Abdullah Kamran Khan
The tax-to-GDP ratio is an indicator of the level of taxation in a country relative to its economic output. It measures the share of the gross domestic product (GDP) that is collected by the government as taxes. A higher tax-to-GDP ratio means that the government has more resources to spend on public goods and services, such as education, health, infrastructure, social protection, etc. A lower tax-to-GDP ratio means that the government has less revenue and may face fiscal constraints and deficits.
According to the latest data from the Federal Board of Revenue (FBR), the tax-to-GDP ratio in Pakistan was 9.2% in 2021-22, which is low compared to other regional countries and the OECD average. The IMF and the World Bank have urged Pakistan to increase its tax-to-GDP ratio to improve its fiscal position and create fiscal space for development spending. They have also suggested various reforms to broaden the tax base, reduce tax exemptions, improve tax administration, and enhance tax compliance.
The time for implementing these reforms is challenging, as Pakistan is heading towards general elections in February 2024. The caretaker government may not have the mandate or the capacity to undertake major policy changes, and the incoming government may face political and social resistance from the vested interests and the public. However, the IMF and the World Bank have made their financial assistance conditional on the progress of the fiscal reforms, which creates an incentive and a pressure for the authorities to act.
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The achievement of the revenue target set by the IMF and the World Bank may not be impossible, but it will require a concerted and sustained effort from the government and the society. Inflation may help increase the nominal tax collections, but it will also erode the real income and purchasing power of the people, especially the poor and the fixed-income earners. Therefore, inflation should not be seen as a substitute for tax reforms, but as a challenge that needs to be addressed by sound monetary and fiscal policies.
The expansion of the tax net is essential for increasing the tax-to-GDP ratio and ensuring a fair and equitable distribution of the tax burden. Currently, many sectors and segments of the economy are either exempted or evading taxes, which creates distortions and inefficiencies in the market and the society. Bringing them into the tax net will not only generate more revenue for the government, but also improve the accountability and transparency of the public finances. The CBR policy of squeezing those already taxed is not sustainable or desirable, as it may discourage economic activity and investment, and create resentment and distrust among the taxpayers.
Summing up, the tax-to-GDP ratio in Pakistan is low and needs to be increased to support the economic stabilization and growth of the country. The IMF and the World Bank have recommended various fiscal reforms to achieve this goal, but they also face several challenges and constraints in their implementation. The government and the society need to work together to overcome these challenges and create a conducive environment for the fiscal reforms.
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