The tax to GDP ratio is an indicator of how formal an economy is. A high ratio means more taxes are being collected. In Pakistan, this ratio has been around 10 percent, the lowest in the region. In a virtual meeting last week, the government decided to take tax-to-GDP ratio to 20 percent over the next 6 to 7 years. Unless this is accomplished, neither the provinces nor the federation can be at ease. However, some quarters are calling this goal unrealistic and difficult to achieve.

In another development, the World Bank has pointed out that Pakistan’s tax to GDP ratio dropped during the last two years. The bank also said an overdependence on withholding taxes is bad because “it converts into another kind of sales tax” and these taxes are collected through third parties. The state’s tax machinery does not collect these taxes directly. Special Assistant to Prime Minister on Revenues Dr Waqar Masood has responded by saying that the government will soon abolish 40 withholding taxes, bringing the number down from 65 to 25.

Finance Minister Shaukat Tareen has highlighted the need to boost tax revenues, saying that for Pakistan to achieve a sustainable GDP growth of 7 percent per annum and alleviate poverty it has to drastically raise its tax-to-GDP ratio. The current ratio, he says is discouraging and one of the major reasons for country’s financial problems.

It is encouraging that the FBR has crossed the historic milestone of collecting more than Rs 4 trillion from July 2020 to May 2021. The reported figure is 18 percent more than last year’s Rs 3.54 trillion. It is on the basis of increased revenue collection that the government is claiming that the economy is recovering although it is still under pressure due to the Covid-19 pandemic.

Talking to TNS, economist Kaiser Bengali says it is strange that people are commenting on economic recovery and GDP growth without waiting for the Economic Survey of Pakistan to be released shortly. He says the document, which is released shortly before the budget, will help him understand which areas are performing well and where there is scope to impose more taxes. He says the tax paying entities should not be asked for more and the tax net should be broadened.

According to a newspaper report, “A break-up of the taxes collected by the FBR shows that sales tax grew by a hefty 28.3 percent in the first 11 months of the ongoing fiscal because of a hike in fuel prices, increase in imports and better economic conditions. Collection of duties by Customs posted an increase of 18.6 percent. The federal excise duty was up by 11.55 percent. However, income tax revenues have grown by just over 10pc in spite of a significantly large number of presumptive and withholding taxes. “

Bengali says there can be no do doubt that a high tax to GDP ratio is an encouraging factor. However, it has to be seen whether it has come through indirect taxes that directly affect the poor or direct taxes that are targetted. Another question here, he says, is where are the tax proceeds being spent. If most of the expenditure is on defence or lavish administration then there is not much use collecting the taxes. He recalls that during the meetings for 7th NFC, Shaukat Tareen had hinted at raising the tax-to-GDP ratio to 15 per cent. “I had opposed the idea saying this will not be possible as there is not enough capacity in the economy to bear the burden. The result is there; this ambition remained unfulfilled.”

Analyst and commentator Hasaan Khawar, on the other hand, says it is heartening to note that the FBR has made good tax collection after a plateau for two years. It has crossed the Rs 4 trillion mark and it is hoped that this year they will end up around Rs 4.7 trillion. If this happens, the growth over last year will be around 20 per cent, which is no small deal. The GDP increasing at 4 per cent is also no small deal.

Khawar says a 15 per cent tax to GDP ratio is a good target to achieve in five to seven years. He recalls that after the passage of the 18^th Amendment, this ratio was aimed at but nothing substantial happened. Many people have pointed out that it was due to this that the federal government was always short of funds.

The author is a staff reporter and can be reached at shahzada.irfan@gmail.com