The World Bank recently released a report on business taxes titled Toward a More Business Friendly Tax Regime: Key Challenges in South Asia. In the report, the World Bank has warned that Pakistan has a disturbingly high tax rate for businesses. The tax rate is stated as unusually high for a nation from a developing region.
The report ranks Pakistan’s corporate tax rate as the third highest in the world. A similar trend was seen in several other developing countries from the South Asian region. World Bank’s report cites that “Corporate tax rates in South Asia are higher than those in other developing regions” due to a “narrow tax base” which has resulted in higher tax rates.
The Pakistani government continues to give tax incentives to privileged firms despite the small tax base nationwide. This approach benefits the few high-revenue businesses which are already settled in the market while deteriorating the overall investment environment in the country. This also puts extra pressure on the already small number of taxpayers, the report states.
According to State Bank of Pakistan (SBP), Pakistan’s tax-to-GDP ratio has remained within a range of 8.5% to 9.5% over the past 10 years. Out of all the cities in the country, Islamabad has the lowest tax-to-GDP ratio. Islamabad also holds the title of having the lowest tax-to-GDP ratio in the world.
World Bank’s report says that despite having such a big population, only 1.2 million individuals and firms file their income tax returns in Pakistan. Half of these tax filers are from the corporate sector. About 118,000 firms are enrolled to pay sales taxes, however, only 15,000 actually pay any tax at all.
Pakistan’s tax-to-GDP ratio has remained within a range of 8.5% to 9.5% over the past 10 years.
Pakistani government offers $4.7 billion worth of subsidies on different forms of direct and indirect taxes, which is about 2 percent of the country’s GDP. The report notes that these incentives and subsidies are not targeted to address market failures so they produce little benefit.
The policy paper, compiled by Anna Reva (Operations officer at the World Bank’s Poverty Reduction and Equity Department), discusses issues residing in the structure and administration of corporate taxes in the South Asian region including Pakistan. The report notes that, throughout the region, select industries and firms are offered exemptions and concessions, while different indirect taxes are levied and industries have to comply with high taxes.
Global average corporate tax is about 24 percent, which increases to 32 percent in the South Asian region. Pakistan has an even higher 34 percent corporate income tax rate.
High business taxes discourage investment due to decrease in revenue and an increase in sales taxes reduces spending. The report also urges the Pakistani government to make the tax payment process easier. For comparison’s sake, in some countries, it takes companies 12 payments and 175 man-hours on tax regulations while in Pakistan, firms make 47 payments and spend 74 business days each year. The government should promote a positive trend of buying and investment by reducing taxes to the lowest possible level and making the process easier, states the report.
