EDITORIAL: Development Policy Series in collaboration with the World Bank during a webinar titled “Unlocking Pakistan’s Income Tax Potential” noted the unsurprising fact that Pakistan’s tax to Gross Domestic Product (GDP) ratio declined for the second year in a row. Other disturbing features of the country’s flawed tax structure repeatedly pointed out by multilateral staff, consultants hired to reform the tax structure and domestic economists/sector experts, as well as this newspaper, include: (i) overtaxation of the formal economy compared to the informal economy has effectively implied sustained failure to widen the tax net. In this instance, successive administrations, including the incumbent, have focused attention on raising the number of tax filers while conveniently ignoring the fact that few of the new filers are eligible to be taxed with the overwhelming majority filing their returns to take advantage of the difference in the withholding tax rates for filers and the non-filers; and (ii) the heavy reliance on withholding taxes in the sales tax mode, an indirect tax whose incidence is greater on the poor relative to the rich, a trend that began during the Pakistan Muslim League-Nawaz administration which then proceeded to incorrectly credit the amount collected under total direct tax collections instead of under indirect taxes. The webinar participants urged the government to do away with the withholding taxes in this mode and Dr Waqar Masood Khan, the Special Assistant to the Prime Minister on Revenue, pledged to abolish 40 withholding taxes in the next two fiscal years thereby bringing the total number of withholding taxes from 65 to 25 starting from the budget for 2021-22.
The budgeted tax to GDP ratio in 2018-19 was projected at 11.6 percent; however, 10.8 percent was achieved as per the revised estimates. Given that the budgeted projection was made by the PML-N administration seeking to win a re-election it was widely dismissed as totally unrealistic. Thus for the PTI administration to achieve 10.8 percent tax to GDP ratio during its first 10 months in office must be appreciated. However, in 2019-20, the budget projected a tax to GDP ratio of 14.4 percent considered even more unrealistic than the projection for 2018-19 due to the acceptance by the then newly-appointed economic team leaders to achieve total Federal Board of Revenue (FBR) collection of 5.5 trillion rupees with no takers given the growth rate projection of 1.5 percent. The revised estimates place the ratio at 9.4 percent attributed by the economic team as due to the pandemic-related contraction in the economy. True that a portion of the GDP projected at 44 trillion rupees last year against 41.7 trillion rupees maybe attributed to the pandemic; however, the growth projection was from 38.5 trillion rupees (revised estimates of 2018-19) to 44 trillion rupees (budget 2019-20) – a rise of 14 percent and not the 1.5 percent projected.
The budget for 2020-21 envisages a tax to GDP ratio of 10.9 percent against 9.4 percent in the revised estimates of last year. However, reports indicate that while the government budgeted 4.9 trillion rupees as tax collection in the current year yet the FBR categorically informed the International Monetary Fund during the recently concluded staff review (second to fifth) that 4.5 trillion rupees was an ambitious target and 4.9 trillion rupees unrealistic. However, credible sources told Business Recorder that the government has agreed to 4.7 trillion rupees this year, a target that would be a challenge unless accompanied by additional tax measures in the current year (mini-budget). In recent weeks, the government has resisted regulators’ recommendation to raise tariffs and prices of POL products in deference to its political considerations by reducing taxes. Thus there is a distinct possibility of revenue constraints as the year comes to its close. Non-tax revenue that exceeded expectations last year due to a rise in State Bank of Pakistan’s profits from the budgeted 406 billion rupees to over one trillion rupees is unlikely to be repeated this year as the discount rate today is 7 percent against 13.25 percent for three quarters of last year as per the SBP that “allowed the bank to accrue significant amount of interest income from the interest-sensitive assets, particularly lending to government and income from bank’s open market operations…further, during the year, the liquidity mop up operations were relatively low reducing the interest expense.”
There are numerous studies that are gathering dust in the relevant ministries as well as the detailed recommendations of the National Taxation Reform Commission that remain unimplemented while administration after administration finds the easy way out: relying on taxes that are easy to collect; for example, withholding taxes, taxing the already taxed and last but not least relying heavily on unfair and inequitable indirect taxes as pointed out by a participant, if a chauffeur who is ineligible to pay taxes buys petrol for his motorbike he pays heavy taxes.
Copyright Business Recorder, 2021
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