Though various sources can be tracked to raise the level of national
exchequer, national tax base remains most important. The Pakistan Muslim
League Nawaz (PML-N), while having majority in the federal government
plans to increase tax to GDP ratio up to 15% which is currently 9% and
has been declining over time. Pakistan has a workforce of 58 million out
of which only 2 million are registered taxpayers. Monetizing the
potential 3.2 taxpayers can provide additional tax financing to the
development programs.
The creeping reform process in the Federal Board of Revenue (FBR) is
also a big hurdle. If this institution still believes in its current
passive strategy, it needs around 32 years to target the potential tax
payers. To identify the hidden tax payers, the National Database and
Registration Authority (NADRA) should facilitate the FBR department
which is very difficult otherwise.
The alternative financing mean which is the tax financing in the
present case becomes very important especially when the PML-N government
seems divided over a proposed increase in gas tariff presented by Mr.
Shahid Khaqan Abbasi, the Federal Minister for Petroleum and Natural
Resources. However, the limited options provided by the International
Monetary Fund (IMF) may not allow government to suspend the gas price
rise as the government is supposed to collect around PKR100 billion
under the IMF programs.
A number of factors in political economy do not allow the government
to raise the gas prices. The textile and industrial sectors both claim
that the proposed rise in gas tariffs would not allow them to take
benefit from the Generalized System of Preferences (GSP) by the European
Union. In addition, the CNG sector is afraid that such a rise would
throw various CNG stations out of the business. All these factors may
give benefit to the Pakistan Tehreek-e-Insaf (PTI) in the local
government elections scheduled in the end of January. On the other hand,
the government is under severe pressure as it is already facing
criticism over the past rise in electricity prices.
The statutory regulatory orders (SROs) provide various tax exemptions
to the business community. SROs are a source of corruption, and loss of
revenue in Pakistan. They contribute to tax leakage of around 3-4% of
Gross Domestic Product (GDP). Nine out of ten SROs issued by the
government give tax benefits to monopolies. These SROs reduce the
competitiveness of the industry which is reflected in the form of
inefficiency and reduced exports. The FBR needs to bring back the
confidence of taxpayers by revising tax policies, reducing
administrative problems and tax evasion culture.
However, making the tax filing procedure easier for the persons
willing to pay taxes and targeting the others who do not pay taxes at
all, can increase the tax collections. The complicated tax filing system
creates various problems to tax payers and needs to be made easy.
Further, incentive schemes for tax collectors can increase tax
collections. The absence of such incentives promotes leakages, reducing
tax collection.
The role of the provincial government is very important in increasing
tax revenues. India has a 16 % tax to GDP ratio in which the federal
government contributes around 10% while the provincial governments
collect the remaining 6%. After the 18th amendment, the provincial
governments in Pakistan are empowered to devise the provincial
policies. Following the Indian model can increase Pakistan’s tax to GDP
ratio significantly. Though there are provincial tax laws in Pakistan,
however, the provincial governments are unable to implement these laws
in agricultural sector showing their lack of commitment.
The absence of accountability in the FBR does not allow the tax to
GDP ratio to rise. The regular tax audits of the business entities can
reduce the tax evasions. Various politicians and members of parliament
pay fewer taxes in which around 51 include senators. The absence of
penalty for tax evasion makes the things worse and this situation needs
urgent attention.
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