ISLAMABAD: There is approximately a tax gap of 58 percent or Rs 1,855.254 billion in the overall economy of Pakistan, pointing towards implementation of substantial changes in tax policy including broadening the tax base, reducing distortions and phasing out exemptions for bridging the huge gap.

Sources told Business Recorder here on Tuesday that a tax gap report prepared on the behalf of the Federal Board of Revenue (FBR) revealed that tax revenue in Pakistan is raised in an inefficient way, giving more weight to certain sectors and economic activities over others.

Such incidence of taxation can deter people from investing in the most productive sectors and earning more from the resource available and ultimately adversely affect economic growth. Some sectors are much more heavily taxed compared with their contribution to GDP than other sectors. It is already known that about one fifth of GDP comes from agriculture, yet this sector yields no more than 1 percent in terms of FBR revenues. Services make up almost half of economic value addition, but generate only one quarter of central taxes due to the low tax receipts from wholesale, retail, and transport.

Given the shortfall in agriculture and services, industry bears the brunt of the tax burden - its tax share is three-times as high as its GDP share. Within the industrial sector the variations in tax gap estimates demonstrate the unequal incidence of taxation. In addition, there are question marks to what extent the tax system, through the way it treats different income classes of people differently, is sufficiently equitable.  While some progress has been made, Pakistan's tax code remains complicated and most taxpayers have little knowledge on their obligations, it said.