By Abdul Wajid Khan ISLAMABAD, April 14 (INP-WealthPK): The Asian Development Bank (ADB) says Pakistan has to introduce well-defined and comprehensive reforms in tax policy and administration to tap the huge potential for an increase in tax revenue to around 26% of the gross domestic product (GDP), reports WealthPK. According to the Asian Development Outlook Report of the bank for April 2022 on Mobilizing Taxes for Development, if implemented in a sustained manner, tax reforms can pave the way for realizing Pakistan’s tax potential and providing greater fiscal space to fund critical public services. Recent studies by the International Monetary Fund (IMF) and the World Bank (WB) on Pakistan’s tax gap estimate that tax revenue could potentially reach 22.3% to 26.0% of its GDP. The challenge is to tap this potential through well-defined and comprehensive reforms in tax policy and administration. A simplified and understandable tax system that makes it easy to file tax returns would encourage voluntary compliance and reduce tax evasion. Effective enforcement of tax laws can be achieved by improving governance, continued investment in information technology infrastructure, and more and better-trained staff. Modernizing tax administration by integrating internal database and information systems and improving training in data management can enhance efficiency, improve compliance risk management and audit capability, and reduce the cost of paying taxes. Gains from recent administrative and technological improvements for smoother digital filing can be increased by improving taxpayer education and facilitation services. Developing and strengthening technical capacity in data analysis can facilitate evidence-based policy making and support better compliance by identifying tax gaps and facilitating systematic monitoring and evaluation. These measures, complemented with broader efforts to improve the business climate and measures to address the trust deficit in the delivery of public services, can encourage informal businesses to enter the formal sector. Improving the ability of provincial governments to raise revenue is critical for the success of tax reforms. Expanding the provincial tax net, particularly in services like retail trade, boosting the capacity of provincial tax collection, improving the efficiency of collecting vehicle tax, and optimizing the urban property tax would substantially increase the generation of provincial revenue. Stronger institutional arrangements are needed to improve coordination of tax policies and administrative laws among the federal and provincial governments. Pakistan’s Medium Term Budget Strategy Financial Year (FY)2021-FY2024 outlines directions for tax reforms, focusing on broadening the tax base and widening the tax net, removing exemptions, simplifying procedures, and digitalizing tax administration. Pakistan has a low tax-to-GDP ratio compared to other emerging economies, averaging only 11% from FY2010 to FY2021. Low tax revenue contributes to high fiscal deficits and constrains fiscal space for infrastructure and social spending. Continued structural weaknesses of the tax system are reflected in a narrow tax base and poor taxpayer compliance due to the large informal economy, tax avoidance in the formal sector, and under-taxation in certain sectors. Pakistan’s tax regime is complex and unpredictable, marred by excessive exemptions and preferential treatment, multiple rate structures, frequent ad hoc changes in tax policy, and fragmented tax administration. Revenue from direct taxation is low compared with indirect taxes and remains concentrated among salaried workers and large industries. Indirect taxes accounted for two-thirds of the total tax revenue in FY2021. The extensive use of withholding and sales taxes collected by third-party agents has become a preferred mode of revenue collection. The provincial tax collection, compared to the share of federal tax revenue, remains miniscule, averaging 8.9% of total tax revenue over the last 5 years. However, the Federal Board of Revenue (FBR) says strong growth in tax collection driven by its fiscal consolidation measures is helping improve the country’s fiscal position. The FBR is preparing a strategic reform plan that delineates similar reform interventions with specific and measurable outcomes over the next 5 years. The FBR has introduced a number of innovative interventions both at policy and operational level with a view to maximizing revenue potential through digitization, transparency, and taxpayers’ facilitation. According to the latest official data released by the FBR, despite massive tax relief, the FBR registered 29.1% growth in revenue during July 2021-March, 2022. According to the provisional information, the FBR collected net revenue of Rs4,382 billion during July 2021 to March 2022 of FY22, which exceeded the target by Rs247 billion. This represents a growth of about 29.1% over the collection of Rs3,394 billion during the same period last year. Net collection for the month of March 2022 reached Rs575 billion, representing an increase of 20.5% over Rs477 billion collected in March, 2021. On the other hand, gross collections increased from Rs3,577 billion during July 2020 to March 2021 to Rs 4,611 billion in the current financial year July 2021 to March 2022, showing an increase of 28.9%. Likewise, the amount of refunds disbursed during March 2022 was Rs31.9 billion while in March 2021 the refunds disbursed were Rs26.3 billion, registering an increase of 21.3%. Similarly, refunds worth Rs229 billion were disbursed during July 2021 to March 2022 compared to Rs183 billion paid last year, showing an increase of 25.0%.