The main message of this report is thatPakistan can take measures to increase the tax to grossdomestic product (GDP) ratio by around 3.5 percentage pointsover the next five years. In order to ensure a healthylong-run economic development, Pakistan needs to embracesubstantial changes in tax policy aimed at increasing thebuoyancy of the tax system, broadening the tax bases,reducing distortions and phasing out exemptions. Such taxreforms are also required to deal with the risks stemmingfrom sustained large budget deficits. Failing to act soonerrather than later, only makes the problem more difficult toaddress without considerable instability, raises theprobability of fiscal and financial disarray at some pointin the future, and runs the risks of further constrainingpolicy flexibility in future. This report highlights designingredients for a comprehensive reform of tax policy inPakistan. In the final analysis, the success of tax reformwill depend less on the mechanism of taxation and more onthe politics of taxation. Beyond adequate administrativeresources and an implementation strategy, this will requirea clear political recognition of the importance of the taskand the willingness to persist with tax reform over the long haul.
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