Economy Unsustainable at Single-Digit Tax Ratio: Aurangzeb

Economy Unsustainable at Single-Digit Tax Ratio: Aurangzeb

Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, reiterated the pressing need for digitization and broadening the tax base, emphasizing that a tax to GDP ratio below 10 percent is unsustainable for managing Pakistan’s economy.

Speaking at a post-budget press conference on Thursday, Aurangzeb underscored the importance of increasing this ratio to 13 percent within the next three years.

“We have to take it up to 13 percent in the next three years gradually,” Aurangzeb stated, noting that according to international benchmarks, no country can sustain itself with a 9.5 percent tax to GDP ratio without external assistance. “Hence, there is a dire need to enhance the tax to GDP ratio,” he added.

Flanked by State Minister for Finance Ali Pervaiz Malik, Secretary Finance Imdad Ullah Bosal, and Chairman Federal Board of Revenue (FBR) Amjad Zubair Tiwana, Aurangzeb highlighted the critical role of reducing the undocumented economy through end-to-end digitization. This approach aims to minimize human intervention, enhance transparency, and reduce corruption within the tax system.

The minister admitted that the FBR had not achieved the level of compliance and enforcement expected. In response, the government introduced progressive taxes in the federal budget for the fiscal year 2024-25, targeting high-income earners. “The country needs to move towards broadening the tax base to make the economy sustainable,” he emphasized, noting the necessity of bringing retailers and wholesalers into the tax net to share the burden.

Aurangzeb detailed the government’s efforts to include retailers and wholesalers in the tax scheme. Initially offered on a voluntary basis, the scheme was deemed unsuccessful. However, since May 2024, mobilization by the FBR has resulted in the registration of approximately 31,000 retailers. The registration process will continue, with tax imposition starting in July 2024. “We have no other option but to get this sector into the tax net,” he remarked. To further encourage compliance, the Point of Sale (PoS) prize scheme will be re-launched to minimize cash transactions.

Addressing the Petroleum Development Levy (PDL), Aurangzeb mentioned plans for a gradual increase aligned with international oil prices. He assured that the exemption and 35 percent salary slab categories remain intact, with changes only affecting other income brackets. The tax rate for non-salaried individuals has been increased to 45 percent.

Recognizing Pakistan’s status as the third largest freelancer population globally, Aurangzeb highlighted the government’s focus on youth development. The government has allocated record funds for the Information and Technology sector to enhance digital infrastructure and create an enabling environment for youth. With IT exports currently at $3.5 billion, the minister believes they could reach $7 billion with the right support.

Aurangzeb admitted that small and medium-sized enterprises (SMEs) have not received adequate financing due to banks’ lack of appetite for such ventures. He assured that banks would now introduce specific schemes for agriculture, IT, and SMEs.

Regarding the Public Sector Development Programme (PSDP) priorities, Aurangzeb stated that the government is focusing on completing ongoing projects, allocating 81 percent of the budget for these, and only 19 percent for new schemes, which include significant and foreign-funded projects.

To plug tax leakages, Aurangzeb announced the initiation of end-to-end digitization of the revenue collection system to reduce human intervention, end harassment, and improve tax compliance. Measures are also underway to close loopholes in the Sales Tax system through complete digitization. A data analyst team will verify sufficient data indicating potential tax evaders, which will then be executed by field formations to bring them into the tax net.

Negotiations with provincial governments are also in progress to enhance revenue collection and rationalize expenditures. Aurangzeb mentioned plans to close devolved ministries, with some like the PWD already shut down, and others to follow in the coming months.

Regarding privatization, Aurangzeb assured that all stakeholders are on board, and the process is progressing with allied political parties’ consultation to complete it within the stipulated timeframe. He highlighted the importance of privatizing loss-making entities for economic recovery and social development. The privatization of Pakistan International Airlines is set to be completed by August 15, followed by the outsourcing of Islamabad Airport and subsequently Lahore and Karachi airports. The government also plans to introduce corporate governance in power distribution companies by appointing private sector experts as their chairmen.

Minister of State for Finance and Power Ali Pervaiz Malik acknowledged the hardships faced by the common man and emphasized the government’s commitment to broad-based reforms to enhance public sector organizations’ efficiencies, creating fiscal space. Despite fiscal constraints, the government has increased allocations for the Benazir Income Support Programme and subsidies for the power sector to protect consumers and raised the minimum wage.

Chairman Federal Board of Revenue clarified that there has been no increase in the tax on DAP fertilizer, while the tax on imported tractors has been raised by 10 percent to make them competitive with locally manufactured tractors, which are taxed at 18 percent.