Pakistan's persistently low tax-to-GDP ratio is primarily a result of poor tax design and extensive exemptions rather than widespread tax evasion, according to economic experts. The country's tax-to-GDP ratio has remained around 10-11% for decades, significantly below regional averages.
Structural Issues in Tax System
Experts point to a narrow tax base, with only about 2 million people filing income tax returns out of a population of over 240 million. The system relies heavily on indirect taxes, which are regressive and burden the poor disproportionately. Direct taxes contribute only about 40% of total revenue, while indirect taxes make up the rest.
Key problems identified include:
- Excessive tax exemptions and concessions that erode the tax base
- Complex tax laws that create loopholes and encourage avoidance
- Weak enforcement capacity of the Federal Board of Revenue (FBR)
- Lack of documentation in the economy, with a large informal sector
Exemptions and Concessions
A study by the Pakistan Institute of Development Economics (PIDE) found that tax exemptions amount to over 6% of GDP annually. These exemptions benefit specific industries, export sectors, and agriculture, which remains largely untaxed. The study argues that eliminating these exemptions could double the tax-to-GDP ratio.
"It is not that people are not paying taxes; it is that the system is designed in a way that many are legally not required to pay," said Dr. Ashfaque Hasan Khan, an economist.
Reform Recommendations
Experts suggest a comprehensive overhaul of the tax system, including:
- Broadening the tax base by bringing agriculture and retail into the tax net
- Simplifying tax laws and reducing exemptions
- Improving taxpayer services and voluntary compliance
- Using technology to track transactions and reduce cash-based economy
Without such reforms, Pakistan will continue to struggle with low revenue collection, limiting its ability to invest in infrastructure, health, and education.
