Under pressure from IMF and other donors, Pakistan has imposed new taxes on the existing taxpayers. These are reformed GST, which reformed only the exemptions on certain items, and 10% flood surcharge on income tax already being paid. The government has very smartly ignored the mightier and wealthier segments of the society while thinking about new tax measures. There is some cosmetic resistance from the political parties but in the end, they will reconcile to these new taxes because their members are the actual beneficiaries of this policy of “reconciliation”. For the present, they are playing to the galleries for the benefit of poor who make them reach the Parliament. The government has, thus, very successfully managed the pressure for tax reforms.
However, a new kind of pressure is building up which the government will find quite difficult to manage; this pressure is not of the kind which could be passed on to the poor. Wall Street Journal has reported that Pakistan is embroiled in a row with foreign donors over plans to disburse billions of dollars in funding to rebuild infrastructure following this summer's deadly flooding. The disagreements focus on Western countries' efforts to tie aid to demands that Pakistan ensure the second phase of flood-recovery money isn't used corruptly and that the country raise more of its own rebuilding funds through local taxes.
There is no way that the donors could be assured of transparency of the process of using these funds. In the past, a certificate from the supreme audit institution of the country was considered enough assurance by the multilateral donors but it seems it would no longer be acceptable to them. These issues will be at the center of a gathering next week of foreign governments, multilateral lenders and Pakistani officials, international donors say.
The Pakistan Development Forum, which meets Sunday and Monday in Islamabad, will discuss the country's massive funding needs in the current budget year to June 30, which have ballooned after the floods. Even before the floods, foreign donors were worried about Pakistan's economic stability. The country called in the International Monetary Fund in 2008 amid a balance of payments crisis. Since then, it has borrowed $11 billion from the IMF but made scant progress to reduce its enormous budget deficit, including failing to raise taxes and cut losses from state-owned enterprises, donors say.
So far, funding for recovery from the flooding, which the World Bank estimates caused $10 billion in economic losses, has been slow in arriving. Almost 2,000 people died, and 20 million others lost their homes, food stores or were affected in other ways. The United Nations, which is handling the emergency phase of the recovery, says it has received only 40% of its campaign to raise $2 billion, its largest-ever call for emergency relief. More than a third of those donations have come from the U.S.
In part, the sluggish response reflects concerns over Pakistan's reputation for graft and the state's failure to force its own wealthiest citizens to pay taxes. As donors turn to the longer-term work of rebuilding roads, schools and homes—to be funded and funneled through Pakistan's own government budget and not the U.N. or foreign donor agencies—they have pushed for transparency mechanisms to ensure foreign funding cannot be misused. The U.S. has been vocal about the Pakistan government's need to end corruption. Secretary of State Hillary Clinton last month at an international aid conference for Pakistan in Brussels publicly berated the nation's wealthiest citizens for failing to pay taxes.
Pakistan's ratio of tax to gross domestic product is less than 10%, among the lowest ratios outside of Africa. Many sectors, such as agriculture which is a source of unexplained wealth and political power, are exempt from taxes.
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