This paper is divided into four sections with the purpose to review and present an analysis of the Tax-to-GDP ratio of Pakistan, compare its place to the Asian and international scenario and look at the recommendations suggested by the World Bank to work out for the coming budget.

Section !: Tax-to-GDP ratio (%) for Pakistan

Prof. Vazquez (2006) has prepared a report for the World Bank tilted "Pakistan: A Preliminary Assessment of the Federal Tax System". The report presents an insightful analysis of tax structure and revenue generation in Pakistan. The report mentions that Personal and Corporate Income Taxes and the General Sales Tax (GST) have narrow bases for revenue collection while on the other hand, tax evasion is higher. All these factors are leading to lower Tax to GDP ratio for the country. The data analysis of the report shows that the share of revenue components as percentage of GDP is declining from early 1990’s (especially taxes on international trade). It is pointed out that tax revenue as percentage of GDP during 1980’s and 1990’s remained between 12.3 per cent and 13.7 per cent respectively. We reproduce share of components here from the report to analyse tax-to-GDP ratio. The Tax/GDP ratio was about 9 per cent in 2004-05. However, it ranges 9.2 per cent to 9.6 per cent for the last five years. Direct tax as share of GDP ranges about 3 per cent, GST is 4 per cent while Excise remains below 2 per cent of GDP since 2000. (see table-1)

Graph-1 categorically presents analysis of the Tax-GDP ratio for Pakistan. We collect information from Economic Survey (2005-06) to present a trend in the tax-to-GDP ratio for Pakistan for the last decade of 1990s.

Section 2: Comparison with Asian countries

Pakistan’s Tax/GDP ratio is lower as compared to the Asian countries in the region. The report also performs an international comparison of the Asian Countries to analyse ratio of tax revenue to GDP. It is found that there is low level of tax effort for Pakistan as compared to other countries. For Pakistan, this ratio ranges from 10.16 per cent to 10.91 per cent during the period of 2000-03. Table-2 compares ratio of tax revenue to GDP for a group of Asian countries. (see table-2)

The report performs a Regression Analysis for selected countries using GDP per capita and other proxies for ability to collect taxes. The estimated standard Model is based upon sample of 105 developing and developed countries over time period 1990-99. The dependent variable is taxable capacity as measured by ratio of tax collection to GDP. We quote from the report that:

"It appears that, at least until quite recently, the Tax/GDP ratio for Pakistan was not very far away from the international norm".

However, the report states that extrapolation shows that Tax/GDP ratio of 9 per cent in 2004-05 is about 4-percentage point below than the expected international norm. The report further admits that the lack of availability of data imposes constraints for updated analysis. The report uses two approaches for the analysis of automatic growth in Fiscal revenue. Firstly, it calculates year-to-year buoyancy for overall and each separate revenue sources with respect to GDP. Secondly, it runs regression to estimate the average buoyancy of tax revenues over the period of two decades. The results show that buoyancy coefficient is larger than 1 up to 1990 and, later on, it is under 1 and even negative for 2000-03. Tax revenue buoyancy is calculated 0.93 while for non-tax revenue it is 1.04. The average buoyancy coefficient of income tax and GST are 1.27 and 1.70 respectively.

Section 3: International comparison of total tax receipts per cent of GDP

When we see Pakistan tax structure in international perspective, it is noted that income and payroll tax as per cent of total taxes is higher 40 per cent to 60 per cent mostly for developed countries while below for other countries like Pakistan. The income tax as per cent of total taxes for Pakistan is 28 per cent, which is about 4 percentages below the mean. The property tax as per cent of total taxes is 1.2 which should be higher and, contribute to total tax up to mean of 3.6 at least. Indirect taxes as per cent of total taxes are 44.7 per cent, which is not far from mean 47.5. Its share should also be improved up to about 50 per cent. The taxes on international trade as percentage of total taxes is 16 higher from mean 13.4, and for other taxes it is 10.1 far from mean 2.00 because of inclusion of surcharges and natural gas and petroleum.

