Tax-to-GDP ratio suffers blow due to pandemic

ISLAMABAD: The tax-to-GDP ratio of the Federal Board of Revenue (FBR) suffered a blow due to the Covid situation and stood at 9.9 percent during 2020-21, according to a FBR report released on Tuesday.

According to the FBR’s new report, with the Covid-19 induced economic slowdown, the tax-to-GDP ratio also suffered a blow.

However, the FBR has been able to stem the tide with timely measures, both short and long-term.

These measures improved the tax-to-GDP ratio of the taxes collected at the federal level to 9.9 percent of the GDP during FY 2020-21.

Adding 1.0 percent of tax-to-GDP ratio for the taxes collected by the provinces, the country’s overall tax-to-GDP ratio calculates around 11 percent. With improved revenue collection prospects witnessed during the first half of FY 2022, this tax-to-GDP ratio can be reasonably forecasted for further improvement in the short term.

However, with sustained improvement in the FBR revenue collections, the provincial tax-to-GDP ratio also needs improvement, which is hovering around one percent for the last eight years.

Disaggregating tax-to-GDP ratio into the FBR’s constituent taxes, it is evident that sales tax and direct taxes contribute major shares, followed by customs revenues and the FED with relatively lower shares.

Reasons for low tax-to-GDP ratio are multifarious and also vary from country to country.

However, documentation of transaction, prudent economic policies, good taxation structure, well-directed fiscal policy, automation and effective use of IT are some of the general factors, which play crucial role in incrementing tax-to-GDP ratio.

As emphasised by a World Bank report, taxation and expenditure are essential tools for macroeconomic stabilisation, growth, and development.

The report further underscores that in the long run, countries must rely on an effective tax system to meet the needs of the public sector. Another study underlines the strong link between good governance, healthy economy and the tax revenues and concludes that governance plays critical role in expanding tax revenues.