Pakistan can double its tax revenues by concerted efforts to broaden tax bases, strengthening tax compliance, eliminating distortionary tax expenditures, and rationalizing the tax system in an efficient and equitable manner, says a latest study of the International Monetary Fund (IMF).
The study, Unlocking Pakistan’s Tax Revenue Potential notes, Pakistan’s tax system does not promote efficiency and fairness and is complex and fragmented. Although Pakistan’s constitution assigns significant revenue responsibility the provinces, provincial governments’ own revenues contribute only 6.8 percent of total tax revenues.
The findings suggest that a concerted agenda of well-designed federal and provincial policy adjustments and institutional reforms can boost revenue mobilization, and also improve the perceived fairness of the tax system in Pakistan. It recommends that the Ministry of Finance should enhance analytical capacity by establishing a tax policy research and analysis unit outside the FBR to improve revenue forecasting and upgrade the quality of fiscal policymaking.
It says the composition of tax revenues is highly skewed towards indirect taxes, which account for about 63 percent of federal tax revenue, while the extensive use of tax concessions and exemptions results in a distorted and unfair tax regime.
In Pakistan, revenue collection remains highly centralized with the federal government collecting over 93 percent of total tax revenues, while provincial governments’ own revenues contribute the remaining 6.8 percent (or 0.8 percent of GDP). Consequently, the provincial governments have little incentive to boost own source revenues and instead rely on transfers from the federal government.
The agriculture sector, for example, generates less than 0.1 percent of total tax revenues under the purview of provincial governments, although it accounts for about 25 percent of GDP and employs 45 percent of the workforce.
The number of corporate income tax (CIT) filers is 25,551 out of more than 60,000 companies registered for the CIT. Furthermore, the number of active CIT filers is a mere 0.8 percent of the number of commercial and industrial electricity users, which represent an illustrative pool of potential entities liable for taxation.
Likewise, the number of entities registered for the General Sales Tax (GST) is 178,190 out of about 1.4 million retailers (and 3.4 million commercial and industrial electricity users). These underlying features of the tax landscape leave Pakistan with an unusually heavy reliance on indirect taxes collected from very narrow tax bases and vulnerable to fluctuations in import prices.
It says high levels of informality in the economy further constrains tax compliance and enforcement, especially given significant gaps in information gathering and sharing across all layers of government. In addition, institutional weaknesses in revenue administration, such as bureaucratic red tape and corruption, undermine tax morale and compliance.
According to the World Bank’s Doing Business survey, time spent preparing and paying taxes for a typical firm in Pakistan is more than 594 hours, compared to an average of 325 hours in South Asia and 175 hours in OECD countries.
The reforms at federal and provincial levels can help achieve stable public finances, boost economic growth, employment and competitiveness. Simply aiming to increase revenue by further taxing already compliant taxpayers would worsen inequalities, undermine tax morale and cause distortions in economic activity.