Pakistan has a low tax-to-GDP ratio compared to other emerging economies, averaging 11 percent, which can potentially reach 26 percent of GDP, donors believe.
According to the Asian Development Outlook (ADO), 2022, released on 6 April 2022, the country’s tax revenue could potentially reach 22.3-26 percent of GDP.
The challenge is to tap this potential through well-defined and comprehensive reforms in tax policy and administration. A simplified and easy-to-understand tax system that makes it easy to file tax returns would encourage voluntary compliance and reduce tax evasion, the donors argue.
However, international donor agencies unanimously believe that the Government of Pakistan has failed to reach even half of the tax potential of the country, which causes high fiscal deficits and constrains fiscal space for infrastructure and social spending.
The ADB report is coherent with the views of other international donors such as the International Monetary Fund (IMF) and World Bank.
ADB, in its report, notes that the effective enforcement of tax laws can be achieved by improving governance, continued investment in information technology infrastructure, and more and better-trained staff. Modernizing tax administration by integrating internal databases and information systems, and improved training in data management can enhance efficiency, improve compliance risk management and audit capability, and reduce the cost of paying taxes.
The continued structural weaknesses of the tax system are reflected in a narrow tax base and poor taxpayer compliance due to the large informal economy, tax avoidance in the formal sector, and under-taxation in certain sectors, the report states.
The report further notes that Pakistan’s tax regime is complex and unpredictable, marred by excessive exemptions and preferential treatment, multiple rate structures, frequent ad-hoc changes in tax policy, and fragmented tax administration.
Revenue from direct taxation is low compared with indirect taxes and remains concentrated among salaried workers and large industries. Indirect taxes comprised two-thirds of the total tax revenue in FY 2021Ù« the report said.
The extensive use of withholding and sales taxes collected by third-party agents has become a preferred mode of revenue collection.
The provincial tax collection in Pakistan, compared to the share of federal tax revenue, remains minuscule averaging 8.9 percent of the total tax revenue over the last 5 years.
Gains from recent administrative and technological improvements facilitating smoother digital filing can be increased by improving taxpayer education and facilitation services.
As per the report, developing and strengthening technical capacity in data analysis can facilitate evidence-based policymaking and support better compliance by identifying tax gaps and facilitating systematic monitoring and evaluation.
These measures, complemented with broader efforts to improve the business climate and measures to address the trust deficit in the delivery of public services, can encourage informal businesses to enter the formal sector, the report states.
Improving the ability of provincial governments to raise revenue is critical for the success of tax reforms. The report further states that expanding the provincial tax net, particularly in services like retail trade; boosting the capacity of provincial tax collection; improving the efficiency of collecting vehicle tax, and optimizing the urban property tax would substantially increase the generation of provincial revenue. Stronger institutional arrangements are needed to improve the coordination of tax policies and administrative laws among the federal and provincial governments.
Pakistan’s Medium Term Budget Strategy FY 2021-FY 2024 outlines directions for tax reforms, focusing on broadening the tax base and widening the tax net, and removing subsidies.
Our GDP does not reflect the actual growth achieved due to increase in our local industry or exports it is mainly our debt that’s being used to pump blood in our suffering economy further taxation would do nothing but add to our problems. Only solution is to cut our non developmental expenditure rather then increasing taxation.