ISLAMABAD: Low tax-to-GDP ratio has left the government with no option but to keep the sales tax rate, the major source of revenue collection, at the current 17 percent.
The Federal Board of Revenue (FBR) has reportedly conveyed to the parliamentarians in writing that in view of existing tax-to-GDP ratio, no decrease in the sales tax rate could be made as any reduction in sales tax will have negative implications on the overall revenue collection.
The tax-to-GDP ratio in 2012-13 stood at 9.9 percent and was projected to rise to 10.6 with FBR collection from 8.8 percent to 9.5 percent. The FBR is, as a consequence, was required to undertake a number of policy actions related to improving compliance, ensuring equitable taxation, simplifying tax system, reforming customs administration and strengthening efficiency and effectiveness of tax system. The FBR tax target for 2015-16 has been proposed at 11 percent of GDP.
The tax authorities stated that the share of direct taxes stood at 38.03 percent during the first three quarters of the current fiscal year as compared to 38.18 percent last fiscal year or in other words if the trend continues direct tax collection would be lower than last year. The tax authorities have informed the Senate Standing Committee on Finance that in 1970-71 shares of direct taxes in total FBR collections was 19 percent while the remaining 81 percent was from indirect taxes in 2012-13. The direct taxes share stood at 38 percent in 2012-13 while the remaining 62 percent was indirect tax collection.
Direct tax collection in the first nine months of the current year stood at Rs599 billion compared to Rs743 billion in the corresponding period of last year while indirect tax collection was Rs1,203 billion in 2012-13 and recorded at Rs976 billion in 2013-14 (up to March, 2014).
The tax authorities stated that no drastic steps can be taken to reduce the share of indirect taxes in the overall FBR collections. The share of indirect taxes has already come down from almost 81 percent in 1970-1971 to about 62 percent at present and the reason has been reduction in rates of customs duty. Any further reduction in the collection of indirect taxes without a commensurate increase in the collection of direct taxes would further dent the fiscal position of the government. The FBR is committed to increasing the share of direct taxes in the overall collection through broadening tax base and better enforcement efforts.
