The Federal Board of Revenue (FBR) suffered a blow to its tax-to-GDP ratio in the fiscal year 2021 as the economy slowed down due to the pandemic.
FBR’s new report puts the tax-to-GDP ratio at 9.9 percent. However, the Board took timely short- and long-term decisions to mitigate the negative effects of COVID-19.
Provinces made a meager contribution of 1.0 percent only, pushing the tax-to-GDP ratio to around 11 percent in the fiscal year 2021. The tax-to-GDP is expected to grow in the fiscal year 2022 due to an improvement in revenue collection during the first half of the ongoing year.
According to the report, provincial tax-to-GDP is around 1 percent for the previous eight years.
Analysis of breakdown of tax-to-GDP ratio highlights the sales tax and direct taxes are the primary contributors, after smaller shares from custom revenues and FED.
Reasons for the low tax-to-GDP ratio can vary from country to country. However, some of the general variables that play a key role in increasing the tax-to-GDP ratio include transaction documentation, sensible economic policies, efficient taxation structure, targeted fiscal policies, automation, and effective use of IT.
Similarly, improved taxation, along with efficient expenditure management, are critical for the economic growth and stabilization of a country, according to the World Bank.
Further, in the long term, governments must rely on an effective tax system to satisfy the demands of the public sector. Another research emphasizes a significant relationship between effective governance, a thriving economy, and tax revenues, concluding that governance is important in increasing tax revenues.