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Pakistan Tax-GDP ratio: Some unfrequented aspects

Perhaps one of the most mentioned, discussed, and almost attaining the degree of truism is dictum of Pakistan’s low Tax-GDP ratio. It is stated to be abysmally low, stagnant and is compared, somewhat unfairly, with countries having no comparison in any dimension of national power, such as Gabon, with Pakistan.

The purpose of this article is to shed light on such aspects of our Tax-GDP ratio, which are either unknown or for some reason not brought into discussion, thereby unwittingly contributing to a half-educated discussion on our Tax-GDP ratio, leading to despair. Its purpose is by no means to defend the low ratio or to defend the tax collectors. Let’s begin by having a look as to what was our Tax-GDP ratio, historically.

The above table shows two things, first that while the GDP was growing at an average yearly rate of 11.4%, the FBR Tax Collections were growing by an average of 9.4% during these eight years. Growth in taxes was lagging behind the growth in GDP by 2%. Secondly the average Tax-GDP ratio was 11.5%.

But then something dramatic, and in hindsight of very distortionary consequences happened. In 2003, it dawned on an economic wizard, who happened to be in a position of influence and in so deciding that the Pakistan’s GDP was under-reported and he/they chose to rebase the same.

Source:

i) Pakistan Economic Survey 2002-03(Page No 13 Statistical Appendix)

ii) Pakistan Economic Survey 2006-07(Page No 13 Statistical Appendix)

iii) FBR Yearbook 2011-12 (Statistical tables)

Suddenly we learnt that the Tax-GDP ratio in 1999-2003 was not on an average 11.2% rather it was 9.2%! Why was it done is another story, an area of inquiry with promising answers waiting just to be stated. Staying with the point being made here, the fact is that through this one ‘feat’ the entire fiscal analysis of our Tax effort has been subjected to eternal distortion and misleading conclusions.

Source:

i) Pakistan Economic Survey 2011-12(Page No 11 Statistical Appendix)

ii) FBR Yearbook 2011-12(Statistical Tables)

It is thus clear that without the re-basing of 2003, we have since 1995 been on an average above 11% in our Tax-GDP ratio, which is not as bad as 9% being generally reported and quoted. It is for the highest level economic managers of our economy to see if they would like to continue with the above distortion or would like to correct it. It is rumoured that another exercise to again re-base the GDP is in hand in some quarters. I will thus be not surprised to learn in near future that our Tax-GDP ratio is actually not 9%, rather it is even less. I hope the rumour is only a rumour and is wrong.

The second aspect of discussion on Tax-GDP ratio which is hardly brought out is to examine as to whether growth in the Tax Collection has been lagging behind the growth in GDP.

As is evident from the above table average annual growth in FBR taxes since 2003 has been keeping pace with average annual growth in the GDP, which are 16.7 % and 16.6% respectively. Tax growth as such has not lagged behind and has been commensurate with growth in the GDP. Could FBR do better than what it has been able to do during last ten years? The answer that every reader would like to read is, yes it could do better. This desired answer is not generated through a dispassionate analysis of our tax policy or that of the tax administration, rather by common observation of wide spread undesirable practices that the functionaries of the Board are observed to be indulging in

(The writer is Deputy Chairman FBR. He has contributed this article in his personal capacity. The views expressed here do not represent in any way official position of FBR or GoP)

Shahid Rahim Sheikh, "Pakistan Tax-GDP ratio: Some unfrequented aspects," Business recorder. 2013-04-28.
Keywords: Tax law-Pakistan , Economic Survey-Pakistan , Income Tax , Tax collections , Economic survey , Taxes , Economy , Pakistan , FBR , GDP