Poor Tax Collection

Comprehension:

With a decline of 0.4 percent, the tax-to-GDP ratio currently stands at 4.4 percent compared to the previous year’s 4.8 percent which is one of the lowest internationally. For a sustainable economy, the minimum tax-to-GDP ratio should be around 16-18 percent. The decline reinforces the concern that FBR will be unable to attain its target of 9% which indeed is an extremely low target. This at a time of severe economic crisis is the key factor behind the delay in the deal with IMF. The disappointing performance of the tax collecting agencies is not surprising at all, as it has been the trend for the previous five years now. However, this has forced successive governments to run huge budget deficits, and accumulate massive public debt to fill the widening gap. It, furthermore, reduces developmental spending and increases the burden of indirect taxes on the masses. The reasons for this poor performance are multifaceted, but specifically, it is the flawed, corrupt, and inefficient tax structure that facilitates and even encourages tax evasion. It has enabled tax evaders to bring their illegal money into circulation and make it white. The main sanctuary is the real estate industry. In addition, the FBR claims to have registered around 3 million fresh tax filers but only to the filers’ advantage, as only a few of them come into the ambit of taxpayers. Successive governments take credit for increasing the number of tax filers; however, there has been no improvement in the tax-to-GDP ratio. Thus, the government needs to implement direct taxes on the purchase of real estate, luxury cars, foreign traveling, etc. which are luxuries only available to the elite. Other than that, the government will be unable to either broaden its tax net or increase the tax-to-GDP ratio to internationally acceptable standards. 

Main Editorial: (Published in Dawn, February 13th, 2023)

AT a time when the government is struggling to seek a bailout from the IMF, the 0.4 percentage point drop in the tax-to-GDP ratio in the first half of the current fiscal to 4.4pc from 4.8pc last year should worry the government. The decline, which represents a multi-year trend, reinforces concerns that the FBR will not be able to attain even the extremely low targeted tax-to-GDP ratio of nearly 9pc for the ongoing fiscal. No wonder the IMF is insisting on new, permanent tax measures to fill the resource gap — one of the reasons said to be behind the delay in the conclusion of an agreement with the Fund.

The reduction in the tax-to-GDP ratio is not surprising considering the poor performance of the tax collectors, particularly in the last five years. Falling tax collection is at the core of Pakistan’s financial and external woes as it is forcing successive governments to run huge budget deficits and accumulate massive public debt, domestic and foreign, to fill the widening gap. It is also resulting in a rapid decrease in development spending, a growing debt-servicing burden, and an increase in indirect taxes and levies on both documented businesses and consumers.

There are multiple reasons behind Pakistan’s low tax-to-GDP ratio, regarded as one of the lowest internationally, and they include a flawed, corrupt and inefficient tax structure. Sadly, the government’s lack of political will and inability to make it difficult — let alone impossible — for tax evaders to spend their illegal money has cost the country dearly. Instead of enforcing measures to stop the circulation of illegal money in the economy, government policies encourage tax evasion. These policies have, for example, turned the real estate sector into a parking lot for dirty money. There is also no limit to the number of bank accounts an undocumented person can open, while a taxpayer is required to produce a raft of documents as proof of legitimacy of their income sources. In spite of the FBR’s claims that it had collected data on over 3m persons who live in luxury, frequently travel abroad and drive expensive cars, the revenue collector has failed to widen the tax net. Successive administrations have focused attention on increasing the number of tax filers but conveniently ignored the fact that few new filers are eligible to be taxed. A large number file their returns to only take advantage of the difference in the withholding tax rates for filers and non-filers. The tax-to-GDP ratio is unlikely to increase unless the government implements measures to ensure that those spending illegal money pay the highest tax rates on the purchase of real estate, cars, foreign travel, etc. Without this, it will not be able to expand the tax net or raise the tax-to-GDP ratio to internationally acceptable levels.