Poor tax collection

Published February 13, 2023

AT a time when the government is struggling to seek a bailout from the IMF, the 0.4 percentage point drop in the tax-to-GDP ratio in the first half of the current fiscal to 4.4pc from 4.8pc last year should worry the government. The decline, which represents a multi-year trend, reinforces concerns that the FBR will not be able to attain even the extremely low targeted tax-to-GDP ratio of nearly 9pc for the ongoing fiscal. No wonder the IMF is insisting on new, permanent tax measures to fill the resource gap — one of the reasons said to be behind the delay in the conclusion of an agreement with the Fund.

The reduction in the tax-to-GDP ratio is not surprising considering the poor performance of the tax collectors, particularly in the last five years. Falling tax collection is at the core of Pakistan’s financial and external woes as it is forcing successive governments to run huge budget deficits and accumulate massive public debt, domestic and foreign, to fill the widening gap. It is also resulting in a rapid decrease in development spending, a growing debt-servicing burden, and an increase in indirect taxes and levies on both documented businesses and consumers.

There are multiple reasons behind Pakistan’s low tax-to-GDP ratio, regarded as one of the lowest internationally, and they include a flawed, corrupt and inefficient tax structure. Sadly, the government’s lack of political will and inability to make it difficult — let alone impossible — for tax evaders to spend their illegal money has cost the country dearly. Instead of enforcing measures to stop the circulation of illegal money in the economy, government policies encourage tax evasion. These policies have, for example, turned the real estate sector into a parking lot for dirty money. There is also no limit to the number of bank accounts an undocumented person can open, while a taxpayer is required to produce a raft of documents as proof of legitimacy of their income sources. In spite of the FBR’s claims that it had collected data on over 3m persons who live in luxury, frequently travel abroad and drive expensive cars, the revenue collector has failed to widen the tax net. Successive administrations have focused attention on increasing the number of tax filers but conveniently ignored the fact that few new filers are eligible to be taxed. A large number file their returns to only take advantage of the difference in the withholding tax rates for filers and non-filers. The tax-to-GDP ratio is unlikely to increase unless the government implements measures to ensure that those spending illegal money pay the highest tax rates on the purchase of real estate, cars, foreign travel, etc. Without this, it will not be able to expand the tax net or raise the tax-to-GDP ratio to internationally acceptable levels.

Published in Dawn, February 13th, 2023

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