In any state, tax revenues are the most effective way to grow country’s domestic resource mobilization efforts by which the state increases its income to meet compulsory public expenditures. I would like to mention here that the developing states face lower tax collection as compared to target amount because of inefficiencies in tax collection procedure.
If we talk about Pakistan where many factors are identified that affect tax collection in the country. Because of some major issues such as political backwardness, poor economic development, undefined taxation strategies and unsuitable institutional capacity, the Government of Pakistan is still not successful to implement an efficient taxation procedure.
Furthermore, it supports the government in raising its capacity to direct the resources for development, lessening poverty and delivering public services. Consequently, the Government of Pakistan has failed to increase tax collection necessary to create enough fiscal space essential for infrastructure, education, healthcare and social assistance.
Under Government of Pakistan calculation until FY2015, the overall tax-to-GDP ratio varied between 9.1 and 11.0 percent of GDP, however, by FY2016 overall tax collection as percentage of GDP enhanced considerably and stood 12.6 percent of GDP.
Significant increase in total tax collection during FY2016 is mainly attributed to enhanced collection under Gas Development Surcharge (GDS), Gas Infrastructure Development Cess (GIDC) and Petroleum Levy. The collection under these heads scaled up on account of higher sales of oil and gas products. Of total tax revenue, FBR tax collection as percentage of GDP has also registered a extraordinary improvement and reached at 10.7 percent of GDP in FY2016. The improvement in FBR tax to GDP ratio has been on account of substantial reduction in tax concessions and exemptions, raised withholding taxes on non-filers of income tax returns and improvements in tax compliance and enforcement. The country’s tax structure has seen a great transition from indirect to direct tax system as a consequence of various tax reforms. During FY2006, indirect taxes constituted 68 percent of total FBR tax collection, while the direct taxes accounted for only 32 percent. The proportion of direct taxes in total FBR taxes has risen steadily to 39.1 percent in FY2016, whereas the share of indirect taxes has declined to 61.0 percent during FY2016.
During the FY2017, the share of direct taxes is predicted to boost further to 43 percent on account of various tax measures initiated by the government of Pakistan. The share of sales tax in total FBR tax collection has risen to 41.9 percent in FY2016 from 41.3 percent in FY2006. However, the share is probable to decline to 39.7 percent during the fiscal year 2017. On the other hand, the government of Pakistan also mentioned that the proportion of sales tax in total indirect tax has risen from 60.3 percent in FY2006 to 68.7 percent during FY2016. Sales tax as percentage of indirect tax is targeted to stand at 69.7 percent during FY2017. In contrast, customs duty as percentage of indirect tax has declined from 28.3 percent in FY2006 to 21.3 percent during FY2016, while its share is predicted to decline further to 20 percent during FY2017. Similarly, excise duty as percentage of indirect tax has declined to 9.9 percent during FY2016 from 11.3 percent registered in FY2006 because of the shrinking base over the years. During FY2017, its share in indirect tax is predicted to remain at 10.3 percent.
In last, it has been revealed that taxes whether they are direct or indirect are more affected by corruption, political unrest and high inflation rate in Pakistan. I think, corruption is main hurdle in boosting tax revenue for both direct taxes and indirect taxes. The Government of Pakistan should launch more sophisticated online records and computerize all records through massive e-government campaign in all ministries and departments. The Government of Pakistan should also focus on creating awareness among citizens that paying tax is their moral and social obligation and it can be strengthen by enhancing the transparent collection and utilization of tax collected by enhancing societal welfare.