Pakistan’s medium-term outlook critically hinges on a significant revenue mobilization effort that should produce 2-3 per cent of GDP in the next 4-5 years, notes World Bank’s Country Partnership Strategy (CPS) progress report. The report says the toughest question government faces is how to create fiscal space. This occurs in a context of fiscal retrenchment and gets aggravated by its low and declining total and tax revenue ratios that reached single digit by end of last fiscal year. Revenue mobilisation in Pakistan has been historically weak. In the last fiscal year, various tax policy reform measures were approved, but not fully implemented.
It says looking at the most recent decade, tax revenues are declining since the global crisis, only partially offset by non-tax revenues; budgeted revenue targets are persistently missed under a widening gap. Income and sales taxes represent a rising share of total revenues, while trade and excise taxes are trending down. Trade taxes decline stopped with a series of protectionist measures applied in fiscal year 2008-09, but these introduced distortions in the trade regime; low and declining tax collection is also apparent for the provincial governments and privatisation proceeds have been marginal in the last four years.
A comprehensive revenue mobilization strategy centered on structural reform of the taxation system is needed to confront these challenges. The overall tax policy strategy points to six major measures including adoption of broad based Reformed General Sales Tax (RGST) on goods and services, provincial tax reforms; a two-tier structure for individual income tax and adopting a withholding tax; reform of federal excise tax; adopting a business friendly corporate income tax; and a simplified structure of customs duties. Tax administration strategy should be centered on broadening the tax base; establishing an effective audit and enforcement mechanism; establishing an effective internal and external mechanism; and limiting Federal Board of Revenue’s administrative powers to legislate by administrative orders. It says during last fiscal year, various tax policy reform measures were approved, but not fully implemented. RGST was not approved by Parliament, but additional tax policy measures were introduced in the current fiscal year budget. In mid-March 2011 government approved a flood surcharge levy, increased special excise duty on imports and imposed a 17 per cent sales tax on sales of tractors. It also increased the ex-factory rate on sugar, removed sales-tax exemptions on fertilisers, pesticides and plant machinery, and eliminated zero-rate sales taxes on garments, carpets, leather, surgical and sports goods. However, soon afterwards, a few measures were diluted: tax rate on the textile sector and some other items was reduced from 17 to 5 per cent. Combined fiscal impact of these tax measures were aimed at preserving the tax ratio at a similar level as last year, but this target was not met.
These measures were extended in the current fiscal year budget, while new measures were also adopted. These included a reduction in the sales tax to 16 per cent, removal of sales tax exemptions on 21 items and Army’s stores, removal of 397 statutory customs duties, hike in federal duty tax. Overall, tax collection has increased above 20 per cent on an annual basis, compared to the first quarter of last fiscal year. Tax administration reforms have been comprehensive, but their implementation had been slow and had not produced the expected final results. However, some catch up effect is expected during next two years with the rapid increase in the number of new tax filers, creation of a centralised unit for audits, introduction of risk-based auditing on large taxpayers, creation of a centralised unit of tax appeals and a fully modern and computerized tax system supported by massive FBR staff training. Building on lessons and performance of TARP, the bank will continue its support to tax administration reform through a performance-based operation.
Revenue mobilisation toughest task for Pakistan:WB
