World Bank Unhappy With Pakistan’s Sales Tax System

World Bank has expressed serious concern that the sales tax system in Pakistan allows for concessionary rates below the standard 18 percent for select products and sectors. According to the WB latest report- World Bank Pakistan Development Update (PDU), the sales tax system also allows certain domestic supplies to be zero-rated, which further narrows the tax base. The GST base definition is narrow, with multiple exemptions permitted. The sales tax system allows for concessionary rates below the standard 18 percent for select products and sectors. It also allows certain domestic supplies to be zero-rated, which further narrows the tax base. Pakistan’s tax system is complex, has a narrow tax base, and high tax rates. The tax system has numerous special provisions, concessional rates, exemptions, and, to some extent, unorthodox approaches to tax policy. Many of these policy choices were implemented to balance the provision of fiscal support to certain groups or industries with the need to maintain a minimum level of revenue collection. This has resulted in a complex system with many vested interests and has come at the cost of losing economic efficiency and revenue, it said. In FY23, Pakistan’s aggregate revenue stood at 11.6 percent of GDP, with 92 percent of revenues collected at the federal level and remaining at the provincial level. The tax-to-GDP ratio reached just 10.2 percent in FY23. Although Pakistan’s tax revenue performance improved between FY11–18, rising from a low of 8.6 percent of GDP in FY11 to a high of 11.4 percent in FY18, it still falls short of 15 percent of GDP, which is considered the minimum required tax revenue by developing countries. Total revenue fell to 11.6 percent of GDP in FY23 from 12.1 percent of GDP in FY22 with both tax and non-tax revenue declining by 0.2 percentage points. Within tax revenue, revenue from indirect taxes—including sales tax on goods and services, customs duties, and excise duties—fell to 5.2 percent of GDP in FY23 from 6.3 percent of GDP in FY22. This was largely due to a decline in imports, which lowered revenue from sales tax and customs duties on imported goods. Conversely, revenue from direct taxes and the PDL rose during the year. The hike in the PDL from zero to PKR 50 per liter increased PDL revenues to PKR 580 billion, almost 4.5 times higher than in FY22.28 In addition, revenue from direct taxes grew in part due to changes in tax policy measures, including revisions in income tax rates, super tax on banks and non-bank firms, and higher property taxes, WB added.