Taxing issues

With Pakistan appointing a new man in charge at the helm of the FBR, and negotiations with the IMF progressing, the World Bank has issued a report on the country's tax potential. The good news in the report, titled 'Pakistan Revenue Mobilization Project', is that there is no need to impose any new taxes or increase tax rates to bring up tax revenue. Instead, the World Bank effectively says that tax collection could simply be doubled if the FBR were simply doing its job. The report estimates that if tax compliance was increased to 75 percent, Pakistan could collect around 26 percent of GDP as tax. The numbers alone indicate how high the toll of the existing mechanisms of direct and indirect taxation is. For a state that delivers so little in public welfare and redistributive mechanisms, tax rates are so high that a quarter of economic output could be collected as revenue.

This would also imply overly bloated state-sector spending, which would be fine if it goes into welfare and economic development, but instead it is just being used to keep the state afloat. The World Bank has said that existing mechanisms allow individuals to conceal their wealth, which allows tax evasion. It believes that the regulatory framework on benami transactions is not strong enough; the World Bank gives prize bonds and low taxes on immovable property as examples. Moreover, it has also criticised the fact that almost 60 percent of income tax receipts were collected indirectly, as taxes on consumption, rather than income. The World Bank suggests getting rid of the withholding tax culture.

Now the question is whether the FBR can implement the World Bank's straightforward recommendations. The FBR’s position since the PTI took power is to introduce new taxes. It is not willing to – nor does it appear capable of – increase the tax base. The World Bank believes that 75 percent tax compliance is doable for a middle-income country like Pakistan, but one must wonder if the $400 million World Bank loan for increasing revenue mobilisation will actually be spent to improve domestic revenue. The technical details of such plans are never discussed in public, which creates a culture of opacity over projects that are supposed to improve the functioning of public bodies. The World Bank has pointed to a number of internal issues, such as not being organised along functional lines, and having a lack of clear hierarchies. This makes it seem that there is poor coordination between the federal and provincial levels. A serious question is whether collecting more tax at a time of economic slowdown is a good idea at all. The fact is that Pakistan has improved tax collection from 2011 to now, but most of the increase has come from reducing tax exemptions and imposing indirect taxes. Formal tax compliance remains low. Whether the World Bank’s plan of transforming the FBR’s organisation structure would work is a bigger question. The futility of international roadmaps is not a new story. It is hard to tell if these $400 million will be useful or will just add to Pakistan’s debt burden.