Pakistan

Written evidence submitted by Christian Aid

 

Int roduction

 

1.1 Christian Aid is a Christian organisation that insists the world can and must be swiftly changed to one where everyone can live a full life, free from poverty. We work globally in 45 countries for profound change that eradicates the causes of poverty, striving to achieve equality, dignity and freedom for all, regardless of faith or nationality.

1.2 Christian Aid has supported humanitarian and development programmes in Pakistan between the 1970s and the 1990s. Since then it has responded to humanitarian emergencies such as the Kashmir Earthquake in 2005 and the Indus River floods of 2010. We have formal working partnership in Pakistan with members of the ACT Alliance network (Norwegian Church Aid, Church World Service - Pakistan/Afghanistan, and Diakonie Katastrophenhilfe), and Muslim Hands. Additionally, as part of Christian Aid’s global work on tax justice, in 2012, we funded our partner Church World Service – Pakistan/Afghanistan (CWS-P/A) to prepare a research report entitled ‘Options for Pro-Poor Taxation Policy’ in Pakistan.

1.3 Our submission will focus on two areas. The section on tax and governance draws on research by our partner, CWS-P/A [1] , supported by our global tax justice advocacy. The section on DFID’s programme focuses on humanitarian response, based on our experience in Pakistan and that of our partners.

1.4 We welcome the opportunity to provide written evidence to the IDC inquiry on Pakistan. We are happy to provide further written/oral evidence on any of the subjects covered in this submission via Barry Johnston, UK Political Adviser bjohnston@christian-aid.org; telephone no +44 (0)207 523 2175.

2. Governance and t ax collection in Pakistan

 

2.1 Public expenditure on poverty reduction is expected to amount to PKR 1,534 billion (7.2 percent of GDP) in 2011-12, representing a slight reduction in the proportion of GDP allocated to poverty reduction compared with the previous year. In the 2011 financial year revenue shortfalls and current expenditure overruns led to a budget deficit of 6.6 percent of GDP, and general government tax revenue declined to 9.8% of GDP from 10.1% a year earlier. There is clearly a need to reverse these trends, and it can also be expected that Pakistan, as a lower middle income economy, can reduce its level of aid dependency through enhanced tax revenue generation.

2.2 There are various direct and indirect taxes imposed by the Federal and Provincial Governments, with Federal taxes, comprising of Income Tax, Sales Tax, Customs Duty and Federal Excise Duty together constituting almost 95 percent of the total tax revenues. These are administered by the Federal Bureau of Taxation (FBR), part of the Ministry of Finance. There is evidence that redistributive policies in Pakistan have failed to maximise the potential impacts of economic growth on poverty, and that this has contributed to a lack of public confidence in the fairness of the country’s tax system. Pakistan’s economic growth has been higher than the global average at around 8 percent during the period 2000-2010, however Pakistan ranks 145th out of 187 countries in the UNDPs Human Development Index with an HDI of 0.504. When adjusted for inequality, the HDI is 0.347, representing a 31 percent loss of HDI due to inequality, a figure greater than the average loss of 23 percent. This suggests a need for more public expenditure in support of poverty reduction. While this could be achieved in part through budget-neutral measures involving reallocation of expenditure, there is also a need for progressive measures to broaden the tax base and enhance tax revenue.

2.3 It is estimated that 40 percent of all taxes are paid by the richest 20 percent of the population, with the remaining first to fourth consumption quintiles contributing 60 percent. This sizable majority of the population carries no burden of personal income tax but rather is subject to a range of indirect taxes. [1] Despite the exemption of the poorest groups from personal income tax, the Gini coefficient for Pakistan shows that levels of inequality have increased during the period 1997 to 2008 (most recent available data) [2] . A measure of inequality used by the Asian Development Bank (ADB) reveals a similar picture, with the ratio of income or consumption of the highest to lowest population quintiles rising from 3.9 in (1997) to 4.2 (2008). Although income inequality figures for Pakistan are low by comparison across the Asia region, they mask the considerable wealth disparities between rural and urban parts of Pakistan, and may also be unreliable, given that Pakistan’s informal sector comprises some 30 percent of the total economy and that other tax loopholes exist providing significant opportunities for income to go unreported (see section 3 below). Further, Pakistan’s inequality-adjusted HDI suggests that figures for income/consumption inequality fail to reflect the prevalence of inequality of opportunity in Pakistan. Perhaps the most striking indicator of this is the employment to population ratio which is not only the lowest in developing Asia but also demonstrates the greatest gender gap when data is disaggregated. [3] Widening inequality and the crisis in employment in Pakistan is of great concern regarding both poverty reduction and inclusive economic growth. A recent ADB report highlights how it threatens to weaken the economic basis of growth by reducing social capital and cohesion and undermining the quality of governance [4] . More efficient fiscal policy, including public spending on education and health, targeted social protection schemes and measures to promote small and medium-sized businesses and other forms of employment would go a long way towards addressing these problems. Progressive reform of tax policies, coupled with improved public education about their purpose, would help to finance such measures and also help to challenge the perception that Pakistan’s tax system is regressive, contributing to improved voluntary compliance (see 3.4).

