KARACHI: Pakistan’s tax collection has failed to improve since the late 1990s mainly due to inherent structural problems, including a narrow tax-base, massive tax evasion and administrative weaknesses, Federal Board of Revenue (FBR) said in its quarterly report.
The report said that taxpayers distrust public institutions and the tax-to-Gross Domestic Product (GDP) ratio had declined in recent years. But in fiscal 2009/10 (July-June), tax-to-GDP ratio is expected to rise to 9.3 percent from 8.8 percent in 2008/09.
In order to ensure adequate public funding for the development and safeguard macroeconomic stability, the government plans to increase tax collection to 13 to 15 percent of GDP in the next five years, the report said. This commitment is linked with the implementation of broad-based Value Added Tax (VAT) from fiscal 2010/11, it added.
“International experience shows that tax reform can deliver large increases in the tax-to-GDP ratio. While there are other developing countries at Pakistanís income level with similarly low tax-to-GDP ratios, countries in the region set a different example.”
“The simple average of the tax-to-GDP ratio in Bangladesh, India, and Sri Lanka ñ countries with similar tax policies and administration ñ is systematically higher than Pakistan,” the report said adding that this gap increased during the present decade.
The reports said that Malaysia, India, Thailand, Turkey, and Sweden saw rapid growth and rising tax ratios, while in Pakistan tax collection rose just in line with the economic growth. In Asian Pacific countries, the tax collection ratio increased from 13.8 percent in 2000 to 16.5 percent in 2004, while in Pakistan it remained roughly constant as a percent of GDP since the early 2000.
Exemptions are made part of the tax system for a variety of reasons including the income tax threshold and GST exemption on basic foodstuffs are granted to protect the most vulnerable groups of society, the FBR report said.
Exemptions are also introduced to protect certain industries, including those which are new, it added. “There are also political exemptions Ö (for) diplomats, top echelon of civil and military bureaucracy, and employees of the international organizations. Temporary exemptions are also granted to address issues that arise from time-to-time.”
Tax exemptions are also given for the import of essential commodities to counter inflationary pressures, it said. “The estimated total cost of all of the exemptions that could be around Rs200 billion, which comes to 3 percent of the GDP.”
The report said that Pakistan needs to look thoroughly at the available reform options, pursuing twin-track reforms of tax policy and administration, which would help the government to meet its medium-term revenue collection targets.
“Different studies conducted on Pakistan taxation system highlight that Pakistan has the potential to achieve the objective of increasing the tax to GDP ratio by 13-15 percent over the next five years.”
Source: http://www.thenews.com.pk/daily_detail.asp?id=232702
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