ISLAMABAD: Federal Board of Revenue (FBR) in a quarterly review for the first half July-December period has suggested the policy makers to have a fresh review for unbiased tax practices for every sector according to their tax paying capacity.

Thus, to have any meaningful increase in revenues, there is a need for widening of tax base to sectors that are either outside the tax net or they are lightly taxed. It is important that equity and efficiency considerations continue to be the driving forces behind modernisation of taxation system. For instance, the revenue productivity of sales tax is extremely low in Pakistan mainly due to low coverage and huge exemption, it added.

Low Coverage: It is patently clear that growth in a number of sub-sectors does not correspond on one-to-one basis with growth in FBR revenue. For instance, the contribution of bumper crop of cotton is immense as far as value added in agriculture is concerned, but the revenue contribution of this source of GDP has been insignificant. The same has been true of transport, wholesale and retail trade, and many other sub-components of GDP.

Structural weaknesses of Pakistan’s tax system heighten its vulnerability to the economic crisis. The revenue is raised in an inefficient way by favoring certain sectors and economic activities over others. This creates excess burden of taxation and can deter people from investing in the most productive sectors and earning more from the resources available. This ultimately gets in the way of economic growth. Some sectors are more heavily taxed compared to their contribution in terms of GDP than others. Agriculture contributes about one fifth of GDP, yet gives no more than 1 percent in FBR tax revenue. Services sector make up almost half of economic value added, but contribute only one quarter of central taxes due to the low tax receipts from wholesale, retail and transport sub-sectors. Given the shortfall in agriculture and services, industry carries the brunt of the tax burden – its tax share is three-times as high as its GDP share. In addition, there are question marks to what extent the tax system, through the way it treats different income classes of people differently, is sufficiently equitable. While some progress has been made, Pakistan’s tax system remains complicated and mot taxpayers have little knowledge of their obligations.

There are, 2.75 million National Tax Number (NTN) holders in the country of 160 million people, which is only 1.6 percent of the population. Out of the NTN holders, the return filers are only 2 million. The compliance ratio has always been below. The share of taxpayers to population is low when compared with few selected developing and developed countries, where the share ranges between 4.7 percent and 86.4 percent. For example, in India the share of taxpayers to population is 4.7percent, in Argentina 16.5 percent, France is around 58 percent and the same is over 80 percent in Canada.

Despite this low share in comparison to population in Pakistan, the share of taxpayers belonging to non-corporate sector is close to 99 percent in the total returns filers. On the other hand, the corporate sector that contributes around 66 percent in the total income tax collection has a share of only 1 percent in income tax base.

Low Compliance: At present, there are over 50,000 companies registered with the Securities Exchange Commission of Pakistan (SECP), while NTN holders are with FBR around 24,000. The returns received were around 20,000. With such a low compliance rate, the obvious outcome is the unsatisfactory level of the revenue realization. The tax-to-GDP ratio of income tax (including corporate income tax has remained hovering between 3 percent and 3.5 percent, which is in no way aligned with the resource mobilisation efforts of the government. In fact, the ratio has started to decline in recent years, which is even worse.

The gravity of the situation becomes even more pronounced, when an international comparison is drawn. Pakistan is far behind from the emerging economies of East Asia like Malaysia, Indonesia, Thailand and Philippines where the ratio of income tax to GDP is 7 percent, 6.8 percent, 6.3 percent and 5.7 percent respectively. Therefore, there is serious need to expand the income tax base to bring currently untaxed corporate entities to the tax net. staff report