Pakistan

Finance ministry says 60% of economy out of tax net

Shahbaz Rana April 22, 2010

ISLAMABAD: Sixty percent of Pakistan’s economy is working outside the tax net, which has put the burden on those already paying taxes, particularly the industry, a finance ministry official said.

“Sixty percent of our economy is a no-go area for taxes. Transport, agriculture, wholesale, retail and key services have to be taxed,” said Saqib Sherani, Principal Economic Adviser to the Ministry of Finance.

In a meeting of a subcommittee of the National Assembly’s Standing Committee on Finance and Revenue, Sherani sought the parliamentarian’s support to bring the no-go areas into the tax net from the next financial year. He said that the agriculture sector’s contribution to the gross domestic product was 20.9 percent but its share in total taxes was only 1.2 percent.

The services sector contributed more than half to the GDP but its share in taxes was around 25 percent. Sherani said that this year again the tax-to-GDP ratio would remain unchanged, which was the lowest in South Asia.

According to reports, the tax-to-GDP ratio of Pakistan is 9.3 percent. Additional Secretary Expenditure Seerut Fazal requested the committee to devise a mechanism so that more sectors could be brought into the tax net. Convener of the sub-committee Abdul Rashid Godil recommended that every income above a set threshold should be taxed including agriculture. Shahid Khaqan Abbasi of PML-N said “the tax culture encourages people to cheat and not to pay taxes.” FBR’s Trade and Tariff chief Ashraf Khan briefed the committee about broader parameters of the new tax measures.

He said that the Federal Board of Revenue was considering whether 35 to 50 percent regulatory duty on import of luxury items should continue in the next fiscal policy or not.

He said the FBR was also considering giving relief to the manufacturing industry and small-scale importers. Karachi Chamber of Commerce and Industry’s Taxation Committee Chairman Qamar Suleman presented budget proposals to the NA panel. He demanded a reduction in the corporate tax and turnover tax rates.

Suleman warned that if the government tried to enforce value-added tax from the next financial year, Karachi traders would protest and come on streets.

COMMENTS (2)

Fahad Hasan | 13 years ago | Reply Mr. Shirani is simply MBA with no background of Economics but thanks to his close links with Shaukat Tarin he got the coveted post of Principal Economic Adviser. He is probably refering to Economic Survey 2006-07 and Fiscal Policy Statement 2007-08, where it is stated that services and agriculture sector accounts for 75% of GDP but their contribution to tax is just less than 10%. He is not talking about informal sector but tax evasion within documented sector. If we take into account informal sector the tax evasion is far more and Meekal is right that the size of the informal economy may be larger than formal economy. The tax evasion may be larger than tax collection.

Meekal Ahmed | 14 years ago | Reply Has Mr. Sherani discovered something new? I don't know the basis of his 60% figure but by some estimates the situation is much worse. The un-taxed 'shadow' economy is as large as if not larger than the 'formal' economy. Nevertheless, this does not let the economic policy-makers, the 'awam dost' or the leadership off the hook. We don't even tax the formal visible sectors of the economy and certainly not equitably. Large swathes of the formal economy are not taxed at all. Those who do pay taxes under-file massively (or short-file) and get away with it because there is no follow-up audit. Pakistan does not lack technocratic solutions. There is no dearth of ideas. There are many smart people who know what the problem is and what needs to be done. Pontificating about them to grab a headline and a pat on the back does not help. It is a waste of time. To state the obvious, we lack the political will to take bold decisions and see their implementation through. As for the VAT, I am sure the traders will come out on the streets. Their fear is they may have to pay taxes and their 'fake and flying invoices' under the present GST regime may come under scrutiny.

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