Pakistan’s stagnant tax base

Updated 22 Nov 2020

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KARACHI: For decades, Pakis­­tan’s policymakers, multilateral donors, and the Inter­national Monetary Fund (IMF) have highlighted the need for Pakistan to broaden its tax base. This broadening is seen as a necessary ­precondition for stabilising the country’s chronic fiscal deficit challenges.

Additionally, a broader tax base would lead to increased fiscal capacity for spending on human development needs, a dire necessity given that Pakistan now lags behind countries like Rwanda when it comes to youth literacy and child mortality.

A look at long-term trend reveals that despite all efforts, Pakistan has largely failed to broaden its tax base. In fact, long-term data from the Federal Bureau of Revenue (FBR) suggests that there has been an erosion of past gains.

In 2003-04, 32 per cent of Pakistan’s total tax revenues were generated through direct taxes. The majority of these taxes include corporate taxes collected from businesses and income taxes collected from individuals. By 2006-07, 39pc of total tax revenues were generated from this category, with year-on-year direct taxes rising by a whopping 48pc when compared to 2005-06.

Since then, the proportion of tax revenues generated through direct taxes has stagnated, hitting a peak of 39.97pc in 2017-18. In the following year, this figure hit a 13-year low of 37.76pc, rising to 38.11pc in 2019-20.

After hovering around 10pc of GDP from 2004-05 to 2013-14, Pakistan’s tax-to-GDP ratio rose to 13pc in FY 2017-18, according to data released by the Ministry of Finance.

This increase, however, did not occur due to any significant shifts in the structure of taxes collected, as direct taxes continued to represent around 40pc of total tax revenues. Since then, the ratio has fallen to 11.4pc in 2019-20, highlighting Pakistan’s growing inability to sustainably fund its expenditures.

These figures highlight the failure of successive governments in reforming Pakistan’s regressive tax system which continues to place a tremendous burden on poorer households to meet the country’s growing fiscal needs. At the heart of the issue is elite capture of the state and vested interests have continued to overtly and covertly push back against efforts to reform the taxation system.

The World Bank is funding a tax reform project by lending $400m to the government. While over $100m have been disbursed, recent reports indicate that the project’s implementation and progress rating has been downgraded.

It is also worthwhile to note that the World Bank has funded such projects in the past as well, but the data above shows that these loans have failed to fundamentally change Pakistan’s taxation system.

The writer is a senior fellow at The Atlantic Council and host of the podcast Pakistonomy.

Published in Dawn, November 22nd, 2020