Tax-to-GDP ratio: flawed debate

Business Recorder

5 days ago

There has been persistent pressure on successive Pakistani Governments by policymakers, especially those affiliated with multilateral donor agencies, to increase the Percentage Tax-to-GDP ratio. It is true, that the fiscal deficit continues to increase.
However, the assumption that it is a tax shortfall that grows the deficit needs to be challenged — Nadeem Ul Haque & Raja Rafi Ullah, The Odd Fascination with Tax-to-GDP Ratio (PIDE Knowledge Brief No. 78:2022)
'If we want lower taxes for growth, then spending must be curtailed so that governments won't need so much money. The next time you hear a politician promise another tax break for some special group of taxpayers, think how much that hurts the economy and you as a taxpayer. It's time to simplify the system and reduce its onerous impact that undermines economic growth' — Jack M. Mintz, the Palmer Chair of Public Policy, School of Public Policy, University of Calgary, Canada
The recent claim by the Chairman of Federal Board of Revenue (FBR) that for the recently-ended fiscal year (FY) 2024-25 its tax-to-GDP ratio improved by 1.5 percent needs reconsideration [in FY 2024 FBR's tax-to-GDP ratio was 8.8 percent and not 9.5 percent, which was of total national taxes]. It is well-known that the debate over tax-to-GDP ratio in Pakistan has always been lopsided, failing to take into account the fact that the Pakistani nation remains the most heavily taxed in the entire region.
Adding insult to injury, the citizens in return even do not get clean drinking, what to speak of free education, decent healthcare, affordable housing/transport and social protections like universal pension for all, out of taxes paid by the citizens.
In federal tax collection by the FBR, there has been an overwhelming reliance on indirect taxation [even under the garb of direct income taxation through presumptive and minimum tax regimes through withholdings on a number of transactions having no nexus with income], without evaluating its impact on the economy and life of the less privileged sections of society. This flawed tax policy has been contributing towards the rich-poor divide as well expanding inequalities in income/wealth distribution.
In the face of declining income tax contribution in GDP of less than 3 percent (after excluding indirect ones levied under Income Tax Ordinance, 2001), the finance minister of successive regimes — civil and military alike — and Revenuecracy have been making tall claims about 'impressive' (sic) increase in taxes before the International Monetary Fund (IMF) and elsewhere. The reality of this 'impressive' performance has been exposed in various columns by these scribes.
However, the IMF and World Bank in the past kept mum, as they were party to portraying all-good 'projection saga' during the era the Uncle Sam needed Pakistan; first for dismemberment of the then USSR and later for imposing New World Order in the name of 'War on Terror' (sic).
Back in 1995, the then Prime Minister, Nawaz Sharif, claimed during a meeting, held in Washington on October 21, 2015, with that time Managing Director of IMF, Ms. Christine Lagarde, 'We have achieved the highest tax-to-GDP ratio and Pakistan's economy has been stabilising due to prudent policies of my government'. This claim was diametrically opposite to what was stated by the then Auditor General of Pakistan (AGP) in his report making 'astonishing disclosure' that the tax-to GDP ratio of FBR 'reached its lowest level on the conclusion of the World Bank funded Tax Administration Reform Project (TARP)'.
It was strange that in the presence of report of AGP, our Prime Minister, his finance minister and other 'financial experts' were trying to convince the IMF that 'all is well'. Nawaz Sharif on assuming the power for the third time as prime minister gave unprecedented tax waivers and concessions to the non-filers and tax evaders—even then, his amnesty schemes miserably failed. It could only yield Rs. 1.3 billion!
In these columns efforts have been made to explain reasons for the poor tax collection. However, the citizens for the last many decades rightly raise the question, 'Do you know how rulers play havoc with the taxpayers' money'? They insist that we must calculate cost to national exchequer in providing tax-free perquisites and benefits to indomitable militro-judicial-civil-complex and public office holders in the form of palatial residences, army of servants, expensive cars, golf courses, rest houses etc. They call on first ending this colossal wastage of funds and money spent on fruitless foreign tours, state banquets etc. and then debate the issue of low tax-to-GDP ratio.
Although in these columns a detailed roadmap for reforming the existing tax system and raising taxes to the level of Rs 30 trillion is presented, the self-styled stalwarts and wizards sitting in Ministry of Finance (MoF) and FBR want 'advice' and 'assistance' from IMF and World Bank despite. Needless to say, they miserably failed in the past to reform tax system. The situation can aptly be described what great Urdu poet Mir Taqi Mir said in the following couplet:
Mir kya sada hein beemar howe jis key sabab, usi attar key londey sey dawa letey hein (What a simple soul is Mir; he seeks cure from the healer's boy who is the cause of his ailment).
