Measures taken in current budget: tax to GDP ratio projected to rise to 11.5 percent

Tax to Gross Domestic Product (GDP) ratio is projected to rise to 11.5 percent due to measures taken in the current fiscal budget - an improvement from 10.5 percent in 2013-14, so maintained the fourth and fifth International Monetary Fund staff review under the $6.64 billion Extended Fund Facility.
The 10 percent tax to GDP ratio is almost 5 percent below the average of peer countries, the staff review notes. The review further notes that provincial governments remain crucial to the fiscal reform process especially by improving revenue collection at subnational level. Revenue collection by provinces at present is extremely low generating only 7 percent of total tax revenues despite the large tax base that falls under their purview. The mismatch between expenditure and revenue decentralization leaves the federal government with a chronic deficit, the review adds.
However the review acknowledges that the provincial governments have supported fiscal consolidation by maintaining budget surplus, but emphasises that balancing the devolution of revenue and expenditure however fiscal responsibilities is key to attaining sustainable intergovernmental fiscal relations. The critical issues for long term fiscal sustainability across all layers of government, the review notes, are: (i) revenue mobilisation by federal and provincial governments in currently under taxed areas such as agriculture, services, and property taxes; (ii) additional financing of high priority expenditures such as education, health and infrastructure; and (iii) robust public financial management, debt management and procurement systems.
IMF in its report apprehended that there is a risk that some of the tax measures approved in the federal budget (2014-15) may yield less than originally envisaged, while the stock of General Sales Tax (GST) refund claims remains high at above Rs 135 billion. The political resistance to bold revenue reforms has also been an issue under the current program, the review notes further.
The review emphasises that fiscal consolidation program hinges on broadening the tax base through the elimination of tax concessions and exemptions. The fiscal 2014-15 budget eliminated a number of tax concessions and exemptions granted through Statutory Regulatory Orders (SROs), which are expected to yield about 0.3 percent of GDP. The government has also continued to refrain from issuing new SRO concessions or exemptions and plans to remove most additional SROs over the next two years and to enact legislation to abolish the practice of granting tax concessions or exemptions through SROs in 2015.
The Federal Board of Revenue (FBR) as part of its reforms agenda begun field surveys of potential high net worth taxpayers to broaden both the sales and income tax bases. In all, FBR has already issued investigation/contravention reports worth 1/4 percent of GDP, so notes the Letter of Intent (LoI) submitted by the government to the IMF Board, a prerequisite for tranche approval.
The government also committed in the LoI to (i) target non-filers who have the potential to contribute at least the average tax paid by currently registered taxpayers, (ii) streamline the online filing scheme, which will facilitate registration and filing of personal income tax returns by simplifying the tax return form, (iii) expand the coverage of tax audits to 7.5 percent of filed tax returns and (iv) improve their quality to generate a revenue demand of approximately Rs 25 billion. Tax authorities will continue to seek technical assistance on tax administration from our international partners, LoI added.
The review acknowledges that revenue mobilisation has improved under the EFF but adds that there is still great scope for increasing tax revenues, especially through tax administration reforms. The government's efforts to raise the tax-to-GDP ratio-still standing at about half of the world average-are steps in the right direction. In particular, the elimination of some SROs is commendable and should be accompanied by strict FBR enforcement actions against tax evaders. It will be important to avoid granting new concessions and exemptions that would undermine the gains accomplished thus far. However, a broader tax administration reform strategy is needed, including the expansion the FBR's information reporting processes and technologies to better manage tax compliance and enforcement, including by using the Anti-Money Laundering (AML) tools to tackle tax crimes.
Staff also encouraged the authorities to continue enhancing the effectiveness of the AML/CFT framework to detect and disrupt proceeds of crimes including corruption. This, the review maintained, will not only improve the tax-to-GDP ratio and create resources to finance much-needed spending on fixed investment and social development, but also make the taxation system more efficient, transparent and equitable. Finally, staff encouraged the authorities to build on the reform momentum and develop the GST to a modern system of indirect taxation- including services-along with an income tax regime that integrates all sources of income, it added.