Pakistan’s tax to GDP ratio drops below average levels: WB

ISLAMABAD: The World Bank has pointed out that Pakistan’s tax to GDP ratio dropped to below average during the last two fiscal years. Furthermore, the overdependence on withholding taxes is also bad because it converted into another kind of Sales Tax.

This emerged during a webinar organized by the Pakistan Development Policy Series 2021 in collaboration with the World Bank on Monday. World Bank’s Senior Economist Sebastian James, WB’s Country Director in Pakistan Najy Benhassine and SAPM on Revenues Dr. Waqar Masood, besides others participated

At this point, Special Assistant to Prime Minister on Revenues Dr. Waqar Masood said that the government would abolish 40 withholding taxes, bringing them down from 65 to 25 taxes, starting from upcoming budget for 2021-22. “There is a need to broaden the narrow tax base instead of burdening the existing ones. It’s our serious concern that the average tax collection in Pakistan has dropped in the last fiscal years compared to similar economies,” World Bank’s Senior Economist Sebastian James, who also worked on Pakistan’s taxation policy issues, said.

The WB’s Country Director in Pakistan, Najy Benhassine, said the tax base was narrow in Pakistan and higher tax expenditures and tax concessions created distortions. He said that this dialogue was aimed at finding out solutions.

Sebastian James said that there was a need to ponder upon what Pakistan was collecting and second how much it could collect. He said that there was a higher taxation rate on the formal economy and under taxation for the informal economy. It is a fact that Pakistan was collecting below than average and its collection dropped further in the last two fiscal years. He said it was important to understand how taxes were collected and how they were spent. He said the withholding taxes created distortions besides creating cash flow problems for the formal sector because the refunds were not paid in a timely manner. He suggested that the transition for moving away from withholding taxes should be done carefully with the placement of an improved information management system. Some withholding taxes are not meant for collection of money but they provided information, so transition becomes tougher and it should be done carefully.

The WB senior economist said that the World Bank had always asked for a broadening of the narrowed tax base. He said that the WB conducted a study on agriculture income tax and found that certain loopholes were misused. There is GST on goods and services, the GST on goods falls under the domain of the FBR and that on services is collected by the provinces. The volume of GST collection from goods is much higher as compared to GST on services.

The Special Assistant to PM on Revenues, Dr Waqar Masood, said that the FBR possessed a reservoir of database that would be utilized to broaden the tax base. He said that he was opposed to the concept of the filers and non filers. He said that the numbers of withholding taxes would be reduced from 65 to 25 over a two year period, starting from the next budget for 2021-22. He said that the government planned to phase out withholding taxes in a gradual manner. He said that in some instances, the cases of amnesty schemes were opened up so the government would address genuine problems faced by taxpayers. The continuity will not be broken, he added.

Aqeela Mumtaz, Head of Corporate, Accounting, and Tax at Jazz, said that tax compliance was complex as tax rates were on the higher side and cited the example that the advance tax stood in the range of 5 to 12.5 percent. She said that people wanted to get themselves registered with tax authorities but there was discrimination in the case of certain sectors and certain income bracket.

On this occasion, Dr. Michael Best, Assistant Professor at Columbia University, renowned economist Dr. Ijaz Nabi and Business Recorder’s research head Ali Khizar also spoke on the occasion.