ISLAMABAD, Sept 28: The tax-to-GDP ratio has touched its lowest level at 9 per cent during the year 2004-05 from 9.4 per cent a year ago, according to the CBR quarterly review report released here on Wednesday.
CBR Member Fiscal Research and Statistics Dr Ather Maqsood Ahmad in the report said that the Central Board of Revenue was facing the declining trend in the overall tax-to-GDP ratio particularly in the two leading taxes — income and corporate taxes and sales tax. “There are valid reasons to justify low level of tax-to-GDP ratio, it is rather difficult to rationalize the fall,” he added.
The review report says that the further analysis on the relative strength of different components of the GDP and their contribution to revenue is quite revealing. It is rather startling to observe that the high growth of GDP has been accomplished on the performance of those sectors whose tax compliance is low traditionally.
It is patently clear that growth in a number of sub-sectors does not correspond on one-to-one basis with growth in the CBR revenue. For instance, while the contribution of bumper crop of cotton has been immense as far as value added in agriculture is concerned, but the revenue contribution of this source of GDP has been insignificant, it added.
The same has been true of transport, wholesale and retail trade, and many other sub-components of the GDP. Thus, to have any meaningful increase in tax-to-GDP ratio there is a need for widening of tax base to sectors that are either outside the tax net or they are lightly taxed.
The statistics showed that share of agriculture in the GDP during the year 2004-05 is 20.2 per cent while its share in taxes stood at 1.2 per cent, transport, storage and communication 13.8 per cent (tax share 4.5 per cent), manufacturing 17.1 per cent (share in taxes 62.2 per cent), wholesale and retail trade 16.9 per cent (share in tax 2.8 per cent), respectively.
The member said that this situation highlighted the need for widening of tax base as well as turning the existing base to an effective base. “It is now well established through the analysis of income tax returns that the compliance level of the corporate sector is awfully low.”
Similarly, the collection of sales tax (domestic) was inconsistent with the overall growth in the economy. Realizing this precarious state of affairs, bold budgetary measures have been introduced at the time of Federal Budget 2005-06.
Within the context of low tax-to-GDP ratio, the continuity of tax policy and administrative reforms cannot be over emphasized to ensure that the reshaping of the taxation system on modern lines is completed within the stipulated time. As a result, the efficiency gains are materialized sooner than later.
The projected gain in the shape of increase in tax-to-GDP ratio by 0.2 percentage points each year is not small enough to be ignored. While the ‘reformed’ model units are performing better than their predecessors in terms of facilitation and service delivery, it is relevant to ask why their resource mobilization has not been as effective as originally perceived, the member added.