The low tax to GDP malaise

Syed Shahid Zaidi, Council Member of the Institute of Chartered Accountants of Pakistan and session chairman at a post-budget seminar the other day expressed concern over Pakistan having the lowest tax to Gross Domestic Product (GDP) ratio in the region. He attributed this to there being no tax on exports, agriculture income, and the services sector - a sentiment that appears to somewhat echo what was stated late last year by Milan Zavadjil, assistant director at the International Monetary Fund's (IMF) Middle East and Central Asia Department.
Zavadjil maintained that the tax-to-GDP ratio in Pakistan was low largely because tax on agriculture and services was very low. He did not refer to exports as being a cause for the low tax-to-GDP ratio because Pakistan's balance of payments situation precludes the imposition of a tax on exports.
The government, therefore, can easily defend itself on this issue by arguing with a degree of credibility that if a new tax is imposed exports would fall thereby further worsening the balance of payments situation. Agriculture tax or an income tax on the rich farmers is an issue that has been raised repeatedly in the past and only the resistance by the country's politicians who, by and large, are landlords has forestalled all moves to tax their income.
Ironically, it is the failure of all governments, democratically elected as well as military run, to impose a farm tax that has been the price that the country has paid for the low level of democracy that we have enjoyed.
Tax on services is frequently debated prior to the announcement of budgets and has been imposed in the past but organised resistance by the services sector has always managed to make it negligible in terms of total collections.
Pakistan's current tax-to-GDP ratio is estimated at 11.1. The CBR's share in tax-to-GDP ratio is 10.6 percent, while provinces' share is just 0.5 percent which has not increased in 20 years.
The reasons behind this statistic is Pakistan's low personal income tax rate, with only partial responsibility for this on the agriculture sector, and minimum tax on profits as part of the Government's strategy to improve the country's business environment and make the private sector the engine of growth. Lal, Member Tax Policy and Reforms, had stated earlier this year that the reason for the low ratio can be attributed to the failure of the Government to bring about administrative reforms in the Central Board of Revenue (CBR).
The perception that corruption continues within the CBR has not evaporated in spite of Government claims that reforms are underway and have begun to take effect.
Be that as it may, the low tax-to-GDP ratio proves that tax collection is unsatisfactory which can be attributed to not only a low tax base but also to CBR's mismanagement at best and, at worst, corruption.
The issue of low tax-to-GDP ratio has been repeatedly raised in recent years because of the high levels of growth experienced by the economy. Basic economic theory argues that with a growth in GDP a growth in tax revenue will be automatic.
But this theory makes one assumption: ceterus paribus or other things remain the same. This has not happened because while the Government was committed to promoting growth, largely with foreign funding, it was not willing to tax its exporters in an effort to ensure that the balance of payments situation did not further deteriorate.
Syed Shahid Zaidi also raised the by now extremely fashionable topic, that of the rather lucrative real estate trading. This has become a political issue, at par with the farm income tax proposal, and while it does raise concerns amongst the have-nots yet there is little that is likely to change in this regard in the near future.