In response to a statement by the Chairman Central Board of Revenue that tax-to-GDP ratio of Pakistan is 11.3% for the financial year 2003-2004, a letter was published in Business Recorder [August 28, 2004] that it is in fact 9.3% as per official document ie Economic Survey of Pakistan 2003-2004. No official rebuttal or clarification was made by the Central Board of Revenue (CBR) after this letter. But the CBR has now confirmed, in a report submitted to International Monetary Fund, that tax-to-GDP ratio is below 10% and it will go into double digits by financial year 2007-08.
A recent report published in Business Recorder is an admission on the part of the CBR that it has miserably failed to improve tax-to-GDP ratio in the past and even in the future it will remain dismally low.
It is tragic that in a country where billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low and the Government is least bothered to tax undocumented economy and benami transactions. The mighty sections of society are engaged in these transactions and CBR being their handmaid has neither will nor ability to tax them. It exposes the uselessness of CBR as an institution to tap the real tax potential of the country.
The definition of 'business' given in the Income Tax Ordinance, 2001 covers "adventure in the nature of trade" and yet our tax machinery is sitting idle causing colossal loss to the national exchequer by not bringing adventures in the nature of trade in real estate into tax ambit and giving undue tax exemption on gains arising on speculative transactions in shares and stocks. Our tax-to-GDP ratio can rise to 20% in one year if we tax speculative dealings in real estate (this will also help in promoting construction industry as prices of land will come down) and bring black economy into tax net. Instead of performing its prime duty, that is levy of tax where it is due, the CBR is busy in constituting committees to ponder over many issues relating to tax policy and administrative reforms, which are in fact the job of Parliament. It appears that the CBR is more eager to do the job of legislators rather than performing its primary function of levy and collection of taxes.
Recently a 'task force' has been formed by CBR to suggest measures for improvement in the taxation structure by speeding up sales tax refund payment to the business community and analysing the scope of expansion in the GST net to cover more services. The task force has been given a mandate to analyse performance of the existing tax system with particular emphasis on broadening the tax base.
In the past, CBR has wasted a lot of time and money in the formation of many such task forces, committees and what not, but the result has always been NIL. We have declining trends in tax-to-GDP ratio and now we will have to wait for many years more to come up to the level of many developing countries.
This is indeed a sorry state of affairs. The root cause is CBR's unwillingness to do what is its duty and indulgence in activities that fall outside its mandate or domain.
The Central Board of Revenue (CBR) has transmitted mid-term 'tax projections' and 'revenue-to-GDP ratio' from fiscal 2004-05 to 2008-09 to the International Monetary Fund (IMF). Official sources told Business Recorder that 'tax projections' and revenue-to-GDP ratio for the next five years had been submitted to the Fund mission on the conclusion of 9th review by the Fund under the Poverty Reduction Growth Facility (PRGF).The CBR has informed IMF that the target is to achieve 0.2 percent per annum growth in the tax-to-GDP ratio on account of ongoing reforms. This growth would be achieved as a result of the reform process. The CBR has worked out new projections on the basis of revenue to GDP ratio, which excludes petroleum levy. CBR revenue to GDP ratio constitutes 85 percent of total taxes. According to projections, the CBR is committed to collect Rs 590 billion during current financial year, keeping in view the revenue to GDP ratio of 9.5 percent. The collection would be Rs 675 billion in 2005-06, taking into account CBR revenue to GDP ratio of 9.7 percent. The CBR would have to collect Rs 750 billion in 2006-07 keeping in view CBR revenue to GDP ratio of 9.9 percent. The revenue collection has been projected at Rs 850 billion in 2007-08 based on the estimated CBR revenue to GDP ratio of 10.1 percent. The CBR revenue collection target would be Rs 960 billion in 2008-09 taking into account CBR revenue to GDP ratio of 10.3 percent.
According to the notification issued by the CBR the newly-formed task force will have following terms of reference. To:
(i) analyse the performance of tax revenue and its major components in relation to GDP;
(ii) study the corporate tax structure and recommend strategy to encourage corporatisation and public listing;
(iii) examine sales tax taxation structure and suggest measures for speedy disposal of refunds and increase revenue generating capacity;
(iv) study the structure of personal income tax and recommend measures for broadening of taxpayers' base;
(v) study the scope for mobilising resources through expanding the general sales tax to cover more services;
(vi) examine customs tariff structure, duty drawbacks and incentives for exports to facilitate the trade;
(vii) suggest measures for increasing the tax-GDP ratio to the level comparable to countries in the region; and
(viii) suggest viable tax administrative measures for implementation of the recommended tax policy.
Tax-to-GDP ratio of selected countries
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Country %
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Belgium 43.3
Netherlands 42.9
Germany 26.6
United Kingdom 34.2
United States 19.1
Malaysia 19.2
Thailand 16.1
Sri Lanka 16.0
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