IMF estimates Pakistan’s tax gap to be around Rs3tr

ISLAMABAD: Contrary to the prevailing perception that a massive tax gap existed at federal levels, the International Monetary Fund (IMF) has estimated that the FBR’s tax to-GDP gap stood at 2.9 percent, equivalent to Rs3000 billion, on an annual basis.

“The tax capacity of Pakistan is estimated at 12.9 percent of GDP which is currently hovering around 10 percent. The tax gap is estimated at 2.9 percent of GDP top official sources quoted an IMF study and assessment which was also shared with Pakistani authorities, in a background discussion here on Monday.

The IMF has assessed that the short to medium approach from FY24-26 could yield additional tax revenues of 2 percent of GDP including through introduction of omnibus tax administration and procedures which comprises anti-avoidance rules and tax administration, effective enforcement tools. The income tax management improvement could yield additional revenues of 0.2 percent of GDP, Personal Income Tax (PIT) rationalisation could fetch 0.5 percent of GDP and rationalisation of General Sales Tax (GST) could fetch additional revenues of 1.3 percent of GDP.

On other hand, the IMF also quoted an FBR’s tax compliance gap which stood at 6.9 percent of GDP, equivalent to Rs7000 billion.

According to the IMF’s assessment, the results in an estimated tax efficiency, the difference between actual tax revenues and tax capacity, is standing at 2.9 percent of GDP. The IMF further explained that Pakistan has the lowest tax capacity among comparators in the region and BRICS reflecting the large size of its agriculture sector, relatively lower level average income on account of per Capita GDP and governance challenges.

“This result possessed implications for Pakistan that raising additional revenues is more challenging for the country than comparators,” the IMF has found in its assessment. It also emphasises that any further increase in tax collection depends on efforts to strengthen tax capacity through strengthening tax administration, improving the fiscal contract between citizens and government and improving governance between government agencies and levels of government.

The IMF has also undertaken tax capacity of different countries and found that the tax to GDP ratio in South Africa stood at 25 percent and there was a gap of 5 percent so it could go up to 30 percent of GDP. Argentina’s tax to GDP ratio was hovering around 23 percent and it could go up to 26.5 percent of GDP. Nepal’s tax to GDP ratio stood at around 16 percent but it could go up to 23.4 percent of GDP.

India’s tax to GDP was hovering around 19 percent of GDP and it could be increased up to 22.5 percent of GDP. Ethiopia’s tax to GDP stood at around 9 percent and it could go up to 19.5 percent of GDP. China’s tax to GDP ratio stood at 15 percent which could go up to 18.9 percent of GDP. Bangladesh’s tax to GDP ratio hovered around 7 percent of GDP which could be jacked up to 17.1 percent. Indonesia’s tax to GDP stood at 9 percent which could be increased up to 15.6 percent. Sri Lanka’s tax to GDP ratio hovered around 7 percent which could go up to 15.4 percent. In case of Pakistan, the tax to GDP ratio is standing at around 10 percent of GDP which could go up to 12.9 percent of GDP.