3 DFID Contribution to a Fairer Tax System in Pakistan

 

3.1 In its submission to the IDC inquiry on Tax in Developing Countries [1] , Christian Aid argued that there are three inter-related issues hindering the development of effective tax regimes in developing countries: (a) lack of capacity to collect revenue; (b) limited policy space to devise and implement appropriate tax policy; and (c) a global financial system governed by rules and norms detrimental to developing countries which they had (and continue to have) a limited voice in determining. We would argue that if DFID is to have an enhanced relationship with Pakistan in the coming years, offering support to overcome these three issues should be considered a key part of any engagement.

3.2 A key challenge for development in Pakistan is to enhance capacities and institute appropriate policies and measures to achieve a pro-poor widening of the tax base and enhance revenue for public spending in support of sustainable and equitable development (rather than relying on regressive taxes to meet short-term revenue targets). Christian Aid welcomed the findings of the IDC’s Fourth Report, Tax in Developing Countries, and believes that relevant recommendations should be applied to DFID’s programme in Pakistan.

3.3 There is a continued need to improve the administration of Pakistan’s tax system to address the fiscal deficit, which according to CWS-P/A research is the result of an extremely low and stagnant tax to GDP ratio (around 10 percent) and an estimated ‘tax gap’ (difference between tax collected and potential revenue) of some 79 per cent. There have been some positive steps, including the World Bank-supported national Tax Administration Reform Programme (TARP) which has helped to improve tax administration by registering more individual taxpayers; however this lags behind intended achievements. CWS-P/A’s research suggests this is largely the result of lack of professional competence within the FBR resulting from uncompetitive salaries, and a need for greater freedom to bring in expertise from outside the civil service. In partnership with the Government of Pakistan DFID could take steps to assess the limitations of the FBR and potential for reform, as well as providing support for any such programme if initiated.

3.4 There is also a need to build public confidence in the integrity of the tax system and its administration which are widely perceived to serve corrupt interests. This could help to promote upward and downward accountability between citizens and the relevant authorities. As the Prime Minister, David Cameron noted in Islamabad in 2011 "Too many of your richest people are getting away without paying much tax at all". [2] There is an ‘imperative that elites within those countries pay the correct amounts in personal income taxation, and - critically - are seen to do so’ [3] . Furthermore the informal sector accounts for as much as 30 percent of the total economy in Pakistan, with some 600 Billion PKR generated each year going untaxed. Our partner’s research highlights how this not only results in loss of revenue but also allows illegally generated funds to be accumulated without any scrutiny. As was acknowledged in the IDC report, ‘DFID should encourage and support programmes that engage civil society, trade organisations, academics, journalists and parliamentarians in the tax policymaking process’ [4] There is a clear scope for this kind of work in Pakistan, and we recommend that DFID look to support it.

3.5 Our partner has highlighted how Pakistan’s Final Tax Regime, which is a transaction based mechanism of income tax, is resulting in encouragement of the non-documented sector and serving as a disincentive to the documented sector. The IDC has already recommended ‘DFID should support the governments of developing countries as they seek to incentivise hitherto unregistered enterprises to join the formal, taxpaying economy’ [5] . Given the issues with the FTR in Pakistan there is clearly the potential for DFID to engage in programmes to improve the formalisation of the economy in Pakistan.

