Tax-to-GDP ratio fell to 8.6 percent in fiscal year 2011

Pakistan's tax-to-GDP ratio declined from 9.1 percent in 2008-09 (registering the same ratio in 2009-10) to 8.6 percent in 2010-11 while revenue collection, the President proudly announced in his speech to the joint sitting of parliament, doubled from Rs 1000 billion to about Rs 2000 billion since 2008.
Sartaj Aziz, PML (N) former federal finance minister explained this seeming discrepancy by pointing out that as the price of petroleum and products escalate so does the collection under sales tax which accounts for higher overall sales tax collections in addition to petroleum levy during four years of PPP rule. However, GDP growth has stalled and the estimate of 4 percent for the current fiscal year claimed by the President in his speech is not endorsed by the International Monetary Fund (IMF) which has estimated a growth of not more than 3.4 percent. Sartaj Aziz stated that this scenario does not reflect a healthy state of economic affairs as ideally it is tax-to-GDP ratio which should rise.
Economists, however, stated that it is a clear discrepancy between the existing growth of around 27 percent in revenue collection during 2011-12 and declining tax-to-GDP ratio. If the FBR has been able to maintain high growth of around 27 percent in tax collections, why has the tax-to-GDP ratio not correspondingly increased, they queried.
When contacted, an FBR official termed transfer of capital value tax (CVT) from federal government to the provincial governments and sales tax exemption on essential food items as some of the major factors responsible for declining tax-to-GDP ratio in Pakistan.
According to the FBR, major reasons for decline in tax-to-GDP ratio are:
(i) transfer of CVT from federation to provinces; (ii) floods and power shortage have vastly affected the resource mobilisation efforts; (iii) growth in GDP is mainly due to food inflation whereas food items are exempted from taxes therefore, the inflationary impact could not be captured; (iv) there has been a 24 percent increase in agriculture sector and the size of GDP has increased accordingly but this sector is exempted from taxes, so increase in agriculture sector could not be materialised in tax collection.