Amir Khan

Pakistan should target a tax-to-GDP ratio of 14% to address the significant fiscal challenges. Talking to WealthPK, Mumtaz Hussain Shah, an additional finance secretary at the Finance Division, said that debt servicing was expected to consume approximately 8% of the GDP in FY24, which was the federal government's largest expenditure. He added that to address this deficit and promote socioeconomic well-being, increasing the tax-to-GDP ratio was essential for Pakistan's financial stability. During the last five years, Pakistan's fiscal revenue, including contributions from the federal and provincial levels, has averaged 12.1% of GDP. The federal share is 10.6%, while provinces contribute only 1%. This heavy dependence on federal revenue warrants a revaluation.

In contrast, India maintains an overall tax-to-GDP ratio of approximately 18%, with states and cities contributing around one-third (6% of GDP). The federal tax collection in India is not significantly higher than in Pakistan. Pakistan must increase revenue contributions from provinces and cities for sustainable growth. Most of the easily collectable taxes, such as land and municipal taxes, General Sales Tax on services, and agricultural income tax, fall outside the federal domain. Talking to WealthPK, Aamir Nazir Gondal, an additional finance secretary at the Finance Division, stated that provinces had little incentive to impose new taxes as they were the main beneficiaries of growth in Federal Board of Revenue taxes. "If the FBR increases its taxes by 30% next year, 57.5% of the additional revenue would go directly to the provinces, allowing them to increase their expenditures by 30%," he pointed out.

"The 57.5% of tax revenue accrued from holders of domestic debt and other interest-linked savings instruments is passed on to the provinces, enabling them to spend more freely when interest rates are high," he highlighted. Listed banks contributed Rs947 billion (Rs580 billion in income tax and Rs367 billion in withholding tax on profit paid on deposits) in FBR taxes in 2023, about 10% of FBR revenues. Additionally, non-banking fixed-income instruments are taxed. A significant reason for a 30% growth in FBR revenues in 1HFY24 was the higher tax on interest income, including banking income. Aamir concluded with remarks that provincial governments must be incentivized to raise additional revenues for the spending they wish to undertake.

Credit: INP-WealthPk