3.6 Pakistan’s tax system is characterized by significant horizontal inequalities which are distorting and, it is suggested, need to be addressed. Certain sectors including agriculture, wholesale distribution and retail, and real estate are not contributing to tax revenue in proportion to their overall contributions to the economy. Further analysis of these three sectors is included in our partner’s research. [6] Equitable taxation of all economic sectors would be fairer and contribute to a broader tax base and DFID should support this through supporting reform and engaging with relevant national stakeholders, including civil society.

3.7 Finally a review is needed in consideration of an existing amnesty on foreign exchange remittances whereby the income tax authorities are not empowered to question the source of local currency converted out of foreign exchange remitted from outside Pakistan through normal banking channels. Although this incentive promotes inflow of foreign exchange remittances, it is suspected to be being misused by the persons involved in tax evasion. It is, therefore, recommended by our partners CWS-P/A that this amnesty should be reviewed and if appropriate revised.

3.8 This last area of concern highlighted by our partner also raises issues concerning how UK domestic and international tax policy measures could assist Pakistan’s efforts to increase its domestic resources. As noted there are concerns regarding tax evasion on internationally held assets, and as recommended in the Christian Aid submission to the IDC’s tax inquiry, the automatic exchange of information regarding citizens of Pakistan residing in the UK could assist the government in pursuing tax. Pakistan’s revenue collection could also be supported by UK (and other G20 country), placing pressure on secrecy jurisdictions to encourage agreement in sharing more information (e.g. through signing up to the Multilateral Convention on Mutual Assistance in Tax Matters). Furthermore, as recommended by the UN/OECD/WB/IMF [7] there are more steps the UK could make in domestic tax policy to support developing countries, including Pakistan. We would recommend that DFID work closely with Treasury (and developing countries) to identify potential policies, as well as implementing the relevant recommendations on UK tax policy from the IDC’s inquiry into tax. [8]

4 DFID’s Programme: Humanitarian Assistance in Pakistan

4.1 A study published by the Disasters Emergency Committee [9] reveals that while Pakistan’s government has instituted a comprehensive DRR governance system in Pakistan, this system suffers from a lack of funding, skilled human resources, and coordination among government agencies, with particular weaknesses at the local district levels where the bulk of implementation occurs. The national DRR system also focuses mainly on response and ignores other more sustainable and durable dimensions of DRR, such as prevention and mitigation which can address the root causes of disaster risk within the country. There is clearly a need for more donor support from DFID to address these issues, but it can also be noted that the Pakistani government could generate more resources internally through enhanced revenue generation and allocation of public spending on DRR, including its mainstreaming within all development and poverty reduction measures.

4.2 DFID played a significant role in terms of supporting relief in Pakistan during the last two flood disasters, contributing 7.9 percent of the total funding for the 2010 flood response and 4.4 percent for 2011 floods. [10] Measures to reduce disaster risk were mainstreamed into this response. Our partners have expressed their appreciation for DFID’s engagement with Pakistan’s national DRR Forum but have raised some concerns surrounding the process of development of DFID’s strategy for disaster risk reduction, and suggest that more opportunities for open consultation among the wider NGO community could be created in order to ensure that DFID’s strategy and responses are appropriate and that the views of a wide range of stakeholders are represented.

4.3 Enhanced community based responses, including through partner-based agencies, could help to support appropriate responses to a wider variety of disaster risks. Pakistan is a conflict-affected country which is also geographically diverse. It is affected by a variety of natural hazards including cyclones, droughts, earthquakes, floods, landslides, and river erosion. Human exposure to hazards is high as Pakistan is home to poverty-affected and vulnerable populations including, currently, conflict-affected and internally displaced communities and the second largest population of Afghan Refugees. In order to ensure appropriate responses, Pakistan would benefit from enhanced availability of funding for local-level actions responding to specific risks and vulnerabilities faced. NGOs have the best outreach to local communities and can support them in identifying location-specific needs and build local capacities for community based sustainable responses [11] . Investments in multi-stakeholder partnerships are crucial in tackling disasters and to build future resilience [12] . Given Pakistan’s vulnerability to a range of disasters and shocks, and also the difficulties of accessing some of the more remote communities, a timely availability of funds for both emergency but also preparedness activities such as community based disaster risk management and prepositioning of relief items is in great demand. Christian Aid firmly asserts that developing local capacities is crucial to building resilience to disasters and delivering rapid, effective emergency response, and there is a need for DFID to invest in these areas.

