The world after World War–II has being changed dramatically in its various perspectives. Besides social, Ethical, cultural, environmental, political,.
Written By "Arbab M Shahzad"
Needs To Enhance Pakistan’s Tax-to-GDP Ratio
The world after World War–II has being changed dramatically in its various perspectives. Besides social, Ethical, cultural, environmental, political, and Religious Changes, one of the important aspect was change in thinking dimensions about country’s Economy. Before World War-II, many countries of the world believed extensively on military power in order to gain powerful, respectable and dominant position in the region. But since 1950’s, the concept of strong and sustainable economies has gained much importance, rather than military powers. In other words, we can say that today, there is a period of race to strengthen the economies rather than attacking or snatching someone's land/area to show the country's power. That’s why resource mobilization is considered as a key to prosperity, sustainability and economic development.
In ancient times, the role of Government was limited to certain activities which require fewer resources. But with the passage of time, Government expenditures increases rapidly. So in order to meet these expenditures a government has two sources of revenue i.e. External sources and internal sources.
External sources are foreign aids and loans, which can be received from other countries or International organizations like International Monetary Fund, World Bank, and Asian Development Bank. While internal sources are taxes, fees, prices and special assignments etc. Among these sources, Tax is the major source of internal revenue collection, so it means that the economic stability of a country is highly based upon the Taxation system.
Pakistan’s total population is approximately 180 million, Ranking 6th in the list of most populous countries, with population growth rate of 2.3% per annum. Our labor force is approximately 60.36 million according to current Quarterly Labor force survey Report. But unfortunately it is our historic failure to mobilize our resources. Since independence, we are unable to enhance our Tax-to-GDP ratio. Most of the time Pakistan's Tax-to-GDP ratio remains in single digit. In FY -2013-14, this ratio is approximately 8.6% of GDP, which is lowest in the world. The Simple Question in my mind as a student of Economics is that if Sri Lankan Tax-to-GDP ratio is 14%, India 15.5%, Malaysia 18%, and Turkey 23%, then why Pakistan's revenue base is one of the lowest in the world? Due to shortage of revenues, every time Pakistan faces a deficit budget relied more on domestic and foreign debts.
According to FY2013-2014 Budget estimates, the total size of budget is 3.591 trillion PKR. The target for total Tax and non Tax revenue collection is 2.475 trillion PKR, showing a projected gap of 1.6 trillion PKR, 8.8 % of GDP according to Budget speech 2013-2014.
In 1987, when the population was hundred million plus, the total number of income tax payers was just over one million and now in 2013, the population is approximately 180 million, but just 3.5 million citizens are paying income tax. NADRA reveled that over 2 million citizens are potential tax payers but not paying tax. Pakistan's tax collection has failed to improve since the late 1990s mainly due to inherent structural problems, including a narrow tax-base, massive tax evasion, heavy reliance on indirect taxation, corruption, smuggling, Agriculture sector exemption, trust deficit and administrative weaknesses. International experience shows that tax reform can deliver large increases in the Tax-to-GDP ratio.
Unfortunately Just 2% of Pakistan's citizens pay income tax; and the irony is that 100% of the Pakistanis dream of an independent and sovereign Pakistan. How can we become a strong and free nation if we have disparity between words and deed? The country is in a desperate need to enhance its tax-to-GDP ratio to curtail fiscal deficit that remained 8 percent in the previous fiscal year. Every time all of us criticize the role of IMF, I also agree up to some extent but the prescription about resource mobilization through tax reforms is in our own interest. Why we as a nation can’t ready to take the IMF prescription as simple as possible .i.e. either reduce non developmental expenditures or increase Tax and non tax revenues. If our policy makers adopt this simple technique, it will not only reduce Budget deficit, but will solve many other interrelated problems like high inflation, unemployment, deficit financing, poverty, reliance on borrowing, and aids.
By Arbab M Shahzad
NUST Business School Islamabad