Nov 28 - Dec 4, 2011

The finance minister, Abdul Hafeez Shiekh, has confessed that despite all the feelings of good impressions of better tax collection by the FBR given from time to time, the main objective of the 7th National Finance Commission (NFC) award to raise the tax to GDP ratio has not been achieved.

In his biannual report on the monitoring of the implementation of NFC award for the period of July-December 2010 submitted to the chairman senate and the speaker national assembly early this month, the finance minister has admitted, "the tax collection, both at the federal and the provincial levels, is not encouraging and if this state of affairs continues, it may not be possible to achieve 15 per cent tax-to-GDP ratio by the terminal year, 2014-15.

The tax to the GDP ratio remains about 10 percent, which is one of the lowest in the world as it was before the award. Under Article 9 of the award , the federal and provincial governments were required to gradually increase this ratio by plugging leakages, streamlining taxation system and effectively taxing income from agriculture and real estate sectors by the provinces. This has not happened.

The minister also conceded that the recommended quarterly review meetings of the NFC to implement its decision and monitor the progress also could not be held.

He said that the 8th NFC was constituted in July 2010 pending notification of its non-statutory members. "These members have not been notified as yet for want of certain clarifications from the provinces. Due to incomplete composition of the NFC, the required quarterly meetings could not be convened," the minister made the honest statement, which reflects sadly on the governance level of the incumbent government.

The only biannual repot based on the first half of the financial year 2010-11 reflected that the revenue collection during the period remained short of the budgeted target resulting in higher fiscal deficit as the federating units expanded their expenditure profile in anticipation of higher revenues.

Against the revenue target of Rs1667 billion for the year, the FBR could collect Rs621 billion only during the first six months.

Pakistan has one of the lowest tax to GDP ratios in the world and the government wants to increase it gradually to about 15 percent - average in the region - by 2014-15.

However, this is easier said than done as the authorities are not willing to undertake the necessary reforms either by widening the tax net such as milking the holy cows like income from agriculture and curbing tax evasion and the rampant corruption in the tax collecting machinery. It was the government's dilly-dallying over the reforms that has forced it to prematurely quit the IMF standby arrangement (SBA). The tax to GDP ratio is rising all over the world and it has reached up to 60 percent in some civilized countries of the western world.

Pakistan is the only country in the world where this ratio is falling instead of rising. Tax revenue, which stood at 13.8 and 13.4 percent of the GDP in the 1980's and 1990's respectively, has dropped to less than 10 percent during the last few years.

In order to increase tax revenues, either direct or indirect, receipts have to be increased. Any increase in the indirect taxes shifts the burden to the consumer or the final customer and result in price increase. Indirect taxes are essentially regressive as the burden is shifted equally to all regardless of income. Another problem with indirect taxes is the elasticity of demand. Since the demand for essential goods is inelastic and for luxuries elastic, increase in taxes will hurt more the poor and low income group which is against the principal of economic justice.

Thus, any increase in taxes has to be in the direct taxes. However, the problem with direct taxes is that they are easier to evade and require a just, strong-willed and honest government and an honest and efficient tax collection machinery and above all a tax culture in which we are highly deficient.