ADB report: Asia needs improvement in tax collection system

Pakistan and Nepal amongst nations with lowest tax-to-GDP ratios.

MANILA:

Asian countries need to increase taxes and improve their collection systems if they want to raise enough funds for much-needed social welfare programmes, an Asian Development Bank (ADB) study released Tuesday said.

The Manila-based ADB report said the “tax burdens” in the region were lower than the European Union, the Americas, Australia, New Zealand and Africa.

“The review of the tax policy ... makes it clear that there is ample margin for higher tax levels in Asia through more direct taxation, especially private income tax,” the report by economics professor Jorge Martinez-Vazquez said.

Although Asian economies were integrated like in North America and Western Europe, they were not homogenous and had no “supranational authority” to coordinate and harmonise their policies, resulting in different tax systems.

Vietnam was cited as having one of the highest tax-to-GDP (gross domestic product) ratios in Asia. But its ratio was still about half of most European Union countries. At the other end of the scale, Pakistan and Nepal had the lowest tax-to-GDP ratios.

The low tax burden was credited with creating a more “business-friendly environment” that attracted foreign investment. But it could also result in a lack of government resources for vital services such as education, health and infrastructure, which could bring about a less equitable society, the report said.

The report also found that many Asian countries still had a huge “underground economy”, indicating that tax evasion was common. Asian countries also relied more heavily on indirect taxes such as value-added and sales taxes, and even taxes on foreign trade, according to the report.

It also found that Asian countries still ranked far below the standards of developing countries in regards to tax administration costs and practices, indicating there was much room for improvement. “Tax administration reform and modernisation should become part of the policy agenda of many countries in Asia,” the report said.

The study recommended tougher measures to combat tax evasion, such as increased and improved tax audits and tougher penalties for cheating on taxes, including using the media to publicly shame violators.

Published in The Express Tribune, July 13^th, 2011.