By Staff Reporter
ISLAMABAD: The World Bank on Thursday said Pakistan’s recurrent budget shortfall is caused by its low fiscal revenue as the country’s total revenue collection averaged 12.8 percent of GDP over the past decade, significantly lower than the South Asian average of 19.6 percent.
The Bank’s recently released ‘Pakistan Public Expenditure Review 2023’, highlighted the issues of persistent low fiscal revenue and growing budget shortfall in the country.
The report notes that Pakistan’s total revenue collection has been falling over time, with the fiscal year 2018-22 average at 12.5 percent of GDP, down from the fiscal year 2013-17 average of 13.2 percent.
Tax revenue collection, which averaged at 10.3 percent of GDP over the past decade, is also low.
The report identifies that Pakistan’s tax system is complex, has a narrow tax base, and has high tax rates. There are numerous special provisions, concessional rates, exemptions, and to some extent, unorthodox approaches to tax policy, resulting in a system with many vested interests.
These policy choices were implemented to balance the provision of financial support to certain groups or industries with the need to maintain a minimum level of revenue collection, which has come at the cost of economic efficiency and the ability to sustainably raise revenue to a level that can finance Pakistan’s spending needs.
To raise more revenue in a sustainable manner, the tax system needs to be simplified, the tax base broadened, and the burden on compliant taxpayers reduced concurrently.
The report highlights that past efforts to broaden the tax base have not resulted in tangible outcomes, with Pakistan losing a total of 2.6 percent of GDP to tax concessions in fiscal year 2022, 0.2 percentage points more than in fiscal year 2020.
Pakistan annually lost an average of 26, 18, and 30 percent of sales tax, income tax, and custom duty revenue potential, respectively, between fiscal year 2020 and fiscal year 2022.
The sales tax base is narrow, with multiple exemptions, concessionary rates, and zero ratings, all contributing to low revenue efficiency. The sales tax system also allows for concessionary rates below the standard 18 percent for select products and sectors. Pakistan also allows certain domestic supplies to be zero-rated under the sales tax, which further narrows the tax base.
The report reveals that concessionary tax rates, exemptions, and zero-ratings for non-exported products cost Pakistan 15 per cent of its revenue potential.
The personal income tax is complex, which allows for income shifting, and contains multiple provisions that narrow its base. Tax-free allowances, tax brackets, and tax rates differ significantly between salaried individuals and other taxpayers, which risks generating economic distortions and creating opportunities for tax avoidance through income shifting. The income tax exemption threshold is set sub-optimally high, leaving formally employed salaried individuals outside of the tax net.
The corporate income tax (CIT) is complex and features numerous preferential schemes. CIT rates differentiate between three different regimes, with different tax rates and special provisions applying to standard companies, small firms, and small and medium-sized enterprises in the manufacturing sector. These differentiations generate incentives for firms to split or stay small.
Similarly, Pakistan provides certain firms access to a simplified turnover tax regime, which is both financially lucrative for the firms and reduces incentives for them to invest in accounting, business formalisation, and growth.
The World Bank’s report has also highlighted that Pakistan’s fiscal deficit has been persistently large and growing, posing risks to fiscal and debt sustainability.
In fiscal year 2022, Pakistan’s general government deficit stood at 7.9 percent of GDP, the largest in more than 22 years. The deficit has been persistently high, averaging 6.2 percent of GDP over the past decade and growing 50 percent more than its pre-2010 average. Large recurrent budget shortfalls have led to a rapid accumulation of public debt, which reached 78.0 percent of GDP in fiscal year 2022, slightly lower than the record high of 81.1 percent of GDP in fiscal year 2020.
Copyright © 2021 Independent Pakistan | All rights reserved
