NationalVOLUME 16 ISSUE # 05

Falling Tax-to-GDP Ratio

Pakistan’s tax-to-GDP ratio declined to 9.4pc in 2019-20 as compared to 11.1pc in 2017-18. In the last two years of Prime Minister Imran Khan’s government, it remained between 9.9pc and 9.4pc. The falling revenue shows his government has fared poorly against the government of his archrival Nawaz Sharif. It calls for an urgent need to reform the system.

The tax-to-GDP ratio for 2020-2021 is projected at 10.9pc but it is still insufficient to meet the requirements of the country. According to the Revenue Division Year Book (2019-20) by the Federal Board of Revenue (FBR), the ratio has declined during the last two years; however, the decline in the FY 2019-20 has been lower as compared to the previous fiscal year. It hopes the revenue will increase with increased economic activity in the post-Covid period, which would lead to a higher tax-GDP ratio in the coming years. According to FBR’s biannual review 2019-20, the overall tax-GDP ratio of Pakistan remained between 11.4pc and 12.6pc during the last five years. The FBR has projected the ratio at 10.9pc in 2020-21; 11.6pc in 2021-22, and 12pc in 2022-23.

It is an encouraging sign that the FBR has achieved its first quarter (July-September) tax collection target. Against the first quarter target of Rs970 billion, the FBR provisionally collected nearly Rs1 trillion, higher by Rs40 billion or 4.1pc when compared with Rs959 billion collected in the first quarter of the last fiscal year. The collection may increase by Rs10 billion after the reconciliation of figures at all levels. However, the 4.1pc growth rate is not sufficient to achieve the annual tax collection target of Rs4.963 trillion. The growth is also less than half the inflation rate, which means the FBR has not been able to fully capture the impact of increase in prices and there are revenue leakages in field formations.

The share of income tax in total collection shrank to 35.8pc, as out of Rs1 trillion, the income tax collection was just Rs357 billion. For the second successive month, the FBR missed the tax collection target by Rs17 billion in September. It provisionally pooled Rs401 billion in the month as against a target of Rs418 billion. However, the monthly collection was still 4.7pc better than September 2019, when Rs383 billion was collected. As against Rs349 billion income tax collection in the first quarter of the previous fiscal year, Rs357 billion was generated in the first quarter, higher by Rs8 billion or 2pc. The income tax collection target was Rs381.3 billion. Sales tax collection stood at Rs437 billion against receipt of Rs405 billion in the same period of the last fiscal year, showing a growth of 7.2pc. The sales tax target was Rs396 billion.

Prime Minister Imran Khan has expressed his frustration at the tax machinery many times. He even proposed the creation of the Pakistan Revenue Authority to replace the Federal Board of Revenue (FBR). Experts say the government cannot delay the reforms after it has given an undertaking to the lending community to achieve an increase of 4-5pc of GDP in tax revenues by the end of the IMF programme. The PTI government has signed agreements with international lending agencies under the umbrella of IMF’s three-year programme that promises about $38.6b foreign inflows in 39 months from all lenders. It means failure is not an option. Pakistan will have to generate Rs10.51t by 2023-24.

The World Bank (WB) has projected that tax revenues could go up to $82.4 billion till fiscal year 2028-29, without any intervention under the Pakistan Raises Revenues project of $400 million loan. However, with intervention in the shape of taxation measures, the revenue is projected to increase up to $96.6 billion. On the issue of tax gap analysis, the WB found that Pakistan’s tax revenue would reach 26pc of GDP if tax compliance were raised to 75pc, a realistic level for MICs (Middle Income Countries).

Experts say the existing system is a serious threat to the economy. The accumulation of untaxed wealth, flawed taxation policies and administrative loopholes have led to a situation where Pakistan finds it hard to put the economy on the path to recovery. Pakistan’s tax collection system generates less than 10pc of GDP. Even that collection is made through indirect taxes, not being the real income, which hits the poor hard.

According to estimates, only one percent of people carry the burden of the entire state. Despite hectic efforts, less than three million people – out of the 220 million population –file returns. Only three hundred companies in Pakistan pay 85pc of the tax. Over 90pc industrial consumers of electricity do not pay sales tax. Over 50pc companies registered with the Security and Exchange Commission of Pakistan (SECP) also do not pay sales tax. Over 100,000 companies are registered with the SECP but only 50,000 file returns. There are more than 3.1 million commercial electricity connections but more than 90pc of them are outside the tax net. The banking data shows that there are 50m account holders in the country but just 400,000 are paying taxes.

The government believes the documentation of the economy, bringing untaxed sectors into the mainstream through various measures will help recover high revenue. It has launched a movement for increasing tax collection equitably on all taxable incomes. It is acquiring data of economic transactions from third parties, including banks, excise and taxation departments and other offices to net tax evaders.

The present system is not sustainable for Pakistan and its people. Social services can only be provided when there is adequate collection of revenue. In the presence of massive loopholes in the system and a large number of companies and individuals out of the tax net, there is no wonder Pakistan has failed to gain self-reliance. Successive governments relied on internal and foreign loans to run the affairs of the country. The tax collection figures are horrible but they also provide a huge opportunity to the government to collect record revenue by bringing all potential individuals and companies into the tax net.