NationalVOLUME 16 ISSUE # 24

Untapped tax potential

Pakistan collected Rs4.721 trillion in taxes in the outgoing fiscal year, which was more than the revised target of Rs4.691tr. The government has projected a revenue collection target of Rs5.829tr for the Federal Board of Revenue (FBR) for the new fiscal year.

The revenue is more than the target after years but still far less than the potential of the country. Pakistan’s tax-to-GDP ratio remains low at less than 10pc, the lowest in the region, despite massive indirect taxes collected by successive governments. According to the International Monetary Fund, Pakistan’s tax collection is at least 62pc lower than its potential. The government has achieved only one target out of its 10 promised tax reforms-related goals, according to a review by the Policy Research Institute of Market Economy. Six targets have been partially achieved, one was less than partially achieved and two remain unattended. Work in some areas is limited only to files. The only target that has been achieved is to reduce the transaction cost of paying taxes and an electronic facility for the payment of all FBR and some provincial taxes.

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 the 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 not only have to meet FBR’s revenue collection target, but also nearly double it by 2023-24. It means the authorities must increase federal revenues up to16.2pc of GDP by 2023-24.

Under the revised agreement with the IMF, Pakistan will take additional revenue measures equal to 1.4pc of the size of its economy or over Rs700 billion to achieve a tax collection target of around Rs6 trillion in the next fiscal year. A massive increase in petroleum levy collection helped hike the government’s non-tax collection. The government’s non-tax collection increased by 151pc from July to December. The non-tax revenue helped restrict the budget deficit to 2.5pc of GDP or Rs1137 billion during the July-December period.

Meanwhile, the World Bank (WB) has projected that the FBR’s tax revenues could go up to $82.4 billion (Rs12,788 billion) over the next nine years 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 (Rs14,992 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. Flaws in the tax system have led to substantial accumulation of untaxed wealth. Pakistan’s tax collection system generates less than 10 percent of GDP. Even that collection is made through indirect taxes, not being the real income.

According to estimates, only one percent of people carry the burden of the entire state. Despite hectic efforts, only 2.5 million people – out of the 220 million population – have so far been encouraged to 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 aims to bring fiscal consolidation, austerity and additional revenue mobilization. It believes the documentation of the economy and bringing untaxed sectors into the mainstream through various measures will help recover historic 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.

Undoubtedly, 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 the massive loopholes in the system and a large number of companies and individuals out of the tax net, there is no wonder Pakistan failed to gain self-reliance even after almost 74 years of its inception. 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. However, people should not be harassed for it. The number of indirect taxes should also be reduced to provide relief to the common man from rising prices.