Can Pakistan bring tax reforms?

LAHORE: Pakistan needs to increase its tax-to-GDP ratio and stop increasing its revenue through additional taxes charged to sectors already in the tax net.

There are numerous sectors outside the documented economy that pay no taxes. It is indeed an enigma that the size of Pakistan’s GDP has increased in the past quarter century from $60 billion to $350 billion. But the country’s tax revenue that at one time averaged 13 per cent of the GDP has come down to below 10 per cent as the target for the current year is Rs9,300 billion.

One per cent increase in the tax-to-GDP ratio would have added Rs924 billion in tax revenue, and if we had achieved the tax-to-GDP ratio of 13 per cent -- previously achieved 25 years back -- our revenue this fiscal would have reached Rs12,072 billion. Our problem is that our GDP continues to grow, but the tax-to-GDP ratio remains stagnant even if we increase our revenues by above 30 per cent annually.

This is the reason the IMF and all economists plead with the government to increase the said ratio. In emerging economies, this ratio ranges from 17 to 19 per cent. It is up to 30 per cent in highly developed economies. This ratio will increase only when we bring all tax evaders into the tax net. Our failure to meet our expenses is because of our low tax-to-GDP ratio.

If our tax collection reaches the emerging economies average of 17 per cent of the GDP, tax collection on our current GDP will stand at Rs15,768 billion and our fiscal deficit will be in manageable limits.

If budgets are prepared within economic realities, there would be no budget deficit as no sensible economist would go on financing the losses of incompetent state-owned enterprises. A true economic planner would immediately do away with concessions, exemptions and subsidies worth Rs4,500 granted to the privileged elite class.

We are victims of our ill planning. We have reached a stage where we are not respected as a nation. No one is prepared to invest in our country without sovereign guarantees. In fact, things have gone beyond sovereign guarantees as investors now seek security guarantees for the security of their nationals.

We must improve our governance at least to the level where the government writ is accepted; where no one could openly flout law and be spared; where institutions are strong and treat every citizen equally; where the judiciary is fair and decides cases on merit without delays.

There must in fact be an effort to improve the standing of our judiciary from bottom 10 to at least medium. The state should utilize the unemployed youth by asking them to point out and register all economic activities. They should be rewarded on each registration.

Tax evaders should be nabbed through them as the FBR has failed in this regard. These educated youth then should be inducted in a new revenue body while simultaneously reducing the labour force of the FBR. We do not have time on our side.

We expect that the budget (to be announced today) will lay the foundation for a fair, transparent and equitable taxation.