4.4 It should be noted that extensive capacity building of implementing organizations is needed in ‘pre-disaster’ periods, through training and provision of literature. Significant steps can also be taken to direct more funding towards investment in local capacity for DRR, response and recovery through genuine partnerships between local and national government structures and Pakistan civil society to incorporate DRR, resilience and response capacity into preparedness plans at all levels. It is recommended that DFID continue its longer term investment, presence and commitment in this regard.

4.5 DFID’s coordination and partnerships with a wide variety of NGOs operating in Pakistan is appreciated. The establishment of the Donor Coordination Group on DRR, as well as he multi-stakeholder DRR Working Group under the cluster system, are highlighted as positive developments by our partners. It is suggested that this could be further strengthened through a joint mapping exercise to share knowledge of existing resources and gaps. It is also suggested that an umbrella coordinating group be established for the purpose of sharing learning and increasing outreach.

4.6 According to our partners in Pakistan, opportunities for new local and international organisations to access DFID funds have been limited. This could be remedied by initiating a dialogue with NGOs in advance of issuing calls for proposals in order to better identify needs and priorities, and by ensuring announcements and calls for proposals are made through the UN clusters system, the Pakistan Humanitarian Forum and the National Humanitarian Network.

4.7 Our partners have also identified a need to improve the quality of humanitarian aid and of accountability to its recipients on the part of all humanitarian actors [13] . In particular this research highlights the need to include voices of women and children in response and targeting, to eliminate discrimination against minorities, and to address what it describes as the ‘one-size-fits-all’ approach in design of relief packages that can add to survivors’ sense of deprivation, reducing them only to the status of mere recipient with no voice in decision making. Christian Aid has been supporting an initiative implemented by CWS-P/A in response to the 2010 floods - Strengthening Quality and Accountability of Humanitarian Action for Flood Affected Communities which has increased the capacity of the humanitarian sector in Pakistan. CWS-P/A have also been instrumental in establishing the Accountability Learning Working Group (ALWG) which currently convenes in Islamabad and Hyderabad, which DFID would be welcome to engage with. In the context of Pakistan, DFID is encouraged to make both technical and financial resources available for improving quality and accountability.

November 2012


[1] Church World Service Pakistan-Afghanistan (2012) Option for Pro-Poor Taxation Policy in Pakistan (available online at: http://www.cwspa.org/resources/research-and-surveys )

[1] Based on research conducted in 2006 by the Andrew Young School of Policy Studies using data from Pakistan’s Household Integrated Economic Survey for 2001 – 2002, at which time only the 5 th consumption quintile fell within the taxable bracket for Personal Income Tax

[2] http://data.worldbank.org/indicator/SI.POV.GINI Most recent entry for Pakistan, in 2008, expressed as Gini Index, was .30 http://www.adb.org/sites/default/files/pub/2012/ki2012.pdf Table 147 for figures from the ADB including Gini expressed as coefficient: 0.287 (1997) and 0.300 (2008)

[3] See figure 2.9 in http://www.adb.org/sites/default/files/pub/2012/ki2012-special-supplement.pdf

[4] Asian Outlook 2012, Asian Development Bank

[1] http://www.publications.parliament.uk/pa/cm201012/cmselect/cmintdev/writev/1821/tax19.htm

[2] http://www.guardian.co.uk/politics/2011/apr/05/david-cameron-pakistan-raise-taxes-rich

[3] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/130/13005.htm - para 8

[4] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/130/13005.htm - para 13

[5] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/130/13005.htm - para 32

[6] Church World Service Pakistan-Afghanistan (2012) Option for Pro-Poor Taxation Policy in Pakistan (available online at: http://www.cwspa.org/resources/research-and-surveys )

[7] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/130/13006.htm#a8

[8] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/130/13006.htm#a8 – para .

[8] 56

[9] Disaster Risk Reduction in Pakistan: the contributions of member agencies 2010- 2012, DEC 2012

[10] http://fts.unocha.org/reports/daily/ocha_R24c_C163_Y2010_asof_1202190206.pdf

[11] www.christianaid.org.uk/images/building-the-future-of-humanitarian-aid.pdf

[12] http://www.christianaid.org.uk/images/DRR_case_studies_2011.pdf

[13] Research on Observance of Quality and Accountability Principles in the Humanitarian Sector in Pakistan, CWS, 2011

Prepared 14th November 2012