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Fiscal adjustments remain key problem for five years: report

Fiscal adjustments remain key problem for five years: report

ISLAMABAD: The effective sales tax rate is very low because of exemptions, and huge input adjustments. This has been specifically noted in a paper prepared by Umar Wahid, Chief Strategic Planning Reforms & Statistics FBR and Zafar-ul-Hassan, Chief Planning Commission on ‘Structural Reforms to Boost Economic Growth’ contained in the FBR’s quarterly report.

The report said that fiscal adjustment has remained the key problem area for the last five years as the fiscal deficit averaged 6.6 percent of GDP per annum. Half hearted reforms in tax administration and policy, power sector, restructuring public sector entrepreneurs and governance remained major bottlenecks towards improving fiscal situation. Tax and expenditure slippages and problems in financing the deficit remained the hallmark of fiscal situation and as a result tax-to-GDP ratio fell from 11.1 per cent in 2007-08 to 9.3 per cent in 2012-13. Provincial tax collection stagnated at around 0.5pc of GDP. Tax-to-GDP ratio actually fell from 10.3 per cent in 2007-08 to 8.5 per cent in 2012-13. Pakistan yields one of the world’s lowest tax-to-GDP ratios and ranks 115th out of 179 countries.

The tax administration and structure is planned to be reformed to contribute adjustment to the tune of 0.7 percentage points each year by reforming existing tax system. The multiple rates are applied on sales tax – (0%, 5%, 7%, 16%, 19.5% and 3% additional tax on commercial importers). Effective Sales Tax rate is 3.6pc which is very low because of exemptions, and huge input adjustments.

With irregular structure, almost one-fourth of the entire tax collection or more than 25 per cent comes from POL at various stages. In customs tariff, 54 per cent of tariff lines have different tariff rates for different importers through SROs. Around 86 per cent of tariff lines are affected by an SRO in one way or the other and 44 per cent of the value of imports affected by SROs.

Tax gap is almost half of the actual tax collection, according to the paper. The reforms are aimed at de-politicising the recruitment, transfer and postings in the FBR which must be based upon merit. This will enhance administrative efficiency. Another area of concern remained the tracking of non-filers who enjoy decent living and huge ability to pay. This is weakening the overall writ of the government and cause of institutional degeneration which has also impacted the functional and operational efficiency of the country in recent past and efforts are underway to make FBR a vibrant organisation. However, FBR alone could not make headway in boosting revenues substantially unless it is not equipped with effective legislation.

The structure and the legal framework governing the taxation need to be reviewed by the parliament. The international best practices, technology and political will could play an important role in restructuring the taxation environment. The SRO culture has detrimental effect on competitive environment and nurturing entrepreneurship. This is retarding economic growth and by bringing those in normal tariff lines could help enable to raise revenues. Taxation policy has to be complemented by other macroeconomic policies as it is just a small component of the big pie, paper added.