Pakistan faces funds crunch as Govt fails to roll out tax reforms: Report
New Delhi, June 5
Pakistan's failure to carry out tax reforms has left its tax base narrowing over the years, resulting in shrinking revenues for the government to implement welfare schemes for the poor. As the country prepares for a new budget for FY27, there is little hope that things will improve, going by the past track record, according to local media reports.
"Every budget over the past 10 years (and more) is pretty much the same with minor differences usually in the gimmickry being advanced in the name of a 'revenue plan'. And it will be no different this time round when the budget for FY27 is announced," according to an article in the Karachi-headquartered Dawn newspaper.
A little more than a decade and a half ago, Pakistan finally abandoned its last attempt to try and get serious tax reform through.
"Since then, successive governments have been rolling out various gimmicks, from amnesty schemes to 'point of sale machines' to do something that cannot be done with gimmicks. They are trying to document the growing services sector of the economy with these gimmicks, which is like trying to measure the ocean with a teacup," the report laments.
It points out that since the 1980s, the single fastest-growing sector of the economy has been services. It was slightly less than half of Pakistan's GDP back in those days. Today, it is touching 60 per cent while the shares of industry and agriculture have shrunk. But today, services contributes less than 40 per cent of total revenues while the share of manufacturing can be as high as 55 per cent.
The crux of the problem is that the fastest-growing sector in Pakistan's economy has made a diminutive contribution to its revenue effort. Successive governments have failed to undertake the kind of tax reforms necessary to keep abreast of the changes sweeping the economy where the services sector is driving growth. For now, the bulk of the revenues contributed by this sector comes from banking and telecom which are being overtaxed, the article points out.
In some shape or form, VAT was always on the agenda as a crucial structural reform measure of every IMF programme that Pakistan signed between 1988 and 2008, and there were many. In 2008, it was supposed to be updated and modernised but the government of the time failed to ensure passage of the legislation so spectacularly that the IMF simply dropped it from all future reform agendas. Since then, it has been abandoned, the article states.
The failure to widen the tax net has resulted in Pakistan's tax-to-GDP ratio stagnating in single digits and intensified political struggles around the shrinking resource envelope of the state. This has forced the government to lean harder on fuel taxes and print more money to help make ends meet at the centre.
The growing resort to gimmickry was the state thrashing around within the shrinking confines of its resource envelope when it could not generate resources in quantities sufficient to keep pace with its expenditure growth. And they squeezed out a decade for themselves like this, the article further laments.
— IANS
Reader Comments
The article highlights a major problem - services sector contributes 60% of GDP but only 40% of revenue. That's a massive gap. In India, our service tax/GST has helped bring more into the net. Pakistan needs political will to tax the rich and powerful, but that's easier said than done when the system is captured by elites.
The IMF drops VAT reform from future agenda? That's telling. If the international community has given up on structural reform, it's a dangerous sign. Pakistan is caught in a debt trap with no way out unless they tax their growing service sector properly. Politicians love gimmicks but hate real reform.
"Measuring the ocean with a teacup" - brilliant analogy. Pakistan's tax-to-GDP ratio stuck in single digits while India's is at around 12-13% and rising. But we shouldn't be smug. Our own tax evasion by the wealthy is still a huge problem. Every developing country faces this challenge. 😔
Interesting read but let's also look at our own backyard. India's direct tax collection as percentage of GDP is still quite low. We lecture Pakistan but many Indian businesses also under-report income, professionals avoid taxes. The difference is we have managed to somewhat widen the net through technology like Aadhaar and GST. Pakistan needs that digital push but political will is missing.
Pakistan's problem is that their rich and powerful don't pay taxes. Same in India actually! But at least our system is more transparent now. The real issue is political - no
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