Tax-to–GDP ratio

Both the IMF and World Bank have called for a higher tax-to-GDP ratio

The time seems to have come for the government to put in place a strategy for a higher tax-to-GDP ratio, now that both the IMF and the World Bank have called for it. The IMF may not have said so in so many words, but the latest MEFP (Memorandum on Economic and Fiscal Policies) does call for a 12 percent increase in the tax collection in the next fiscal year, which itself implies an increase in the tax-to-GDP ratio. This was also said by World Bank Vice President for South Asia Martin Raiser said at an event marking the unveiling of the Bank’s report on Pakistan. While taking no issue with any of the special initiatives launched for privatization of otherwise bring in FDI, Mr Raiser said that there was a need to address the ‘big picture issues’ by carrying out reforms aimed at improving larger business climate, taxation and human capital. These were not really new themes, but they did gain added urgency first from the fact that they were raised by Pakistan’s most important multilateral donors.

An additional source of pressure is that these messages were being conveyed at a time when the country is heading towards elections. The increase in the revenue target is clearly to take place in the period when the new government, elected on February 9, takes office. The caretakers’ ability to commit a government not yet elected is perhaps not given, but they are so committing it. Whoever becomes Finance Minister will merely have to implement the policies that have already been made, rather than making the policy.

Perhaps the achieving of the target set will not be as big a problem as it seems, not with inflation pushing up collections. As inflation picked up in October as opposed to a dip in September (not in inflation, but in the increase in inflation), it seems clear that that particular genie remains out of the bottle. However, that does not mean that the tac-to-GDP ratio can change, the expansion of the tax net means causing pay and suffering to those who have so far avoided paying taxes. When brought into the tax net, they will obviously kick and scream, but their failure to do so will indicate that they are avoiding taxation. The CBR policy of squeezing those already taxed can no longer be used to meet ever stiffening targets.

The Editorial Department of Pakistan Today can be contacted at: [email protected].


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