KARACHI: The State Bank of Pakistan (SBP) has said that there is urgent need to clampdown on corruption and leakages in the tax collection machinery for increasing the tax to GDP ratio.
“There is an urgent need to eliminate tax exemptions; clampdown on corruption and leakages in the tax collection machinery; expand the tax base to include all productive sectors of the economy; and enhance the independence and professional capacity of provincial tax authorities,” the SBP said in its third quarterly review of the economy for fiscal year 2013/2014.
It said that the tax base was still narrow and revenue authorities for meeting their targets only relying upon increasing the tax rates instead broadening the tax base.
“Beyond broadening the tax base, steps to plug leakages in collection and push towards the documentation of all financial transactions, are still to be taken,” the SBP said.
The government has, however, committed to reduce tax exemptions worth Rs500 billion over the next three years. Although the government has contained expenditures growth (through lower subsidies and PSDP spending) and seems committed to austerity, meaningful fiscal consolidation cannot be achieved without increasing the tax-to-GDP ratio, which remains abysmally low (currently the ratio of overall federal and provincial taxes to GDP is less than 10 percent).
The SBP said that provincial government had potential of resource mobilization as they have the constitutional right to tax services and agricultural income.
Although provinces have already imposed a GST on services, they need to increase efforts for the collection of agriculture income tax. “Effective implementation of this tax will disallow the widespread tax leakage that currently takes place at the national level,” it suggested.
To improve FBR revenues, tax authorities are in the process of formulating a plan to eliminate tax exemptions over a period of three years. Importantly, FBR has identified that these tax exemptions cause Rs500 billion loss of tax revenues annually, the SBP said.
Commenting on the revenue collection during three quarters, the central bank said that around 51 percent of the increase in total collection was contributed by sales tax in Jul-Mar FY14, which was mainly due to the increase in tax rates.
According to SBP estimates, 34.5 percent of the total increase in sales tax receipts was driven by one-percentage point increase in GST rate that was announced in the FY14 Budget. While collection from direct taxes also remained strong, custom duties posted a 0.7 percent fall during Jul-Mar FY14, compared to 15.0 percent increase in the same period last year. “This shift in tax incidence away from imports is required as part of trade reforms, but its impact on the fiscal side cannot be ignored,” the report said.
A more detailed look shows that around one-third of total custom duties are collected from imports of vehicles, petroleum products and edible oil. Growth in the import value of these items has been subdued during the year: the import of automobiles (completely built units) is declining as the age limit of re-conditioned cars was reduced from five to three years in December 2012; the import value of petroleum products was lower in Q3-FY14 compared to the previous two quarters (due to stable international prices); and palm oil import fell in Jul-Mar FY14, mainly due to a rise in international prices.