Official sources told Business Recorder on Monday that the main reasons for low tax-GDP ratio are mismatch between sectoral shares in tax and GDP ratio; narrow tax base; poor compliance by taxpayers; too many exemptions; presence of large underground economy and informal sector; leakage and evasion due to administrative weaknesses and limited efficiency gains; too much centralisation and adverse taxpayer''s perception that the collected amount is not spent on basis of needs.
CBR Chairman Abdullah Yusuf informed the Board-in-Council that the Managing Director of IMF had stressed the need for improving tax-GDP ratio. The issue came to limelight during a presentation in Council meeting to enhance tax-GDP ratio.
Sources said that there is need to understand about the composition of tax-GDP ratio in Pakistan before making any comparison with other countries. There are many ratios like Revenue to GDP; tax inclusive of surcharge to GDP; tax inclusive of provincial taxes. The tax-GDP ratio in Pakistan recently declined due to re-basing of GDP by the Ministry of Finance. The CBR prepared a comparison of Tax-GDP ratio based on total revenue, tax revenues, federal taxes and CBR revenue which depicted a decline of 0.4 percent.
Sources said that basically the enhancement in tax-GDP is a policy issue and determination of the parameters of the composition of GDP and identification of gaps.
It was agreed that the tax models of Turkey and Korea should be studied for enhancing the tax-to-GDP ratio as these countries have achieved double-digit growth in their tax-to-GDP ratio.
The tax-to-GDP ratio has fallen to 9 percent during the year 2004-05 from 9.4 percent in the previous year, which was the lowest level recorded so far particularly in the sales tax and income tax.