Provincial Tax Revenue-to-GDP Ratio Dips to 0.7%: SBP Report

Provincial Tax Revenue-to-GDP Ratio Dips to 0.7%: SBP Report

Karachi, October 20, 2024 — In a recent report, the State Bank of Pakistan (SBP) revealed a concerning decline in the provincial tax revenue-to-GDP ratio, which fell to 0.7% during the fiscal year 2023-24, down from 0.8% in the previous year.

This decrease occurred despite substantial nominal growth in provincial tax collections, which surged by 19.2%, nearly three times the rate of growth observed in the prior year.

The SBP highlighted that this growth was driven predominantly by indirect taxes, particularly sales tax on services and other levies such as the infrastructure development cess. These indirect taxes played a pivotal role in bolstering provincial revenues amid a broader economic landscape characterized by inflationary pressures.

Sales tax on services saw a significant rise in collection, mirroring the inflation-driven increase in the sales tax on goods. Services such as communication, which includes call and internet charges, saw a price hike of 7.8%, while the readymade food sector, encompassing restaurants and hotels, witnessed a staggering 23.7% rise in prices during FY24. This inflationary boost, the SBP noted, inflated the base of taxable services, thus contributing to higher tax receipts in nominal terms.

However, the SBP report also pointed out a key concern: despite these nominal gains, the sales tax on services as a percentage of GDP remained stagnant at 0.5% for the sixth consecutive year. This stagnation, the SBP indicated, underscores the persistent challenges faced by provincial governments in expanding their tax base and enhancing revenue collection efficiency.

The unyielding sales tax-to-GDP ratio, coupled with the overall dip in the provincial tax revenue-to-GDP ratio, signals the limitations of current revenue mobilization efforts. While inflation provided a temporary lift to collections, it appears insufficient to offset structural inefficiencies and an overreliance on indirect taxes.

Moreover, the provincial governments’ dependence on indirect taxes, which are less progressive and often more burdensome for lower-income groups, raises questions about the sustainability and equity of provincial tax systems. The SBP’s analysis suggests that a more diversified and robust approach to revenue generation is essential if provinces are to improve their tax revenue-to-GDP ratio in future fiscal years.

The report concludes by emphasizing the need for comprehensive reforms in provincial tax policy, with a focus on expanding the tax net, improving compliance, and enhancing the capacity of provincial tax authorities to mobilize resources more effectively. Without these reforms, the provincial tax revenue-to-GDP ratio risks further decline, potentially jeopardizing provincial fiscal sustainability.