From Revenue Statistics 1965-2005, OECD, Paris, 2006, we reveal that Sweden had the highest tax-to-GDP ratio of 50.7 per cent against 50.6 per cent in 2003 among OECD countries while Denmark at 49.6 per cent (48.3 per cent in 2003) and then Belgium at 45.6 per cent (45.4 per cent in 2003). Mexico had the lowest tax-to-GDP ratio at 18.5 per cent (19.0 per cent in 2003). Korea 24.6 per cent (25.3 per cent in 2003), United States at 25.4 per cent (25.6 per cent in 2003) are at the second and third rank with lower tax to-GDP ratio. Below we report the total tax receipts as per cent of GDP (2003) for international comparison from Revenue Statistics 1965-2005, OECD, Paris, 2006 as per availability of Data. (see table-3)

Section-4: Recommendations on which we can work out for budget

The WB Report suggests some short, medium and long-term policy recommendations, which can be very helpful to restructure our tax system. We discuss major policy recommendations as given below:

1: The report prescribes that long run comprehensive tax reforms should be based upon the following international criterion:

(a) (i) Simpler, (ii) Fairer, (iii) Efficient, and (iv) Revenue elastic tax system.

The report also mentions that the richest pay 40 per cent while the poorest contribute 60 per cent to the total taxes.

(b) The comprehensive reforms should be based upon:

* Increasing number of taxpayers

* Reducing existing exemptions and special treatment to sectors and people

* Extending GST into services sector

II: The report mentions some priority recommendations for short-term tax reforms. We quote some important ‘Text’ from the report as given below:

(a) Tax long-term capital gain (for assets held over one year with the same regime for withholding tax on dividends and short-term gains as regular income).

(b) Tax capital gains from real estate transactions as ordinary income, possibly using a reduced rate for gains from the sale of the household’s main residence.

(c) Tax unfunded non-contributory pension benefits as regular income.

(d) Expand the coverage of GST to the taxation of professional services.

(e) Raise excise taxes on tobacco products.

(f) Audit withholding agents (employers) for taxes on wage income.

III: The report also identifies tax administration reforms as discussed given below:

* It is stated that, "CBR rely upon ‘easier’ tax handles (GST as selected items at manufacturing and/or import stages; import duties, excise duties etc.), while for other taxes like income tax, it has ‘inducted’ others to do the collection".

* Provincial governments have been assigned to collect property tax, agricultural tax and professional tax, stamp duties, motor vehicles tax and other fees, which are difficult to administer and, as a result, the yield is very low. The provincial taxes as percentage of GDP remain at 0.5 per cent of GDP over the period 1999-2005.

* The next issue is to make changes in the legal prosecution and criminalisation of the tax offences. The report suggests that there must be severe punishments for tax offences.

Conclusion

The report is a good and positive effort in providing feedback of the structural reforms of taxation. The suggestion of fair distribution of tax burden on the subjects is obviously very important.

The tax administration reforms will open new grounds for solid tax system in Pakistan. Especially, it will be indeed very useful to handle and criminalise the tax offences. The discouragement of amnesties and ‘whitener’ schemes by the CBR can lead to higher morale of the taxpayers.

On the other side, taxing the capital gain from real estate transaction is also a very favourable and fruitful step in revenue generation. The suggestion to tax pension as regular income is an alarm especially for old-aged people who live only on their pension. It is peril that the implementation of this strategy will lead to increase poverty related issues in the country.

TABLE-1: TAX-TO-GDP COMPONENTS OF CBR REVENUE (%)

FY CBR taxes Direct taxes Sales taxes Customs Excise Total

1999-00 9.2 3.0 3.1 1.6 1.5 6.2

2000-01 9.4 3.0 3.7 1.6 1.2 6.4

2001-02 9.2 3.2 3.8 1.1 1.1 5.9

2002-03 9.6 3.1 4.0 1.4 0.9 6.4

2003-04 9.4 3.0 4.0 1.6 0.8 6.4

2004-05 9.0 2.8 3.7 1.8 0.8 6.2

Source CBR Year Book 2004-05

TABLE-2: RATIO OF TAX REVENUE TO GDP IN SELECTED ASIAN COUNTRIES, 1999-2003 (%)

Country 1999 2000 2001 2002 2003

Pakistan 13.7 10.18 10.16 10.43 10.91

Bangladesh - - 7.60 7.70 8.07

India 8.87 9.02 8.20 8.99 9.11

Indonesia 16.32 - 12.99 - -

Malaysia 14.16 14.28 18.83 18.82 17.62

Philippines 14.50 13.71 13.3 12.34 12.33

Sri Lanka 15.01 14.50 14.63 14.01 -

Vietnam 16.23 16.51 16.91 16.37 -

Source WB Report 2006

TABLE-3: INTERNATIONAL COMPARISON OF TOTAL TAX RECEIPTS (%) OF GDP

Country Total tax receipts

% of GDP

Australia 31.6

Belgium 45.4

Canada 33.8

Finland 44.8

France 43.4

Germany 35.5

Italy 25.3

New Zealand 34.9

Turkey 32.8

United Kingdom 35.6

United States 25.6