Tax and tariff reforms have started paying dividends

The wide-range tax and tariff reforms, including improvement in the tax administration have started paying dividends in the form of higher tax collection and fiscal consolidation, Economic Survey 2003-04 issued here on Friday said.
Tax collection has picked up, whereas the overall budget deficit as percentage of the GDP has declined, the revenue deficit has narrowed and the primary surplus has increased.
Consequently, public debt as a percentage of the GDP has declined and Pakistan is now moving with speed towards fiscal consolidation.
The basic philosophy of tax and tariff reform has been to move away from investment and production-based taxes (indirect taxes) to income (direct taxes) and consumption (sales tax) based taxes. There is a need of much more effort to enhance the share of direct taxes in total taxes.
During the last five years, tax collection has increased by 65 percent.
As a result of reforms, the structure of taxes has undergone considerable changes since 1990s. Firstly, the share of direct taxes in total taxes has increased from 18 percent to 32 percent in 2003-04. Accordingly, the share of indirect taxes declined from 82 percent to 68 percent during the same period.
Even within the indirect taxes, dramatic changes have taken place. The collection from customs duty used to account for 45 percent of the total tax collection and 55 percent of indirect taxes in 1990-91. Its share has now been reduced to 17 and 25 percent, respectively. This is the consequence of the tariff reform implemented by successive governments since 1990-91.
The share of sales tax increased dramatically from 14.4 percent to 43 percent of total taxes and from 17.6 percent to 62.5 percent of indirect taxes during the same period. Central excise as a tax is loosing its importance and gradually fading out. Its shares in total taxes and indirect taxes were 22.5 percent and 27.5 percent, respectively in 1990-91.
The pace of change in the tax structure, particularly in indirect taxes has gained considerable momentum over the last five years. The share of customs collection has declined from 33 percent to 25 percent, while the share of central excise has declined from 31 percent to 13 percent since 1998-99. The share of sales tax increased from 36 percent to 62.5 percent.