The FINANCIAL — Taxation reforms implemented in Pakistan over the past year could be used as a benchmark for other developing countries struggling to collect tax revenues, according to an LSE economist.
The reforms, made possible by collaboration between independent researchers at the International Growth Centre (IGC) and the Pakistan government, are expected to increase revenue streams to fund basic services for a population of around 180 million people, according to LSE.
Pakistan’s current tax revenue is just 8.5 per cent of its GDP – a “paltry amount” to service the needs of an emerging economy, the London School of Economics and Political Science researcher said.
The evasion of corporate taxes, which raise about 25 per cent of all federal revenue, is a big problem in Pakistan.
“Like many countries facing this problem, Pakistan has implemented a minimum tax system under which businesses who declare low profits are taxed on their revenues instead. Our research has provided strong evidence that taxing revenues, rather than profits, can be desirable in developing countries where tax evasion is rampant. This reduces evasion by up to 70 per cent of profits,” Dr Spinnewijn, London School of Economics and Political Science researcher said.
The IGC’s close collaboration with Pakistan’s Federal Bureau of Revenue has resulted in a unique partnership between a research institute and a government tax department.
The relationship has generated a number of IGC projects to tackle the inefficiencies in Pakistan’s tax system, including research by Professor Henrik Kleven and PhD student Mazhar Waseem which has helped close loopholes, making it more difficult for tax payers to manipulate the system.
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