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REASON OF LOW TAX TO GDP RATIO IN PAKISTAN GROUP NO 2 FATIMA-TU-ZAHRA SARAH MASOOD USMAN TAHIR SHAH SIDDIQUE HASAN RIZVI SHOAIB SAMDANI What does Tax to GDP mean??? The ratio of tax collection against the national gross domestic product (GDP). Some states increase the tax-to-GDP ratio by a certain percentage in order to cover deficiencies in the state budget revenue. In states where the tax revenue has gone up significantly, the percentage of tax revenue that is applied towards state revenue and foreign debt is sometimes higher. Tax to GDP ratio Pakistan’s overall tax-to-GDP ratio has remained stagnant at around approximately 10-11% and, infact has shown a decline in recent years. Today Pakistan has a lower tax-to-GDP ratio than other Asian countries like • Sri Lanka (15.3 percent) • India (17.7 percent) • Indonesia(12percent) • Malaysia(15.5 percent) • Thailand (17 percent) • Philippines (14.4 percent) • South Korea 16 percent Economic Survey of Pakistan Reason to lower tax rate to GDP • The loss of growth momentum of the economy, especially of large-scale manufacturing and imports, which constitute the primary tax bases in the economy. • To revenue losses resulting from the ongoing tax reforms in the country during the decade of the 90’s, especially the process of trade liberalization which has involved major reductions in statutory rates of import tariffs. Reason to lower tax rate to GDP • There has been a systemic decline in the quality of tax administration and in the face of growing evasion and corruption; it is argued that the incidence of taxes has effectively declined. • The implication of the tariff reforms is a major decline in the tax-to-GDP ratio exemption of agriculture income • Tax collectors are corrupt According to FBR • Floods and power shortage have vastly affected the resource mobilization efforts. • Growth in gross domestic product (GDP) is mainly due to food inflation whereas food items are exempted from taxes; therefore, the inflationary impact could not be captured. According to FBR REASONS There has been 24% increase in agriculture sector the size of GDP has increased accordingly but this sector is exempted from taxes, so increase in agriculture sector could not be materialized in tax collection Recommendation A low per capita income reflects unequal distribution of income and high unemployment. Indirect taxes have an adverse effect in a country where there is unequal distribution of income, so in case of Pakistan direct tax base should be increased rather than indirect as there is more income inequality in Pakistan. Recommendation Tax collection requires consistency in implementation and consistency in implementation comes with political stability Taxes and law and order situation is indirectly related. A country with stable law and order situation would mean greater investment being brought in, more jobs being created, resulting in greater purchasing power on the part of the consumers who effectively have to pay tax Recommendation Awareness to the people on the benefits of paying taxes which increase the tax morale of the people should be brought as long run policy implication. Recommendation Government must ensure that the taxation system is fair by doing away with all kinds of exemptions allowed to certain powerful lobbies, pressure groups and associations and help reduce the burden on common tax payers. Recommendation In Pakistan the Universal Self Assessment scheme has not shown the desired results because of lack of tax culture and effective and comprehensive audit to create limitation for the tax payers, so it must be backed by strong audit. Recommendation Improvement in direct tax administration and collection be made corresponding with countries having high tax to GDP ratio. Conclusion Pakistan’s low tax-to-GDP ratio is because of some success and some failure in tax reform. It appears that the country has been able to only partially compensate for the loss of revenue resulting from the trade liberalization process initiated almost two decades ago. In particular, the country lost an historic opportunity for achieving a significant jump in tax revenue in a period of fast economic growth during the last decade. While arguing that a breakthrough in tax mobilization until and unless we achieve a high GDP growth rate is ambitious the paper concludes that continued effort at resource mobilization can yield some success even in a period of economic slowdown. Thank you!!!
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