November 19, 2018 (MLN): Pakistan continues to face deep fiscal crisis that cannot be easily resolved. Taxes are insufficient to meet Pakistan's debt servicing and defense needs.

Besides, the present government has announced some relief and tax measures in its budget speech 2018-19, Pakistan’s tax policy requires serious focus on immediate, medium and long term corrections.

Pakistan’s tax policy has contributed to premature de-industrialization leading to persistent pressure on foreign exchange reserves and widespread unemployment.

The tax-to-GDP ratio in Pakistan is not sufficient enough to counter inflation or improve governance, provide quality public services or improve human resource to reach a take-off stage for economic development.  

Moreover, there is high tax incidence on very limited number of taxpayers.

Pakistan’s Tax to GPD ratio

If the contribution of informal or black economy is also taken into account in overall GDP, then this percentage will further reduce at least by 2-3 percent.

In addition, there is a heavy reliance on indirect taxes which leads to inflationary pressure in the economy as increased prices translates into increased cost of production, services and living.

This results in higher costs of doing business, which leads to declining exports and GDP due to the lack of cost competitiveness and missed opportunities.

Pakistan’s excessive rely on Indirect Taxes

Source: Pakistan business council

Additionally, Pakistan’s tax policy is heavily dependent on collection on ‘imports’ and other presumptive taxation.

During FY2017 from July to April, around 55% of total sales tax was contributed by sales tax on import. It is in the interest of FBR that our import bill is higher as this directly contributes to tax collection. A clear conflict of interest because higher tax collection increases current account deficit as bulk of such collection are based on imports.

Tax collection through Imports

Source: Pakistan business council

Proposed Solutions

Instead of pursuing the policy of increasing the burden of indirect taxes on those already been heavily taxed, government should increase the ability to widen the tax net through registration of unorganized sector, documentation of existing assets which will increase tax filers.

Multiple taxes should be eliminated, including tax on inter-corporate dividends, bonus shares and undistributed profits.

Taxation policy should be income- based instead of turnover, presumptive income, or indirect taxes on graduated basis.

In addition to this, large landowners and the various exempt sectors must be brought within the tax-net and the revenues raised should be utilized to subsidize the weaker segments of society and to support reforms.

With weaker tax compliance and administration, Pakistan cannot expand its tax base.

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