Political stability must to generate high tax to GDP ratio

LAHORE: Political stability is must to generate high tax to GDP ratio in Pakistan, said experts, adding that economy can only flourish by boosting openness, literacy level, broadening the tax base and by controlling income inequality, tax evasion and tax exemptions.

The federal government is set to increasing tax revenues by almost one trillion rupees or 25 percent in 2020-21, however, no clear plan has so far been put in place. Meanwhile, the Peoples Democratic Movement (PDM) of some 11 opposition parties in the country is ready to launch an anti-government protest movement from 11th October, followed by a possible long march in January 2021.

Pakistan’s tax system is characterized by a number of structural problems. The overall level of fiscal effort is low and the tax-to-GDP ratio has remained more or less, stagnant at between 12 to 13 per cent since 80s. However, Pakistan’s tax-to-GDP ratio has declined to a historic low of around 9 percent during the fiscal year 2019-2020 compared to 11.1 percent in 2017-2018, largely because of lack of leadership at the Federal Board of Revenue (FBR), increase in corruption within the tax machinery, and flawed tax policy measures. Similarly, Pakistan’s budget deficit that in pre-Covid-19 situation had been projected at 7.3% of gross domestic product (GDP) was actually 8.1pc in June 2020. Interestingly, the budget deficit was generally in excess of six per cent of the GDP back in 80s.

Renowned economist Dr Hafiz Pasha said there is over dependence on indirect taxes, which until recently accounted for an abnormal share in revenues. This has increased the regressively of the tax system and imposed a higher excess burden of taxation, he said.

According to him, within indirect taxes there is domination of taxes on international trade, which has promoted inefficiency, distorted the allocation of resources and encouraged illicit trade. Also, he said, the effective tax base of most taxes is narrow due to wide ranging exemptions and concessions and rampant tax evasion.

Consequently, he said, tax rates have had to be pitched at high levels which has created a vicious circle of more tax base erosion and higher tax rates. Fifth, tax administration is characterized by primitive and outmoded procedures, complex laws and considerable arbitrariness and discretion. The common perception is one of high levels corruption and inefficiency.

Despite these problems which have been manifest for a long time Pakistan has been slow to embark on the path of tax reforms. In the 80s, higher fiscal effort was substituted for by large bank and non-bank borrowings. However, the extremely rapid growth in debt servicing clearly indicated that the task of resource mobilization from taxes could not be postponed indefinitely.

Imran Sharif Ch, another tax expert, is of the view that openness, broad money, external debt, foreign aid and political stability are the significant determinants of tax efforts in Pakistan with expected signs. The results also indicates that the determinants of low tax revenue in Pakistan are narrow tax base, more dependence on agriculture sector, foreign aid and low level of literacy rates.