According to newspaper reports, Pakistan has the lowest tax-to-GDP ratio in the region despite its improvement from 9.5 percent in 2011 to 12.4 percent in 2016, showing an increase of over 60 percent in four years. A major factor hindering the revenue growth is inconsistent government policies. Instead of increasing the tax net, the government often opts for ad hoc measures to increase its revenues — either by increasing the tax rate or slapping additional taxes under specific heads. This not only affects the business and industrial activities, but also encourages capital flight. The international donor agencies also give the government tasks and targets while sanctioning a loan. This has mired the shape and structure of the tax system which moves in towards different directions at the same time. The latest move by the government to bring the real estate dealers under strict surveillance has brought this sector to a grinding halt.
According to world financial institutions, Pakistan has the potential of growth and it is expected that tax-to-GDP ratio will increase around 18 percent in the next four years. But the government will have to devise comprehensive fiscal reforms as well as has to ensure tax mobilization. The experience shows that the policymakers allegedly increased the revenue collection at the cost of economic growth. Imposition of withholding tax on bank transactions have severely affected the banking business. As a result, some banks are opting to close their branches in certain areas while others considering retrenchment of their staff. In this exercise, the government has collected the revenue at the cost of the business and economy. The government move will leave long-term negative effects on the development of the economy. There is no doubt the tax-GDP-ratio is lower in the region, but the challenge of increasing the ratio should not bring another challenge for the government. The two-third of the tax revenues are collected under the head of indirect taxes which affects the quality of life of low-stratum of society.
There is a need to increase tax base and encourage direct taxation by taking the corporate sector into confidence. The government has the prerogative to take proper measures to increase its revenue, but it should not be at cost of the already fragile economy. The local industry needs protection, but that should also have limits. Businesses only flourish in an environment where protection of capital is ensured. Pakistan is least attractive country for foreign investment and the government policymakers should visit and revisit their policies. If some Arab countries can grant tax relief to foreign investors, why cannot Pakistan do. Investors, no matter local or foreigners need tax relief and tax policies be devised keeping in view the ground realities.