Karachi, November 5, 2024 – Despite substantial increases in revenue collection, Pakistan’s Federal Board of Revenue (FBR) has struggled to elevate the tax-to-GDP ratio, a critical indicator of fiscal health, over the past decade.
According to a recent report, the tax-to-GDP ratio has stagnated, highlighting a challenge in translating revenue gains into proportional economic growth.
The tax-to-GDP ratio is widely recognized as a key metric for evaluating a country’s tax revenue in relation to the size of its economy. This measure provides insights into tax policy trends and allows for international comparisons, with higher ratios generally observed in developed nations. A robust tax-to-GDP ratio is essential for a government to fund infrastructure, healthcare, education, and other critical sectors. According to the World Bank, a tax-to-GDP ratio exceeding 15% is instrumental for sustainable economic development and poverty alleviation.
The FBR report revealed that while tax collection has surged, the tax-to-GDP ratio has failed to rise correspondingly. Over the past decade, the ratio has hovered between 8.41% and 9.81%, with the latest data indicating a modest increase from 8.54% in FY2022-23 to 8.77% in FY2023-24. Although this uptick aligns with the FBR’s enhanced revenue collection efforts, it falls short of the structural progress needed to significantly boost the tax-to-GDP ratio.
FBR officials attribute recent gains to a series of policy reforms and stringent enforcement measures, including crackdowns on tax evasion and improved compliance frameworks. These efforts contributed to a notable 30% increase in total tax revenue during FY2023-24. However, experts caution that while revenue growth is promising, the static tax-to-GDP ratio suggests an underlying challenge in broadening the tax base—a critical component in achieving a higher, more sustainable ratio.
An encouraging trend in recent years has been the shift towards direct taxation. The proportion of direct taxes relative to GDP rose from 3.10% in FY2020-21 to 4.27% in FY2023-24. This shift reduces the burden of indirect taxes on consumers, indicating gradual progress towards a more equitable and progressive tax system. However, with indirect taxes still representing a considerable portion of revenue, further structural reforms are necessary to enhance fiscal stability.
FBR’s officials stated that while the current trajectory is promising, sustaining this momentum will require comprehensive economic reforms, greater public engagement, and more efficient allocation of tax resources. The government is optimistic that continued revenue growth will eventually translate into a higher tax-to-GDP ratio, but experts argue that without a fundamental shift in tax policy and public sector efficiency, the goal may remain elusive.
