Home South Asia Pakistan Pakistan needs to increase tax compliance, not new taxes: World Bank

Pakistan needs to increase tax compliance, not new taxes: World Bank

World Bank

News Desk |

The World Bank has said that Pakistan does not need to impose new taxes or increase rates because the existing taxes have the potential to generate the amount – Rs10 trillion revenues annually – to take the country’s tax revenue potential to 26 per cent of GDP if tax compliance were raised to 75 per cent.

Calling the 75 per cent tax compliance a realistic level of compliance for lower-middle-income countries, the Washington-based lender has revealed that Pakistan’s revenue gap has widened from Rs3.3 trillion to Rs5 trillion – 26 per cent of the size of its economy.

The details have emerged from the World Bank’s recently published document titled Pakistan Revenue Mobilization Project. The World Bank has prepared the project information document of $1.5 billion to approve a $400 million loan for tax reforms. The remaining $1.1 billion will be contributed by the federal government.

The project information document states Pakistan’s tax authorities were currently capturing only half of the revenue potential and the gap between actual and potential receipts is 50 per cent. As per the last fiscal year, Pakistan’s tax-to-GDP ratio stands at 13 per cent of GDP.

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In the backdrop of revenue shortfall, the lender’s assistance of $400 million for the revenue mobilization project would be implemented by the Federal Board of Revenue (FBR) targeting to contribute an increase in the domestic revenue by broadening the tax base and facilitating compliance.

The $400 million credit will come from the International Development Association (IDA), a World Bank affiliate. The WB and International Monetary Fund (IMF) had estimated Pakistan’s tax gap at 22.3 per cent of GDP three years ago.

Although the WB document claims that Pakistan needs to broaden the tax base instead of burdening the existing taxpayers, the media reported, the IMF’s has been pushing Pakistan to make tax efforts equal to 1.7 per cent of GDP next year that requires at least Rs600 billion additional taxes.

What is Leading to Huge Tax Losses?

World Bank believes that the FBR’s methodology to assess tax liabilities for some sectors like the electricity consumption bills for the steel sector is leading to huge tax losses.

The WB has suggested to withdraw multiple exemptions and discounted rates to selected industries, economic actors, and economic activities like sugar, textiles and fertilizer industries; associations in the real estate sector and imports for infrastructure projects under the China-Pakistan Economic Corridor (CPEC).

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In the last fiscal year, a media report said, the WB had estimated the cost of tax exemptions at 2 per cent of GDP, primarily, due to exemptions from General Sales Tax (GST) and customs duties.

Does FBR Need $400 Million Loan to Go After People?

The number of taxpayers who file tax returns for GST and income tax remained at 1.52 million while those who declared incomes above the taxable threshold amounted to only 1.12 million in the last fiscal year, the news reports quoted the WB as stating in the report.

There were 220,042 registered sales tax persons and only 141,106 filed their returns, it said, adding in reality, only 43,355 paid any amount of tax.

The project document underscores that Pakistan needs to increase its tax revenues to ensure fiscal sustainability and generate fiscal space to finance much-needed investments in human capital and infrastructure.

The WB believes that Pakistan’s tax to GDP ratio would jump from 13pc to 16pc of the GDP in next five years by spending $1.5 billion, which is inclusive of $400 million WB loan.

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At the moment, neither the FBR is organized along functional lines nor does it have a clear hierarchical structure, the WB project document said, adding FBR has a nationwide presence with more than 21,000 staff, of whom about two thirds work for the Inland Revenue Service (IRS) and one third for the Pakistan Customs.

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