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Tax-to-GDP ratio in statistics

Tax-to-GDP ratio in statistics

Across the globe, fiscal deficits reduced in 2020 to 4.7 percent of GDP on average in 2022 from 9.6 percent. Because of increasing interest costs and an anticipated rise in public spending mainly due to higher spending on wages and pensions to compensate for past inflation, the overall fiscal deficits are expected to rise slightly up to 5.0 percent of GDP on average.

In 2023 fiscal tightening as economies encounter expenditure pressure is expected to slow down global economic activity. Furthermore, ongoing geopolitical tensions may further necessitate substantial increases in defence spending and budgetary support to mitigate the negative effects of international trade disruptions.

The Government of Pakistan is committed to reducing the fiscal deficit to attain macroeconomic stability and fiscal sustainability despite significant issues. On one hand, the challenge is to support vulnerable segments of society and on the other hand, there is the daunting task of meeting expenditures on rising interest payments. The government for this purpose is strictly following prudent expenditure management and an effective domestic resource mobilisation strategy. These attempts assisted in containing the fiscal deficit to 3.6 percent of GDP during the first nine months of the fiscal year against 3.9 percent of GDP registered in the corresponding period of the previous year. Similarly, the primary balance recorded a surplus of Rs 503.8 billion (0.6 percent of GDP) during July-March FY2023 against a deficit of Rs 447.2 billion (-0.7 percent of GDP) last year owing to a slowdown in the growth of non-mark-up expenditures. During FY2022 fiscal performance demonstrates that fiscal consolidation initiatives are on track despite enormous issues caused by global and domestic economic situations.

According to the statistics, Pakistan’s tax-to-GDP ratio averaged approximately 4.6 percent from December 2000 to December 2022, which is way lower than the Organisation for Economic Co-operation and Development (OECD) average. In December 2022, sources recorded that Pakistan’s tax-to-GDP ratio was recorded to be 5.6 percent, which is not enough to support the expansionary policies of the Government of Pakistan to spur growth. Pakistan’s tax burden needs to be shared through all the sectors of the economy so that no one sector is overburdened. It is only through a concerted attempt to share the burden of taxation that the government can hope to attain more 3 to 4 percent increase in the tax-to-GDP ratio in the short run and 6 percent in the long run.

However, experts mentioned that if Pakistan wants to attain growth of 7 to 8 percent, and wishes to sustain them till 2035 to attain the saturation of capital, it will have to raise its tax-to-GDP ratio up to 18 percent. It is also investigated that Pakistan needs to bring down the inflation level to single digit as high prices eat away the savings capacity of the people. This prevents them from investing in high-value, high-risk and high-return ventures and consequently, the growth slows down.

To attain GDP growth a high level of exports-to-GDP ratio is also needed. Investment is also financed using the inflow of foreign savings. The average inflow of foreign savings over the past four years, in Pakistan stood at around 1.3 percent of GDP. To sustain the 8 percent growth level, however, Pakistan needs to increase the level of incoming foreign savings to 2.7 percent of GDP until the year 2035.

Domestic and individual savings are not enough to support mega projects that have national-level significance. These projects are supported using big money from multilateral sources like the World Bank, Asian Development Bank, or the China International Capital Corporation.

An all-encompassing, concerted attempt through the government and the private sectors of Pakistan will be required to bring the necessary reforms in the structure of incentives and returns and to expand the net of taxation. It is only through mobilisation of all the resources and policies that the government can hope to achieve high levels of growth. FBR in FY2022, was not only able to surpass the Rs 6.0 trillion mark for the first time in its history, but it also exceeded its upward revised revenue target of Rs 6100 billion by Rs 48.5 billion. Various initiatives to enhance tax collection assisted it to attain a healthy growth of 29.6 percent in FY 2022 against 18.7 percent rise in the preceding year. The net tax collection in FY2022 stood at Rs 6148.5 billion as against to Rs 4,745.0 billion in FY2021. The FBR tax-to-GDP ratio despite significant growth in absolute terms, hovered between 8.4 to 9.8 percent in the last seven years.

Pakistan over the years has been confronting various problems in its tax structure like a narrow tax base, lack of enforcement, poor documentation, exemptions/concessions, fragmentations across provinces for different tax rates, complexity of tax code, widespread tax evasion and avoidance, etc. As a result, Pakistan’s revenue-to-GDP ratio is at the lowest level. The customs duties in FY2022 recorded the highest growth at 35 percent, followed by direct taxes at 32 percent, sales tax at 27.4 percent, and Federal Excise Duty (FED) at 15.7 percent. The share-wise analysis investigated that direct taxes contributed 37.2 percent in total FBR tax collection, while indirect tax contribution remained at 62.8 percent during FY2022. Within total FBR collection, sales tax remained the top revenue-generating source with a 41.2 percent share, customs duty 16.4 percent, and FED 5.2 percent, respectively. The fiscal consolidation efforts are on track and reaping the benefits in terms of better fiscal accounts, despite significant challenges because of the global and domestic economic environment. It is therefore expected that this fiscal year 2023 would observe a considerable decline in fiscal deficit as compared to last year.

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