The Rate Structure of Indirect Taxes in Pakistan

The purpose of this paper is to examine the rate structure ofindirect taxes in Pakistan with particular emphasis on the incentiveaspects of the tax structure. It is a part of a series of studies toevaluate the impact of the fiscal system in Pakistan, which is beingundertaken by the Fiscal and Monetary Section of the Pakistan Instituteof Development Economics. The rate structure of indirect taxes, however,is only one of the many factors that influence the relative prices andrelative profitabilities of industries. Direct controls, like theimport-licensing system, exchange-rate policy, the export-bonus scheme,etc., may in fact have greater impact on relative prices and on thepattern of investment than indirect tax rates. However, this paperexamines the differential incentives provided by the rate structure ofindirect taxes alone, assuming that the market is allowed to operatefreely and that rate structure is the major factor influencing relativeprices of industrial goods. The traditional objectives of taxationpolicy have been confined largely to diverting sufficient resources tothe government sector to match its expenditures. However, recentdevelopments in fiscal thought have come to assign a more positive roleto taxation policy in economic development, and the impact of the taxstructure on the rate and direction of saving and investment is widelyrecognized. In Pakistan and other underdeveloped countries, in view ofthe inadequate coverage and administrative complexities of direct taxes,indirect taxes assume a particular significance.