Pakistan’s Efforts for Tax Reforms
Sales tax harmonization achieved across federal and provincial governments, and 3.5 million are expected to join the active taxpayer's list this year.
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For an efficient tax system, a few things are quite important. Firstly, tax collection must be easy and therefore, shouldn’t be of a distortionary nature. Secondly, the system must be non-discriminatory in terms of economic class, and lastly, it must be politically acceptable. However, Pakistan’s tax system remains regressive as the fiscal deficit surmounts.
To counter the systematic issues in taxation, the 'Pakistan Raises Revenue Program' was initiated by the World Bank with an initial investment of USD 400 million. Its objectives included broadening the tax base and improving laws to increase citizen goodwill.
One of the targeted results includes increasing Pakistan’s tax-to-GDP ratio to 17%, however, it’s at 9.4% currently. An additional problem faced by the tax system is discrepancies in the federal-provincial divide. This leads to problems in collection, and further confusion for willing taxpayers.
Moreover, FBR’s reliance on withholding agents* over the past few years signals convenient tax collection on part of FBR. This increases compliance costs for businesses and further adds to the deadweight loss. The government at large is also complicit in these inefficiencies, however, the role of FBR can’t be ignored.
*Withholding taxation refers to an act of deduction or collection of tax at source, which has generally been in the nature of an advance tax payment.
GRAPHICS OF THE DAY
The tax-to-GDP ratio hasn't seen much improvement considering targets. The undocumented economy is one of the main causes of the downward trend
Withholding taxes lead to easy tax collection, although withholding agents face unnecessary costs
Direct Taxation Breakdown shows an upward trend in withholding taxes
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