Economic Survey (2020-21) on Thursday revealed that the tax-to-GDP ratio (federal taxes) fell to 9.6 percent in 2019-20 against 10.1 percent in 2018-19.
Economic Survey stated that to improve the tax to GDP ratio, the government is making all-out efforts to enhance tax collection through comprehensive tax reforms. Although in budget 2021, the government has not introduced any new tax, however, the emphasis is on strict enforcement and monitoring, broadening of the tax base, documentation of economy and deployment of technology to identify risk areas to support risk-based audit.
During the last five years, the overall tax-to-GDP ratio (federal & provincial) remained within a range of 11.4 percent and 12.9 percent. This ratio fell to 11.4 percent in 2019-20, down from 11.7 percent in 2018-19. The economic downturn caused by the COVID-19 pandemic resulted in a further drop in the tax-to-GDP ratio during FY2020.
Over the years, distortionary exemptions, concessions, weak enforcement, low compliance by taxpayers, reliance on indirect taxes, and issues in improving tax administration have adversely affected the tax to GDP ratio. Historically, Pakistan has a narrow tax base due to the fact that few sectors are under-taxed and some are not taxed at all. There are three major sectors of Pakistan’s economy i.e agriculture, industry and services (in terms of their share in GDP), however, their tax contributions are not proportionate to their economic contribution.
For instance, the agriculture sector accounts for 19.4 percent in GDP during FY2020 while contributing less than 2 percent in tax.
In services, transport, storage & communication, housing, and other private services contribute 12.7 percent, 7.0 percent and 11.7 percent, respectively in GDP, while their contributions in taxes are 7.0 percent, 0.3 percent and 8.4 percent, respectively.
In contrast, the manufacturing, mining & quarrying sectors are contributing the most in taxes relative to their share in GDP i.e manufacturing accounts for 12.2 percent, mining & quarrying 2.6 percent and construction 2.5 percent in GDP, while their share in taxes is 37.0 and 6.0 and 1.2 percent, respectively during FY2020.
This represents that taxes in the respective sectors are not equitable with reference to their contribution to GDP. Consequently, the tax to GDP ratio remained low. Thus, there is a need to improve the tax to GDP ratio by increasing the contribution of tax revenues from the sectors having more potential to pay taxes.