Pakistan’s tax-to-GDP ratio has been experiencing a concerning decline. According to the World Bank’s “Strengthening Government Revenues” report published recently, tax collections in the fiscal year 2022 amounted to a mere 10.4% of GDP. This is in stark contrast to the country’s tax capacity, estimated to be over 22% of GDP. A key contributing factor to this decline is the increase in tax expenditures. At the federal level, these expenditures rose from 1.3% of GDP in FY16 to 2.7% of GDP in FY22.
The majority of revenues in Pakistan are collected at the federal level, with a heavy reliance on indirect taxes related to consumption, such as sales tax, customs duties, and excises. By FY22, 91.2% of taxes were being collected by the federal government, partly due to increased taxation of services by provincial governments. Direct taxes, which are collected by the federal government, only account for around 33% of total taxes collected. Furthermore, agricultural income tax revenues remain minimal, with over 90% of farmers falling below the tax threshold. Total provincial revenue collection remains less than 1% of GDP.
To address these challenges and enhance revenue generation, the World Bank has put forth several recommendations. First and foremost, it emphasizes the importance of improving federal-provincial coordination to facilitate tax administration and policy reforms. Coordinating tax bases and creating a single tax market can reduce compliance difficulties arising from the current fragmented structure.
Efforts should be made to harmonize GST rules and definitions through federal-provincial revenue roundtables, as has already started. Digitization initiatives should also be expedited to reduce compliance costs and taxpayer interactions. This includes data sharing between tax agencies, mandatory use of Computerized National Identity Cards (CNIC) for transactions, establishing a single portal for sales tax, and digitizing land records.
At the federal level, reforms should focus on closing corporate tax exemptions, potentially generating revenue equivalent to about 0.1% of GDP. Some notable exemptions include those for power generation projects and real estate investments. These recommendations, if implemented effectively, can help Pakistan address its revenue challenges and pave the way for a more sustainable fiscal future.
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