It is tragic that in a country where billions of rupees are made in speculative transactions in real estate and shares, tax-to-GDP ratio has been pathetically low hovering around ten percent for over a decade. Those who matter in the land are least bothered to tax undocumented economy and counter benami transactions. The mighty sections of society are engaged in these transactions and FBR being their handmaid has no intention to tax them.
The definition of the term, 'business' given in section 2(10) of the Income Tax Ordinance, 2001, covers 'adventure in the nature of trade'. However, our tax machinery is sitting idle causing enormous loss to the national exchequer by not bringing adventures in the nature of trade (speculative transactions) in real estate and shares into tax ambit.
The elected representatives (sic), in fact, clipped the power of FBR to tax speculative transactions in real estate as adventure in the nature of trade by including immoveable property in the definition of 'capital asset' through Finance Act, 2012 with effect from tax years 2013. Earlier, they have been giving undue tax exemptions on gains arising on speculative transactions in shares and stocks.
Higher tax-to-GDP ratio in industrialised countries is primarily due to the higher level of revenue from social security, payroll taxes, corporate taxes and taxes on domestic consumption while taxes collected from international trade and non-tax revenue are lower. In contrast, in Pakistan the major portion of revenue comes from indirect taxes, particularly taxes on international trade and domestic consumption, while direct taxes have a pathetic share [4.3 percent of GDP in FY 2024 that included 50 percent pass through withholding taxes].
The extending of extraordinary tax-free benefits to the powerful classes, failure to tap actual tax potential, indulgence in wasteful expenditure and funding of inefficient public sector enterprises are continuously pushing the country to more and more expensive borrowings — both internal and external.
The unrelenting huge fiscal deficit and rising quantum of debt are the major source of macro-economic imbalances over the last many years. Making the things worse, the growth-retarding tax policy is playing havoc with stagnant economy. Sole stress on oppressive indirect taxes is not only widening the rich-poor divide, but has also failed to enable Pakistan to reduce even revenue deficit—we are not mobilising enough to meet current expenditure.
The question is: where does the fault lies? Even the World Bank-IMF funding and 'guidance' has failed to bring desired results. Who is responsible for the prevailing pathetic state of affairs? Our debt burden has increased monstrously, fiscal deficit is simply unmanageable, inflation is crushing the poor, taxes are evaded and avoided by the rich and whatsoever is collected is wasted by the rich and mighty. What a tragedy that the elites (ashrafiya) not only evade taxes but also thrive at taxpayers' expense. They are the de facto beneficiaries of all the State's resources—generated mainly by the suppressed land-less tillers and diligent industrial workers.
Pakistan is not a poor country — the State's kitty is empty because of colossal wastage of taxpayers' money on unproductive expenses (perks and perquisites of ruling elites) and non-exploitation of vital natural resources as well unwillingness of the rich to pay income tax.
The absentee landowners (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people trio of indomitable militro-judicial-civil complex, inefficient politicians and greedy businessmen—controlling and enjoying at least 90 percent the State resources—contribute below 1 percent towards national revenue collection but is beneficiary of 90 percent of available national resources.
The existing exploitative, rotten, regressive, ill-directed and unfair tax system is rapidly widening the existing divide between the rich and the poor.
The lack of political will to tax the rich and the mighty remains our dilemma — not scarcity of resources. Equity demands higher taxes from those who have higher income and wealth, but in Pakistan since the first martial law all fiscal policies have decreased tax burden on the rich and increased its incidence on the poor.
Pakistan's tax-to-GDP ratio at FBR level alone can rise to 20 percent, if we bring 5 million ultra-rich into tax net, heavily tax speculative transactions in real estate (it will promote construction industry as prices of land will come down), tax all speculative deals at stock exchanges (it will induce genuine investment in companies, withdraw all tax-free perquisites given to militro-judicial-civil complex and public office holders and confiscate untaxed assts.
The existing tax system is highly unjust. It protects the rich and mighty having monopoly over economic resources. The common people are paying an exorbitant sales tax of 18 percent (in fact 35-55 percent on finished imported goods after mandatory value addition and income tax at source) on essential commodities as well as Rs 80 per litre as petroleum and environment levies on petrol/diesel but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes.
Our present tax revenue potential, if monstrous black economy is dealt with iron hand, is not less than Rs 30 trillion provided that the existing tax base is made wider and equitable, black economy is discouraged, tax machinery is completely overhauled and exemptions and concessions available to some privileged sections of society are withdrawn.
However, this is not possible without simplification of the tax system [FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021, and FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021].
Copyright Business Recorder, 2025