been much change in the tax to GDP ratio over
the last fifteen years. But if we look beyond the surface we can see
changes, for example in (1990-91), indirect taxes contributed 82 percent
of total tax revenue with Customs, Excise and Sales tax each
contributing around 55, 28 and 18 percent respectively, while in
(2001-02), indirect tax share within the total tax revenue fell slightly
to 68 percent with Customs, Excises and Sales tax each now contributing
around 18, 18 and 64 percent respectively. Thus, it may not be wrong to
say that there has been a significant change in the tax mix in the span
of less than ten years and this development is important from the
perspective of efficiency, effectiveness and equity with which revenues
have and will be raised. Although, Value Added Tax (VAT) is likely to be
more efficient in raising revenue than both the ordinary Sales Tax and
Trade Taxes that it has replaced see e.g. [Nellor (1987); Liam Ebrill
(2001)], the same cannot be said as far as the fairness issue is
concerned. This in no way implies that the trade taxes replaced by VAT
were more fair. However in most developing countries they operate with
strict import licensing schemes, binding quotas and foreign exchange
restrictions that make them more a kin to lump sum tax. Therefore in
most cases they have no flow through effect to the consumers [for
example see Clarete (1986); Shah (1991)]. But in contrast to this VAT
being a consumption tax has the capacity to directly affect each and
every household. Thus equity becomes much more of a real concern and
this concern is heightened given that governments of most of the
developing countries lack the capacity to carry out significant
redistribution.
What Drives State Tax Reforms?