Ayesha Saba

Pakistan needs to restore fiscal sustainability by increasing tax-to-GDP ratio through tax reforms, said a renowned economist. Dr Abdul Rashid, Director General of the International Institute of Islamic Economics at the International Islamic University Islamabad (IIUI), said while talking to WealthPK that Pakistan is facing a significant fiscal deficit, and increasing the tax revenue has proven to be a significant challenge for successive governments. He noted that the country’s tax-to-GDP ratio is one of the lowest in the world, indicating a significant tax gap.

“If we talk about the general public, they are already bearing a heavy burden of taxes, but on aggregate, Pakistan’s tax-to-GDP ratio hovered around 10% during the last 20 years,” he mentioned. Dr Abdul Rashid said this stagnation of the tax-to-GDP ratio has widely been attributed to inter-connected factors like weak enforcement of taxes, and lack of government steps to build confidence among taxpayers that the money would be spent on their welfare and development.

“The government needs to ensure the taxpayers that tax revenue will be used to eradicate poverty, provide health and education facilities, build basic infrastructure and increase the living standard of people,” he emphasised. He noted that in Pakistan, there is a dire need to win the trust of people, including businessmen, small traders, and all other stakeholders, to improve tax-to-GDP ratio.

“The government should offer incentives to businesses to increase production and exports by improving taxation policies. It needs to reduce the tax burden on exporters by offering tax breaks, rebates, and exemptions, which will make Pakistani exports more competitive in the international market. This will not only boost exports but also generate more revenue for the country, leading to a better balance of payments situation,” he suggested.

“To improve the revenue base, the government must implement effective tax rates. The government should introduce soft changes in the Federal Board of Revenue (FBR) laws and make the process of filing tax returns easy and simple,” he added. Additionally, the economist pointed out that the political turmoil, which is currently engulfing the country, has a negative impact on the country’s efforts to stabilise its economy.

Dr Abdul Rashid said the federal budget targets for 2022-23 may not be achieved if political uncertainty persists. “When there is growth in the economy, it is a natural fact that tax collection increases as a result of an increase in production and economic activities in a variety of sectors such as manufacturing, agriculture, industry, services, and so on,” he said. Dr Abdul Rashid noted that Pakistan was again facing multiple challenges, including inflation, the balance of payments problem, currency devaluation and energy crisis, and reserves are also decreasing rapidly. “If the government succeeds in ensuring political stability, it will boost business and economic activities, enabling the FBR to achieve its tax targets for the ongoing financial year,” he added.

Credit: Independent News Pakistan-WealthPk