Uzair Bin Farid

No state can function without a consistent stream of revenue, historical analysis by WealthPK has shown. For the past five years, the tax-to-GDP ratio of Pakistan has been 9.4%, 9.3%, 9.7%, 10.8%, and 10.4% respectively. Pakistan falls far short in terms of the level of tax collection needed by a developing country. According to the IMF, the tax-to-GDP ratio of at least 12% is needed for a country to grow economically.

Pakistan falls short of the minimum tax-to-GDP ratio by about 2 percentage points. This shows that on average Pakistan has less money to spend on its infrastructure development, healthcare, education, and related public services. Organization for Economic Cooperation and Development (OECD) countries have an average tax-to-GDP ratio of 33.5% for the year 2020. This shows that advanced economies of the world collect more taxes despite higher growth rates and specialization.

To reduce its dependence on borrowed financing, Pakistan will need to increase its tax base drastically. It is only by increasing the tax base and reducing dependence on external financing sources that Pakistan can incrementally pay off its mounting debts. Otherwise, if Pakistan continues to rely on traditional sources of external finances, its debt burden will continue to grow. The continuation of debt burden in future will not allow Pakistan to spend the already limited tax revenues on essential public services. More of the country’s tax revenues will go into debt-financing and less money will be left to be spent on productivity growth.

The broadening of tax base should be in line with the theory of progressive taxation. Those entities which earn more should be levied with a large tax burden. In the same vein, income taxes should be levied in such a way that more incomes should entail more of taxation. There are many entities which try to use the loopholes in the taxation regime of Pakistan to dodge taxes. They hide behind the façade of corporate social responsibility and philanthropy. They dodge the government by asserting that they are spending in public interest on their own. In this way, they avoid paying their taxes.

This way of forgiving taxes does not produce optimum social output. It is only the government which has enough broad base to make it accountable to most people. Therefore, it is only the responsibility of the government to collect and spend the money collected through taxes. China’s idea of “common prosperity’’ can be a guiding principle for the Government of Pakistan in this regard. Prosperity if not evenly shared is no prosperity at all. For prosperity to be evenly shared, large conglomerates, media houses, industries and businesses should be progressively taxed. This will increase the revenue and allow the government to spend more on health, education, infrastructure and, research and development.

Credit : Independent News Pakistan-WealthPk