Tax-to-GDP Ratio Hits the Lowest Level in History

The tax-to-gross domestic product (GDP) ratio is now at the lowest level of 8.5 percent, revealed the Pakistan Economic Survey (2021-22) issued on Wednesday. According to the survey, the tax-to-GDP ratio is the real index for measuring tax compliance, capacity, and efficiency in the tax system. A higher tax-to-GDP ratio allows the government to rely more on domestic resources rather than external sources of revenue while also ensuring the availability of sufficient funds to meet a country’s development and social expenditures. Unfortunately, the tax-to-GDP ratio in Pakistan has remained low over the years. There are a variety of factors responsible for the low tax-to-GDP ratio, including a narrow tax base, particularly agriculture contributing minimally to the tax collection, tax evasion, poor documentation, the informal economy, exemptions/concessions, smuggling, weak audit, and enforcement, a lack of automation, and lengthy litigation. As a result of insufficient tax revenues, the country has faced numerous challenges over the years in providing much-needed fiscal space for priority areas such as infrastructure, education, health, and targeted social assistance. Overall tax revenues (federal & provincial) increased to 9.4 percent of GDP in FY2021 against 9.3 percent of GDP recorded in FY2020. In total, FBR, which collects a major part of tax revenues, was able to increase the tax to GDP ratio to 8.5 percent in FY2021 against 8.4 percent of GDP in FY2020, the survey added.