'Pakistan's tax-to-GDP ratio not very low as compared to other regional countries'

LAHORE: Pakistan's tax-to-GDP ratio of 14 percent is not very low as compared to other countries of the region, including Sri Lanka (13 percent), India (18 percent), and Bangladesh (8.5 percent), said the Federal Board of Revenue (FBR) sources.

They said this ratio can vary by as much as 15 percentage points even in advanced countries, adding that both the government and donors have established a misleading narrative that Pakistan has a tax-to-GDP ratio lower than some other countries.

Sources said the current target of the IMF for a tax-to-GDP ratio of 16.7 percent by FY 2021-22 is unrealistic and cannot be achieved without enhancing the taxable capacity of the country. Yet curiously the design of the target and measures to achieve it has stifled economic activity. As in the rest of the world, for revenues to increase we need economic growth. Yet policy is killing transactions through arbitrary taxes and the costly documentation drive.

They said not only is our tax policy not based on conceptual clarity but it is also being changed continuously to meet unrealistic targets. The tax rates are high and keep changing several times a year through exemptions and SROs in mini budgets, they added and pointed out that the uncertainty due to continuous tax changes is a huge drag on investment which, as a percentage of GDP, is already among the lowest in the world.

Similarly, they said, the sales tax base is fragmented with services subject to taxes at the provincial level and goods at the federal level. There is also a variation in rates (from 1 percent to 17 percent), in addition to several exemptions. The standard rates on services also vary between provinces. In Balochistan and KPK it is 15 percent, in Punjab it is 16 percent, and in Sindh it is 13 percent. Such fragmentation and exemptions also add to the existing uncertainty, sources added.

Sources have criticised the government's focus on increasing the tax-to-GDP ratio regardless of how this has become the cornerstone of policy. They said Pakistan's tax policy is not based on well-known and clear principles. Section 5 of the Federal Board of Revenue Act legitimizes a Tax Policy Board/Committee to sketch tax policy independent of FBR. Unfortunately, that board convened only once after reconstitution. The finance bills that continually add ad-hoc tax measures in frequent mini-budgets have developed a complex tax system that confounds the principles of rational tax policy, they added.

It is worth noting that every mobile phone user (i.e. 90 percent of population) is paying income tax in withholding form under the current withholding tax regime. Data shows that policy consistently pushes for an unrealistic tax-to-GDP ratio, setting FBR to chase the number with arbitrary measures that kill transactions.

For decades now, they said, the policy has given priority to increasing the tax-to-GDP ratio leaving growth and employment to an outcome perhaps of some projects funded by the Public Sector Development Programs (PSDP). Expenditures are never reviewed or rationalized for efficiency, they added.

According to sources, public sector employment is guaranteed, and annual wage increases are held sacrosanct while operational expenditures are regularly cut. Arbitrary and frequent tax changes have created an environment of uncertainty while cuts in operational expenditure have led to austerity.

Copyright Business Recorder, 2020