Tax to GPD Ratio
Political will is required to increase tax to GDP ratio in Pakistan but political instability coupled by inability of successive governments to review causes of low tax to GDP ratio has been a major source of impediments in achieving the target.
Tax to GDP ratio can be obtained by dividing GDP of the country with total tax collection in a given financial year. Pakistan's total revenue collection in the outgoing financial year 2011-12 against the GDP is slight above 10 per cent so the gap between tax collection and expenditure is always filled by the borrowings. Government borrows from SBP and in the financial year 2011-12 the total government's borrowings stands at Rs. 1100 trillion in which 60 per cent are foreign liabilities. Though tax to GDP ratio in South Asia is not very healthy if compared with the developed and middle income developing countries yet India's tax to GDP ratio is the highest in the region after Maldives. The reason behind the continuous improvement in tax to GDP ratio is tax reforms and enforcement mechanism which compelled the individuals and companies to pay tax. The continuous reliance on indirect tax and easy way to levy it has not been able to improve tax base in Pakistan. In the financial year 2011-12 the tax to GDP ratio has been reported to reach 10.2 per cent of GDP but the sectors that are required to be brought into tax net, i.e. agriculture, real estate, and hotel industry still remain exempted though they are earning handsomely. This speaks of lack of political will and poor performance of revenue collection machinery, narrow tax base, dependence on indirect tax regime, tax exemptions to privileged class and tax evasions.
The lack of confidence and trust upon the government machinery and political system is another cause that compels the people to evade tax. In a country where people pay millions of rupees as Zakat do not feel comfortable to pay tax to the government
Tax to GDP ratio can be improved if concrete steps are taken with a strong political will in the right direction. One of the major reasons for low tax collection is gap between the income of different sectors of the economy and their ability to pay tax. The retail and wholesale sectors, transport, real estate, agriculture and hotel industry do not pay tax proportionate to their income. The lack of confidence and trust upon the government machinery and political system is another cause that compels the people to evade tax. In a country where people pay millions of rupees as Zakat do not feel comfortable to pay tax to the government though it is also their responsibility if they want to get services to their benefit. The performance of provinces in tax collection and their share in total revenue collection is also abysmal and they continue to depend on transfer from centre in the form of NFC award. According to media reports, the tax to GDP ratio in the fiscal year 2011-12 is being estimated around 10.2 per cent which is still far less as compared to India.
There are certain reasons associated with low tax to GDP ratio in Pakistan:-
1- Percentage of male and female population in Pakistan is 49 and 51 per cent, respectively and a big chunk of population, i.e. female population has lesser effective part in economic activity. Moreover, 37 per cent population is below 15 years of age is also playing no role in the economic activity in that case revenue generation chances are less likely to increase which consequently hits tax to GDP ratio.
2- Literacy rate in Pakistan is 56 per cent which is lowest in South Asia. Without education and particularly technical and professional education the dream to bring socioeconomic change is impossible. Therefore, low literacy rate itself brings many problems and ultimately hampers development which is also reflected by the HDI report issued by UN in which Pakistan has been placed at 145th position out of 187 countries.
3- Energy crisis have badly affected the economic activities across the countries and the government is also losing revenue due to low production in all the segments of economy. Foreign investors are reluctant to invest in Pakistan and FDI has significantly decreased in fiscal year 2011-12. Due to increasing CPI and WPI the purchasing power of masses has also gone down in this situation it seems difficult to increase tax to GDP ratio.
4- In a country of almost 180 million people 1.8 million people pay tax it is because of narrow tax base. Efforts are required to increase tax base that includes the monitoring of different entities that can pay tax but somehow they are evading tax. It can also help in identifying new entrants into tax net. Pakistan's tax base is 1 per cent whereas tax base in USA is 25 per cent, in Malaysia 21 per cent and in India 4 per cent. They have taken strong steps in reforming their tax administration and people also feel it their responsibility to pay tax. Therefore, there is a need to make tax culture friendly.
5- Progressive taxation, i.e. increase in tax rate increases with rising income it serves as correcting income inequalities but unfortunately in Pakistan progressive taxes have been abolished in certain sectors of the economy which are required to be rationalised.
6- Informal sector of the economy has always escaped the attention of the government whereas this undocumented chunk of the economy can contribute significantly towards improving tax to GDP ratio. Efforts should be geared up to bring this sector of the economy into tax net.
7- Pakistan has been placed at 34th position among the most corrupt countries according to Transparency International a year earlier it was at 42nd position. Corruption is the root cause of all evils in our state institutions and taxation department is at No 8 amongst the most corrupt institutions. Only exemplary punishment, strict accountability and monitoring can improve the situation along with incentives to the hard workers.
8- Agriculture sector accounts for 22 per cent of GDP but its tax contribution is about 1 per cent of total revenue, tax exemptions are basically granted to boost economic activity in certain sectors or to bring at par with other vulnerable groups to preserve equity in the tax system. But in practice they are meant for privileged classes of the society and with the passage of time the list of exemptions has grown bigger and bigger in the form of tax rebates, and concessions. This policy should be reviewed and be in commensuration with ground realities.
Political will is required to increase tax to GDP ratio in Pakistan but political instability coupled by inability of successive governments to review causes of low tax to GDP ratio has been a major source of impediments in achieving the target. Exemptions of all kinds except which are necessary in the real sense be given whereas other exemptions given to privileged class should be abolished. Economy should be documented and informal sector be brought into tax net in a comprehensive way. Agriculture sector must be brought into tax net and share of services sectors livestock, textile, sports — should also be proportionate to countries having high tax to GDP ratio. The share of provinces in tax collection which is quite less as compare to their potential be enhanced keeping aside political expediency.
The writer is Director in a Public Sector Organization.
Muhammad Ramzan