increasing tax to GDP ratio

Challenge of raising tax-to-GDP ratio

By Tahir Ali

http://jang.com.pk/thenews/nov2010-weekly/busrev-22-11-2010/p11.htm

Low tax-to-GDP ratio is one of the major economic problems faced by Pakistan. Its tax-to-GDP ratio stands at just 9 per cent at the moment and it must be increased to meet the financial requirements for rehabilitation and reconstruction of the flood-hit areas.

The country’s tax ratio is continuously dwindling owing to ineffective tax collection machinery and weak commitment on part of the government to raise new taxes and bring the untapped areas under the tax net. Direct taxes accounted for Rs520 bn as against the initial target of Rs544 bn last year. This year the desired target is Rs633 bn which also seems impossible to achieve given the dismal record of the tax collection machinery. Only 2.5 million of the total population of 170 million pays direct taxes which includes 1.8 million salaried taxpayers. If the salary class goes out, nothing is left.

A broadened but rational and balanced tax structure with minimal exemptions is needed direly but the question is who will bell the cat? The economic survey 2009-10 states that the mighty and influential sectors and individuals have managed to secure tax exemptions worth Rs147 bn. Higher tax-to-GDP ratio means greater socio-economic development as more money is there for developing different sectors of the economy and uplifting the living standards of the people.

The Federal Board of Revenue (FBR) wants to enhance the tax ratio to 15 per cent by 2015. This increase is a must in the wake of lacklustre response by the international community to provide Pakistan the needed money for rebuilding the country following shocks by floods, militancy and 2005 earthquake.

World leaders and US Foreign Secretary Hillary Clinton in particular, have been repeatedly saying that the international community would provide money for reconstruction after floods but Pakistan should raise its own tax-to-GDP ratio and its rich should contribute to the efforts at first. “The most important step Pakistan can take is to pass meaningful reforms to expand its tax base. The government must require that the economically affluent and elite support the government and people of Pakistan,” Hillary Clinton said.

According to an estimate, the government is losing around Rs500 bn a year in taxes, which is a matter of great concern. Each successive government has expressed its utmost concern over the issue, but the remedy often resorted to has proved to be defective. Rather than expanding the tax base by bringing more people under the tax net, the existing taxpayers, mainly the salaried class, have been subjected to increased tax ratio by successive regimes. This strategy has been adopted by all the public service departments like Wapda, Sui Southern/Northern Gas Pipeline and so on, as well as those who have augmented their tariffs but done little to curtail tax theft that has resulted into losses accounting to billions of rupees. This has resulted in an increased resort to theft in taxes and services by the people and entrepreneurs.

According to a report jointly released by FBR, Georgia State University and the World Bank last year, every man and woman in Pakistan is evading taxes worth Rs4,800 annually and the tax gap stood at 67 per cent of the actual tax receipts. “The narrow tax base, tax evasion, distrust of taxpayers and administrative weaknesses have taken a toll on tax collection system and some sectors are more heavily taxed than others. Agriculture contributes about one-fifth to GDP, and amounts to no more than one per cent of FBR revenue. Given the shortfall in agriculture and services, industry carries the brunt of the tax burden, and its tax share is three-times as high as its GDP share,” the report says.

Rulers and leaders lead from the front but Pakistani leadership has not created good precedents for the commoners. According to a report in The News, Prime Minister Yousuf Raza Gilani and his 25 ministers, in sworn affidavits submitted to the Election Commission of Pakistan at the time of their elections, have admitted that they do not pay income taxes.

Extremely hesitant as the incumbent leadership is to cut down on their routine non-developmental expenditures, the lack of funds in light of fewer taxes leaves little capacity with the federal government other than to seek expensive foreign debts as has been witnessed so far in the country.

The national economy has received both internal and external shocks in the past. Prolonged load-shedding and shaky law and order situation have given severe blows to the industrial sector of the country. It need not be said that when productivity is affected by power cuts, how could the entrepreneurs be expected to pay huge taxes?

To get the country out of its current economic turmoil, a strong political will, urge to excel, and development as number one priority are required. Importance of a clear vision, sustained growth strategy and strong political will can not be overemphasised. To ensure industrial growth and full potential of the industries, the government should overcome energy shortages and build as many big and small hydro-power generation units as possible. More economic activities and development would yield more taxes.

For raising the tax ratio, smuggling to/from Afghanistan and Iran would have to be controlled. This informal economy, according to an estimate, is believed to be two times bigger than the formal economy of Rs16,000 bn. Corruption will have to be brought down, if not eliminated altogether.

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About Tahir Ali Khan
I am an academic, freelance columnist, writer and a social worker.

One Response to increasing tax to GDP ratio

  1. This article gives the light in which we can observe the reality. this is very nice one and gives in depth information. thanks for this nice article.

    Like

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