The 'panel of economists' constituted by the Planning Commission, has proposed a strong system of accountability to minimise corruption in tax collection procedure of the Federal Board of Revenue (FBR), after implementation of value-added tax (VAT), from next fiscal year 2010-11.
According to the report of the 'panel of economist', issued here on Tuesday, a strategy to raise the tax-to-GDP ratio will involve, first, an early move towards a comprehensive VAT in Pakistan which removes most of the exemptions in the general sales tax (GST) currently on goods and extends the tax net to achieve comprehensive coverage of services; second, improvements in tax administration to achieve a more functional and integrated tax system for detecting under-filers and non-filers of tax returns; and third, effective levy of direct taxes on agricultural income and capital gains. A strong system of accountability will have to be put in place to minimise corruption in the process of tax collection, the report added.
The efforts will have to be made to mobilise more domestic resources by raising the tax-to-GDP ratio, which has been languishing at about 10 percent and is one of the lowest among developing countries. This will have to be raised by over three percentage points during the Plan period.
The report said that the elite had failed to establish an equitable taxation structure in its own enlightened self-interest that would finance spending on infrastructure development and on the delivery of key social services. Pakistan's consolidated tax to GDP rate is just over 10 percent which is 5 to 7 percentage points lower than the ratio for countries similarly placed economically.
The primary reason for the low rate of government savings is that Pakistan's tax-to-GDP ratio (which determines the fiscal space) is barely 10 percent, compared with close to 18 percent in the case of India, China 18.3 percent, Indonesia 12.4 percent, Malaysia 14.8 percent and Thailand 15.3 percent and in excess of 32 percent in the case of OECD countries. The main reasons for this low ratio are: a) the in elasticity of the tax structure;
b) the horizontal inequity of the tax system in that it either does not extend to certain sectors like wholesale and retail for GST and agriculture for income tax, gives preferential treatment to some sectors or activities like some subsectors under services for GST and real estate and trading in equities for capital gains and taxes partnerships 30 and the rich lightly; and c) that the administrative system is characterised, for a variety of reasons, by poor collection efficiency.
The resulting political uncertainty, problems of law and order, political tension with India, the policy inconsistencies, if not reversals, in respect of external trade, the structure of import duties and their transparent and predictable application, income tax, GST and duty drawback systems, rules and regulations, etc, all adversely affected the climate for investment, the report added.
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