FOR whatever it is worth, FBR’s plan to add 1.5m new taxpayers — or tax filers — by the end of this fiscal year is not realistic. Even if it pulls it off, it is unlikely to significantly increase collection or raise the abysmal tax-to-GDP ratio of less than 9pc. Last year, the number of tax filers rose from 3.3m to 4.8m. However, most did not show taxable income; they filed their returns only to avoid punitive taxation on non-filers. In fact, some reports suggest that less than half actually paid any tax. So much for FBR’s claims of broadening the tax net by adding tax filers. This extremely low tax collection is at the heart of Pakistan’s deepening fiscal woes, with the already massive debt accumulating further with each passing year. We have been hearing FBR’s claims of broadening the tax base to bring the undertaxed and untaxed segments into the net to boost the tax-to-GDP ratio to 15pc to 20pc for many decades. Yet no government, civil or military, has managed to accomplish this feat, while other comparable economies like Bangladesh have successfully raised their tax collections.
The lack of real progress on broadening the tax base has prompted the authorities to impose additional taxation on captive taxpayers — the salaried classes and organised businesses — for meeting budget targets year after year. It also has led to the emergence of a complex withholding tax regime to recover taxes from those who do not pay their due share, and is a major reason for the high tax burden on compliant taxpayers along with multiple other levies. Needless to say, it has proved to be a major incentive for non-compliant individuals to remain out of the tax net. Earlier, during talks with the IMF mission, FBR had submitted a ‘backup plan’ to levy a fixed tax on the retail sector from January in case of a potential shortfall in the tax collection target of Rs9.4tr. A bigger gap would trigger more taxation on real estate transactions. This implies that FBR itself realises that it cannot boost tax revenues without netting the untaxed and undertaxed segments of the economy. While the plan to increase the number of tax filers must be supported, there is little hope of boosting the tax-to-GDP ratio without taxing retailers, real estate transactions and agriculture.
Published in Dawn, November 14th, 2023
