ISLAMABAD: Pakistan’s tax to GDP ratio has been estimated at 10.8 per cent for the fiscal year 2021/2022 as against the ratio of 8.5 per cent in the preceding fiscal year, according to Economic Survey of Pakistan 2021/2022 released on Thursday.
The tax to GDP ratio has been estimated on the basis of tax collection by the Federal Board of Revenue (FBR). The FBR tax to GDP ratio since fiscal year 2015/2016 is calculated on the basis of the revised GDP at the new base of 2015/2016, according to the survey.
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The tax-to-GDP ratio is the real index for measuring tax compliance, capacity, and efficiency in the tax system. A higher tax to GDP ratio allows the government to rely more on domestic resources rather than external sources of revenue, while also ensuring the availability of sufficient funds to meet a country’s development and social expenditures.
Unfortunately, the tax to GDP ratio in Pakistan remains low over the years. There are a variety of factors responsible for the low tax to GDP ratio including a narrow tax base particularly agriculture contributing minimally to the tax collection, tax evasion, poor documentation, the informal economy, exemptions/concessions, smuggling, weak audit & enforcement, a lack of automation, and lengthy litigation.
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As a result of insufficient tax revenues, the country has faced numerous challenges over the years in providing much-needed fiscal space for priority areas such as infrastructure, education, health, and targeted social assistance.
Overall tax revenues (federal & provincial) increased to 9.4 percent of GDP in FY2021 against 9.3 percent of GDP recorded in FY2020. In total, FBR which collects a major part of tax revenues was able to increase the tax to GDP ratio to 8.5 percent in FY2021 against 8.4 percent of GDP in FY2020.
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Total tax collection has been severely impacted over the last two years: first in FY2019 due to a slowdown in economic activity because of stabilization measures, a low tax rate on major petroleum products, import compression, suspension of withholding tax collection on mobile top-ups, and a reduced rate on salary income.
Second, during FY2020, the COVID-19 crisis hampered tax collection. However, FBR’s measures to improve the tax collection helped it to achieve a growth of 19 percent in FY2021 against a 4.4 percent rise in the preceding year.
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It is worth mentioning that FBR tax collection crossed the Rs 4 trillion mark for the first time in history. Nonetheless, during the last six years, the tax to GDP ratio remained lower within a range of 8.4 percent and 9.8 percent.
