- The tax-to-GDP ratio is crucial
The unfortunate reality of Pakistan is that successive governments, both military and civilian, have given false hopes to the people divorced from the ground realities, without taking steps with a futuristic approach to address the existing maladies as well as putting in place policies designed to unleash the process of sustained economic growth. They all succumbed to political expediencies and hence all their economic decisions were politically motivated with the result that the country never experienced a real change and has drifted to the ebb of an economic precipice.
The governments require indigenously raised resources to finance projects related to socio-economic development and public wellbeing. This necessitates broadening the tax base and enhancing the tax-to-GDP ratio. The tax-to-GDP ratio shows the tax revenue collected by the government as a percentage of GDP. Unfortunately Pakistan ranks among the countries having a very low tax-to-GDP ratio. The consequence of this low tax-to-GDP ratio has been that the governments mostly relied on loans from external and internal resources to finance their developmental and other needs whivh, coupled with a phenomenal increase in the non-development expenditure, has pushed the country into a debt-trap and a burgeoning budget deficit, with all the debilitating implications.
The government is well advised to focus more on raising the proportion of direct taxes to save the poorer sections from inflationary impact and also move with utmost care to remain focused on achieving the desired results. The success of the suggested measures is also contingent upon a host of non-economic factors, including political stability
The recipe to rectify the situation lies in broadening the tax base. The ideal situation is when the tax-to-GDP ratio ranges between 25 percent and 50 percent. A cursory glance at the tax-to-GDP ratio of countries across the globe reveals that the states which are considered to be developed and welfare states, owe their status to their higher tax-to-GDP ratio. For example, the Scandinavian countries, including Denmark, Finland, Sweden and Norway, have tax-to-GDP ratios of 51, 54, 50 and 54 percent respectively. The average tax-to-GDP ratio of EU countries is 35 perent. African countries like Zimbabwe and South Africa boast of tax-to-GDP ratio of 27 and 27 percent respectively. India collects 16.1 percent taxes out of its total GDP whereas Nepal stands above the whole region with 27 percent. Latin American countries also have average tax-to-GDP ratios ranging from 25 to 34 percent with Brazil having the highest collection. Pakistan has a dismally low tax to GDP ratio of 11 percent. Even Kenya, the least developed country of East Africa, has a tax-to-GDP ratio of 18 percent. The specific reasons for this low tax-to-GDP ratio in Pakistan, apart from the lack of political will shown by successive government are the narrow tax base, large scale tax evasion or non-existing tax culture, weak and corrupt tax administration and the existence of a large informal economy. The remedy undoubtedly lies in refining the tax structure which means not only expanding the base and bringing more and more people into the tax net, but also eliminating avenues of tax evasion through documentation of the economy as well improving the tax administration.
The foregoing reforms are more easily said than done. It is indeed a very arduous situation for the incumbent government and a challenge to its political will to do the right things without caring for the political cost. It is a reality that raising the prices of gas, oil, electricity, the imposition of additional taxes as well as removal and lowering of subsidies is hurting poorer sections of the society which are groaning under the burden of the hydra-headed inflation set in motion by these steps. However the problem is that the government has no other options available. It is a now-or-never situation. So better do it now than allowing the country to drift further into an economic quagmire.
Therefore, in the backdrop of the developing situation, it is hard to take an issue with the strategy adopted by the government to remedy the situation. The opponents of the government might try to exploit the situation by whipping up public sentiments against it, but the reality is that they also do not have any alternate plan or idea to stem the rot. The PTI government has inherited the present situation and the major blame for this state of affairs logically falls on the previous governments. The PTI has shown the political will to take the bull by horns. It is said where there is a will there is a way. Though it would be a hard path for the government to traverse, ultimately it would lead to the rectification of most of the aberrations afflicting the economy and setting the course for sustained economic development enabling the government to provide desired relief to the masses and spending on their wellbeing. Renowned economists, while dilating on the situation and suggesting remedies to pull the country out of the current dismal economic situation, have expressed unanimity of views on broadening the tax base and bringing structural reforms to improve the tax administration. That is exactly what the government is trying to do.
In view of the precarious situation of the economy, with a whopping public debt, the government had no choice other than to seek assistance from the friendly countries and approach the IMF for a bailout package. Going to IMF is not as reprehensible as the opposition parties and detractors of the government have been trying to portray. Beginning from 1958, all governments have sought assistance from the IMF to rectify their balance of payments situations and to avoid default on previous loans. What really matters is the productive utilization of the loans taken and introduction of the reforms that lead to broadening of the tax base and elimination of the informal economy. Tax Amnesty and Assets Declaration Scheme and the implementation of benami law are positive measures towards documenting the economy and an essential ingredient of broadening the tax base.
While nobody in his right mind can challenge the conceptual thrust of the government initiatives and the rationale for the introduction of the required reforms, the government is well advised to focus more on raising the proportion of direct taxes to save the poorer sections from inflationary impact and also move with utmost care to remain focused on achieving the desired results. The success of the suggested measures is also contingent upon a host of non-economic factors, including political stability.
