Taxation flaws

The latest webinar in the Pakistan Development Policy series 2021 organized with the World Bank brought forward senior economists, including those from the World Bank, as well as others from Pakistan to discuss tax collection and its impact in Pakistan. The promise that tax collection would be improved as a means to generate the revenue the country badly needs has, of course, been a consistent pillar of the PTI government. But the World Bank has noted that over the last two years, the collection of taxes as compared to GDP had fallen below average. The other important finding was the over-dependence on withholding tax, which was converted into a sales tax, thereby burdening consumers. The Special Assistant to the Prime Minister on Revenue promised that over the next two years, the number of withholding taxes would be brought down from 65 to 25. This is a gigantic task and we need to see if it would be possible for the government's economic team to succeed.

The other issue of concern was the collection of taxes and the narrow tax base, which had not been widened over the years. It was noted, for example, that there are many loopholes in the collection of agricultural tax. The lack of higher taxation in agriculture as compared to, say industries, and also the services sector has been a cause of concern for many economists over the years, both within and outside Pakistan. Though agriculture brings in huge amounts of revenue for those who are engaged in it, the taxation levels are comparatively low. World Bank experts have recommended that the flaws in agricultural tax collection be plugged and means found to improve tax collection. While sales tax is in place on both goods and services, it has been noted that the FBR which collects sales tax on goods, does a far better job than the provinces, which collect sales tax on services. This is not really a surprising finding, given that the provincial machinery is often inefficient and vulnerable to manipulation or wrongdoing in many ways.

Beyond this issue, we also need to look at how much burden we are placing on consumers with high sales taxes while other sectors go with comparatively low taxation levels, and are therefore spared the brunt that ordinary people face as taxes are passed on to them from wealthier sectors in society. This concern was expressed at the webinar and is something the Pakistan government's policymakers need to look in at depth. There is also a need to look at taxation as a whole – beginning from where it is collected, to the manner in which it is brought in. Improving tax collection could of course, benefit the Pakistan economy enormously. Part of the reason for the fall in tax collection is attributable to the Covid-19 crisis that began in March last year. But there are also other factors and those pointed out at the webinar must not be ignored as a new policy is devised.