ISLAMABAD: Pakistan's tax-to-GDP ratio has declined to a historic low of around nine percent during the fiscal year 2019-2020 compared to 11.1 percent in 2017-2018, largely because of lack of leadership at the Federal Board of Revenue (FBR), increase in corruption within the tax machinery, and flawed tax policy measures.
This was stated by a very senior official, who remained at the helm of affairs in the Revenue Division/FBR on condition of anonymity.
He stated that despite imposition of 17 percent sales tax on five leading export sectors in budget (2019-2020) and other taxation measures to the tune of Rs735 billion in 2019-2020, the FBR's tax-to-GDP witnessed a constant decline during 2019-2020.
The FBR's policy of heavy taxation and over taxation on certain sectors such as tobacco products totally contributed to revenue collection during 2019-2020.
Harsh enforcement measures such as the condition of computerised national identity card (CNIC) numbers of the unregistered buyers further damaged the relationship between the tax collector and the taxpayers.
"The attribution of the FBR as the most corrupt institution by the leadership at the top level (government) also led to a negative impact on the entire tax machinery of the FBR," he said.
Based on the calculations of the GDP, inflation, rupee-dollar parity, additional taxation and blockage of refunds, it is safe to state that the tax-to-GDP ratio has contracted from 11.1 percent in 2017-2018 to nearly nine percent in 2019-2020, he stated.
When contacted, a senior FBR official quoted data that the tax-to-GDP ratio was 9.5 percent in 2019-2020; 10.1 percent in 2018-2019; 11.1 percent in 2017-2018; 10.6 percent in 2016-2017; 10.7 percent in 2015-2016; 9.4 percent in 2014-2015; 9.7 percent in 2013-2014; 8.7 percent in 2012-2013; 9.4 percent in 2011-2012, and 8.5 percent in 2010-2011.
The FBR official added that the FBR had collected Rs3,989 billion in 2019-2020, which was Rs82 billion more than the revised revenue target of 3,907 billion set for 2019-2020.
The official, who supervised overall affairs of the FBR/Revenue Division for a few years, told Business Recorder that the revenue collection should have been increased during 2019-2020 due to rise in inflation, but the tax collection continued to decline during 2019-2020.
The frequent changes at the top level of the FBR during the last two years have also sent a very negative message among the entire workforce of the FBR.
"It was a massive failure of the leadership that the corruption in the field formations of the FBR has increased manifolds during the last 1-2 years," he regretted.
Another major issue was increase in smuggling during 2019-2020 due to import compression and substantial raise in customs duties, additional customs duties (ADCs) and regulatory duties on the imported items during 2019-2020.
He rejected the FBR's claim that the import compression reduced the FBR's collection by 50 percent at the import stage, as actual imports in terms of rupees were increasing.
The number of tax filers increased from 1.8 million in 2018 to 2.4 million in 2020 only due to the measure taken in 2018-2019 that a person who fails to file income tax return within the due date shall not be included in the Active Taxpayers' List (ATL) for the year for which return was not filed within due date.
However, due to the lack of capacity of desk audit, the FBR failed to achieve desired results, despite increase in the number of filers, he said.
The official explained that the present government was also unable to take advantage of new laws, which were initiated by the previous government such as Benami law, and exchange of information with international jurisdictions.
The new laws were enforced in 2019-2020, but the FBR was unable to make cases or utilise information under these laws.
About the impact of the Covid-19 on the FBR's revenue collection, he stated that it had an impact on the FBR's collection for the months of April and June 2020, but the remaining 10 months collection was not satisfactory in 2019-2020.
International tax expert Dr Ikramul Haq told Business Recorder that the government of Pakistan Tehreek-i-Insaf (PTI) took Rs735 billion worth of taxation measures in the budget 2019-2020, while the nominal GDP growth was projected at 15 percent (three percent real GDP plus 12 percent inflation), which was required to help collect additional taxes of Rs574 billion.
The growth in revenue collection in the first four months was at the level of nominal GDP growth of 15 percent.
But the FBR believed that its efforts have been undermined by import compression as there is a healthy growth of over 20 percent at the domestic stage.
Dr Haq said that the tax-to-GDP ratio was the lowest and that too after withholding bona fide refunds of exporters.
The FBR officials admitted before the National Assembly Standing Committee on Finance that refunds of Rs532 billion were due from June 2014 to June 2019.
The FBR did not report the refund claims outstanding from before June 2014 and also for the period of July 2019 to June 2020.
If we take all the figures, the collection was even lower and the tax-to-GDP ratio would have been lower than nine percent, had all the refunds been issued, he stated.
The tax expert added that Pakistan's tax structure was characterised by a narrow tax base, massive tax evasion, a large number of concessions and exemptions, regressive tax regime, reliance on indirect taxes, and tax administration challenges. The combined effect of these challenges has a low tax-to-GDP ratio during 2019-2020.
Copyright Business Recorder, 2020
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