LAHORE, Dec 17: Prime Minister’s Adviser on Finance Shaukat Tarin has said that the extremely low tax-to-GDP ratio is to be blamed for most of Pakistan’s economic woes, including the current account gap, fiscal deficit, growing public debt, and distortions in the credit market.

Speaking at the inaugural session of a two-day conference on ‘Tax Policy Options for Pakistan’ he described resource mobilisation for development as one of the most important challenges facing the government.

“The public sector plays a central role in providing key social welfare and infrastructure services to meet the needs of a growing economy. However, the most desirable way of meeting the cost of such services is through an equitable system of taxation,” he said.

The conference is being attended by senior Federal Board of Revenue (FBR) and finance ministry officials as well as representatives of the multilateral lenders like the International Monetary Fund.

The adviser said: “Generally, countries with comparable level of development background mobilise tax revenues that are about 18 per cent of GDP. In the last fiscal year, Pakistan mobilised only 9.6 per cent of GDP in taxes. This is not an acceptable level of tax effort.

Indeed, it is significantly below the effort that was registered in the 1980s and 1990s when it hovered around 13 per cent, he added.

The PM’s adviser said the ill-effects of a poor tax effort pervaded the whole economic landscape and no reform effort to correct the economy could succeed without putting the public finances on sound foundations.

He said the government was determined to move in the direction of taking the most difficult decisions required to reform the tax policy and system on the basis of best international practices with due allowance for legitimate peculiarities that may be specific to the local environment.

Mr Tarin argued that a series of policy reversals had neutralised many gains of tax administration reforms undertaken in the recent past and the tax-to- GDP ratio could not surpass the level registered in 1999.

For example, he pointed out, the value-added character of sales tax was nearly compromised by pre-emptive application of zero-rating regime and universal self-assessment scheme without the complimentary provision of random audit for true assessment of a taxpayer’s income.

He said the narrow tax base, higher and inequitable tax rates, plethora of withholding and presumptive taxes, exemptions, multiplicity of taxes, reduction of tariffs much below the level that Pakistan has committed as the bound rates under the WTO, and inefficient and corrupt tax collection machinery were responsible for the low mobilisation of taxes.

He was of the view that subsidising one set of industry or consumer meant implicit taxation to another set of industry or consumer.

Mr Tarin said the government planned to simplify taxes to two basic levies – income tax and consumption tax in a value-added mode. He said all collection must be based on assessment, and the use of presumptive or withholding taxes as full and final settlement should be eliminated.

The adviser on finance said that the tax treatment of income must be uniform and non-discriminatory without regard to its origin. Moreover, he said, there should be no exemptions in taxes on income and consumption except for income of charitable trusts or consumption of foodstuff.

IMF Middle East Director Masood Ahmed said Pakistan’s tax revenue performance was the lowest by any international comparison. He said sustainable economic performance was not feasible without a strong domestic revenue base.

He cited examples of Jordan, Egypt and the Philippines as countries that were able to raise their tax-to-GDP ratio by six, three and two per cent, respectively, in three years. But, he said, it would require Pakistan to bring changes in the structure of tax regime and broaden the tax base.