UN body advises broadening of personal income tax base

KARACHI: A United Nations (UN) body’s on Friday advised Pakistan to gradually broaden personal income tax base in order to reduce income inequality and explore the country’s tax potential, which is immensely untapped.

The United Nations Economic and Social Commission for the Asia Pacific (ESCAP), in a report, said a great majority of the population in Pakistan are exempted from paying personal income tax (PIT) that “may be advisable for countries with average incomes just above the poverty level and which do not have a vibrant middle class, but gradually broadening the PIT base should be a long-term objective for middle- or upper-middle-income developing countries.”

In Pakistan, corporate tax is the second biggest source of revenue generation after taxes on goods and services. Taxes on international trade and payroll and workforce are two other revenue avenues.

ESCAP, one of the five regional commissions of the UN, said corporate income tax can be shifted to labour and that may aggravate inequality.

“In contrast, PIT is potentially the best tax instrument for redistributive purposes, and by its nature is almost impossible to shift to another party,” the commission said in the paper titled ‘Taxing for shared prosperity: Policy options for the Asia-Pacific region’. It said most of the countries in Asia Pacific rely on corporate income tax than on personal income tax as generation of direct taxes.

“On average, developing countries in the region collect 3.6 percent of their GDP from CIT (corporate income tax), which is actually higher than the 2.9 percent of GDP collected by OECD (Organisation for Economic Co-operation and Development) countries,” it added.

“However, the average revenue from PIT in these countries is just two percent of GDP, while OECD countries collect more than four times this amount, at 8.8 percent of GDP.”

ESCAP’s data showed that Pakistan’s tax revenue collection is surprisingly less than 0.5 percent of what it can potentially mobilise, indicating that a gigantic section of the taxable society goes untaxed.

“Developing countries in Asia-Pacific (are) collecting on average less than two-thirds of the tax revenue they could potentially mobilise,” the UN body said, inferring estimates from various studies.

“While these estimated maximum tax potentials are for general guidance only and collection efforts can be highly dependent on policy priorities and individual choices made by countries, these results demonstrate that for many developing nations in the region strengthening the mobilisation of tax revenue is not only possible but also a priority,” it added.

The commission estimated the country’s tax-to-GDP ratio at no more than around 10 percent.

It said the region has one of the world’s lowest tax-to-GDP levels of 16.4 percent compared with a developing country’s average of 20.2 percent and a developed country average of 25.1 percent.

“Given the generally poor state of education, infrastructure, healthcare and social protection in these countries, insufficient public financing is a primary barrier to efforts to lift many millions of people out of extreme poverty and to effectively pursue achievement of the SDGs (sustainable development goals),” it added.