Ambitious government GDP tax target Very difficult to achieve: experts

 Ambitious government GDP tax target Very difficult to achieve: experts

The Ministry of Finance has set itself the goal of achieving a tax-to-GDP ratio of 20 percent in the next six to eight years, compared to 10.9 percent in the fiscal year 2020-2021.

"Given the shortcomings in the structure of Pakistan's tax system, the current finance minister's commitment to reduce the tax-to-GDP ratio to 20 percent is ambitious and even more difficult," said one expert.

The tax-to-GDP ratio in Pakistan is 9.6 percent in 2019-2020, an increase of 10.1 percent in 2018-19. COVID-19 tolerance has affected economic activity and Pakistan's GDP growth rate has become negative for the first time in history, affecting the tax rate, and the effects will continue for the foreseeable future.

It is worth noting that the average tax-to-GDP ratio in South Asia is 12 percent. In order to increase the tax-to-GDP ratio in Pakistan, the FBR has been extensively revised several times and efforts have been made to simplify the tax system. However, the tax-to-GDP ratio in Pakistan is not in double digits.

Compared to Pakistan, the tax-to-GDP ratio in Nepal is 19 percent, the highest level of tax-to-GDP ratio of any country in the region. Similarly, Bhutan leads Pakistan with 16 percent, India and Sri Lanka with 12 percent. Even in a country like Afghanistan, the tax-to-GDP ratio is 9.9 percent, while in Bangladesh it is 8.8 percent. "The main reasons for Pakistan's low GDP tax rate include discriminatory exemptions and tax rates for various sectors, poor law enforcement, non-compliance with taxpayers' laws and high dependence on indirect taxes. On the other hand, tax administration problems and incompetence of tax authorities is also He said that the agricultural, industrial and services sectors play an important role in Pakistan's GDP, but that the share of these tax sectors does not match its role in the economy. For example, the share of agriculture in GDP is 19.4 percent in FY20. while the agricultural share of the tax was less than 2 percent.

Due to smuggling and insufficient invoicing, tax evasion in the unregulated sector poses a serious challenge to the Treasury and private sector investment. According to the French market research company IPSOS, illegal trade in five sectors in Pakistan led to the loss of Rs. 310 billion a year in national investment. These industries include the automotive industry and lubricants, cigarettes, tires, real estate, pharmaceuticals and tea.

According to IPSOS research, the illegal car and lubricant trade in Pakistan costs national sales Rs. 90 billion per year, Rs. 75-80 billion in the illegal cigarette trade, Rs. 55-65 billion in unspecified real estate business and Rs. 45 billion drugs. The banned sale of tea resulted in an annual loss of Rs. 30-35 billion to the state treasury. Tax evasion for cigarettes has more serious consequences than in other sectors. Pakistan has become the largest market for illegal cigarettes in 16 Asian countries, with 4 out of 10 cigarettes being sold illegally through tax evasion. The tax loss in the cigarette sector is also a challenge for government health policy and public health measures, because despite the increase in taxes on legal cigarettes, total cigarette sales are. holds 80 billion cigarettes in Pakistan.

"Only with strong political will and with the help of technology and digitalisation can Pakistan achieve sustainable economic growth by eliminating illegal trade, which has become a burden on the economy," he said.