KARACHI: The Federal Board of Revenue (FBR) has failed to address structural problems in the taxation system and tax-to-GDP ratio remained stagnant in the range of 8.5 percent to 9.5 percent over the last ten year, State Bank of Pakistan (SBP) said in its Annual Report on State of Pakistan Economy released on Friday.
“Although FBR takes a number of measures every year to increase tax collection, it could not improve its achievements. As structural problems in the taxation system persist, the FBR tax-to-GDP ratio remained stagnant in the range of 8.5 percent to 9.5 percent over the last ten years,” the FBR said.
The government has envisaged this ratio to increase to 11.3 percent in FY18 by taking various measures to document the economy, and to broaden the tax base. Significant structural tax measures are needed to bolster the tax to GDP ratio.
The SBP said that the budget deficit during FY15 was 5.3 percent of GDP, which was lower than 5.5 percent witnessed during the last year. If compared with the target for the year, the deficit was slightly higher. While the fiscal consolidation during the year was challenged by lower than expected tax revenues, expenditures remained under control. The budget FY15 envisaged a growth rate of 30.1 percent in total taxes – major part of which was to be collected by FBR; however, actual growth rate of taxes realized during the year was 17.7 percent. Key factors affecting tax revenues were: (i) sharp decline in oil prices, which adversely affected sales tax collection; (ii) continuing issues with tax enforcement; and (iii) subdued manufacturing activity.
Sluggish tax collection, in turn, squeezed the space for development expenditures: in order to consolidate fiscal account and to keep overall deficit within target, the government could increase public sector development expenditures by 14.1 percent instead of the target of 35.8 percent.
In fact, a shortfall in revenue has a direct bearing on development expenses, as shown by. As public development expenditure are key to stimulate overall investment and growth, the shortfall in tax revenues eventually hurts economic growth.
Despite taking several measures to raise tax collection, FBR could not achieve its target. This indicates structural problems in the taxation system, including: (i) large informal economy and lack of documentation, (ii) low social and economic cost of tax evasion, (iii) complexities involved in voluntary tax payments; and (iv) administrative issues in tax collecting authority. These issues cannot be addressed by makeshift measures to increase revenues. This needs a national campaign for taxation by taking all segments of the society on board. Further delay in such an all-inclusive campaign may impede the growth momentum of the economy, the SBP said.
The total revenue receipts (tax and non-tax) stood at Rs. 3,931.0 billion in FY15, showing a growth of 8.1 percent – half the growth targeted in the budget. This was entirely due to a shortfall of Rs 319.6 billion in tax revenues from their target. The non-tax revenues, on the other hand were more than the target, mainly due to high SBP profit and receipts under coalition support fund.
Within tax revenues, FBR taxes were Rs 2,588.2 billion in FY15, compared with the original target of Rs 2,810 billion for the year. The FBR target was subsequently revised downward to Rs 2,605 billion. However, actual collection still could not get to the mark.
