SZABIST

Research Report
Low Tax-to-GDP ratio in Pakistan - Reasons, Implications and Solutions

Contents
1.

Executive Summary................................................................................................................................................1

2.

Introduction.............................................................................................................................................................2

3.

What is the Tax-to-GDP ratio?................................................................................................................................2

4.

Reasons for low Tax-to-GDP ratio..........................................................................................................................3

4.1

Narrow Tax Base.......................................................................................................................................3

References......................................................................................................................................................................4

1. Executive Summary
Taxation is the primary source of revenue for any form of Government all over the world. The Government
uses the collected tax revenues to fund projects meant to benefit the general public. In Pakistan however,
the collection of tax revenues has been dwindling over the years despite a general growth in its economy.
In other words, the tax-to-GDP ratio in Pakistan is very low as compared to other countries in the South
Asian region. This report provides a short insight as to the factors behind this trend, its effects on the
different aspects of the countrys economy and potential solutions to overcome this problem and increase
the tax-to-GDP ratio in Pakistan. The findings and conclusions provided herein are based on secondary
research on the topic through various online resources and analysis of the information obtained. Our
research leads us to believe that the causes of the low tax-to-GDP ratio in Pakistan mostly are concerned
with the ease of the taxation system for the common man, the reputation and image of the countrys
taxation authorities and the relevant laws. Making the system and the law easier for the general public and
a genuine will on the part of the taxation authorities to shed themselves of the negative stereotypes and
image attached with them and to work for the benefit of the public are a few of the solutions that can go
some way in solving the problem of low tax revenues and consequently, the tax-to-GDP ratio.

2. Introduction
The topic of this Research project is The reasons and implications of the low tax-to-GDP ratio in
Pakistan and its solution. Pakistans economy is one that boasts of a good future outlook and growth
potential. The country has the potential to become an economic powerhouse in its own right. However,
despite the growth projections and economic milestones, taxation has been one of the areas where
Pakistan has lagged behind its regional partners in terms of revenue collection and fund utilization.
The aim of this research project is to analyse the main reasons behind the low tax revenues generated by
the Government as compared to the Gross Domestic Product of the country, the resulting impact on the
general public as well as corporate entities as a result of the low tax collection and to propose possible
solutions in order to improve the taxation system of Pakistan and consequently increase tax revenues
which will help boost the economy further.
The report has been divided into three parts namely, Reasons, Impact and Conclusions and Solutions.

3. What is the Tax-to-GDP ratio?

Before delving into the reasons behind the low tax-to-GDP ratio in Pakistan, it is vital to understand what
this measure signifies for a country and its taxation system. The GDP, or the Gross Domestic Product, is
basically a commonly used measure to estimate the standard of living of a country or to judge the quantum
of its economic activities for a given time period. It is an indicator of an economys health. An increasing
trend in the GDP represents a healthy, growing economy as well as an increase in the net value of the
goods and services produced by a country.
An increasing GDP trend with declining or stagnant tax revenue figures represents a lost revenue by the
Government, resulting in lesser funds available for public expenditure and services than should have been
earned. In most developed countries, the tax revenues and GDP trends move fairly similarly on a year-toyear basis due to the fact that efficient tax collection systems are used in such countries.
In short, a low tax-to-GDP ratio signifies either an inefficient tax collection system in place or that a
significant part of the population is outside the tax net or enrolled as a taxpayer.

4. Reasons for low Tax-to-GDP ratio

This section explains some of the reasons behind the low tax-to-GDP ratio.
4.1 Narrow Tax Base and low number of Tax filers
The Tax Base of a country is the assessed value of a set of assets, investments or income
streams that is subject to taxation (Investopedia, 2015). There are 180 million people in Pakistan
of which only 2% are are registered as taxpayers (Jalal Ahsan, 2015). Out of the registered
taxpayers, only 890,000 filed their tax returns in 2013 whereas merely 131,000 people had filed
their returns as of October 5, 2015 (Dawn, 2015).
According to the Federal Board of Revenue, one of the main reasons behind the narrow tax base is
a lack of proper implementation of rules and regulations. There is no use of having regulations in
place if the authorities responsible for enforcing them fall short of their assigned roles and
responsibilities. A majority of the Pakistani public does not pay direct taxes because there is no
effective mechanism to push them towards filing their tax returns.
Another reason why a number of people choose not to file their tax returns is due to a fear of
harassment by the FBR. Such antics by the authorities have led to protests by the public and have
done nothing except increasing the resentment in the general public for tax authorities. One of the
most recent instances of such use of tactics came against none other than a member of the Senate
in September 2015 (Dawn, 2015).
4.2 Complex Laws
4.3 Trust deficit between the Public and Government
4.4 Significant size of undocumented economy
4.5 Corrupt practices by Tax authorities
4.6 Cumbersome Tax Filing Procedure

References
Investopedia. (2015). [Online]. Tax Base. Investopedia. Available at:
http://www.investopedia.com/terms/t/taxbase.asp
Jalal Ahsan. (2015). The Pakistani tax base. [Online]. Business Recorder. Available at:
http://www.brecorder.com/taxation/181:pakistan/1188902:the-pakistani-tax-base/
Dawn News. (2015a). 131,811 file income tax returns by Oct 5. [Online]. Dawn News. Available at:
http://www.dawn.com/news/1211352
Dawn News. (2015b). Senate committee accuses FBR of harassing taxpayers. [Online]. Dawn News.
Available at: http://www.dawn.com/news/1207691