The document summarizes the challenges of broadening Pakistan's tax base and ways to address it. It notes that Pakistan has a narrow tax base relative to its GDP and population size compared to other countries. This results in a low tax-to-GDP ratio, limiting revenue generation. Key challenges include a small number of taxpayers, tax exemptions, an informal sector, and reliance on indirect taxes. To broaden the base, the document recommends reducing exemptions, improving enforcement, increasing the number of registered taxpayers, taxing underrepresented sectors like agriculture fairly, and lowering rates to encourage compliance. Expanding the tax base in a equitable manner is crucial for strengthening public finances.

1. National Institute of Management Lahore
30th SMC
Current Issue Presentation
Broadening ofTax Base:
Challenges and Way Forward
Bushra Fatima (Ms)
Inland Revenue Service
Sponsor DS: Ahmad Nadeem Khan
Dated: December 2, 2021
1

2. SEQUENCE
• CURRENCY OFTHETOPIC
• STATEMENT OF PROBLEM
• SCOPE OF PRESENTATION
• INTRODUCTION
• PUBLIC FINANCE MANAGEMENT AND NARROWTAX BASE
• TAX BASE AND ITS IMPORTANCE
• TAXTO GDP RATIO
• CHALLENGES
• CONCLUSION
• WAY FORWARD
2

3. CURRENCY OFTHETOPIC
Rigo, Ernesto Ramirez. 2021. Pakistan: Staff Concluding Statement of the 2021 Article IV
Mission and Staff-Level Agreement on the Sixth Review under the Extended Fund
Facility. Press Release, IMF Communications Department, International Monetary Fund,
New York: International Monetary Fund Media Relations. Accessed November 25, 2021.
https://www.imf.org/en/News/Articles/2021/11/19/mcs-pakistan-staff-concluding-
statement-2021-art-iv-staff-level-agreement-6th-review-eff.
Asghar, Faisal. “Equality key to broadening tax base.” InternationalThe News, October
31, 2021. Accessed November 19, 2021. https://www.thenews.com.pk/print/904642-
equality-key-to-broadening-tax-base
3

4. STATEMENT OF PROBLEM
1. Pakistan has a weak Public Finance Management. Like other components of
Public Finance, tax management is also struggling. A narrow tax base is part of
the overall weak governance of Public Finance. It is NOT a standalone issue.
2. Pakistan has a narrow tax base propionate to Gross Domestic Product (GDP) and
population compared to other middle-income countries.
3. A narrow tax base is not only inefficient but promotes inequality in society
leading to rampant social problems, deterioration of the State power and armed
violence.
4. Therefore, a broad tax base promotes equity, makes tax administration cost-
effective, and generates revenue at lower rates (thus increasing the overall
efficiency of taxation policy and system).
4

5. SCOPE OF PRESENTATION
The presentation outlines the key issues
around broadening the tax base in Pakistan
and highlights the critical pathways for
improvements.
5

6. Public Finance Management Framework
Public Finance Management
Tax
Management
Public
Expenditure
Management
National
Budget
(allocations &
targets)
Deficit/
Surplus
Management
National Debt
Servicing
6

7. 7
NarrowTax Base
Reluctance of
political elite
Tax Credits,
exemptions and
Deductions
WeakTax Policy
(e.g., Not taxing
agriculture)
WeakTax
Administration
Promoting in-
direct taxations
Unstable macro
economy
Lack of
awareness and
persuasion
REASONS
FOR
NARROW
TAX BASE

8. • Narrow tax base means the low tax effort by the government
indicating large tax gap, meaning thereby, huge tax evasion. Tax
evasion is a dead weight loss for the society.
• Structural weakness in the tax structure in the form of narrow tax
base heightens its vulnerability to the economic crisis.
• Taxing the already taxed, is a regressive approach which creates
burden on the compliant taxpayer.
• Raising the tax revenue through increasing the tax rates, rather than
expanding the tax base, fuels up inflationary pressure.
8

9. 1. The income, property, assets, consumption, transactions,
or other physical or virtual economic activity subject to
taxation by a legitimate tax authority in a sovereign State.
2. The tax base is what gets taxed, and the tax rate is the
fraction of the base collected by taxation.
9
TAX BASEAND ITS IMPORTANCE

10. 3. The tax authority calculates the total tax liability by multiplying the
tax rate by the tax base.
4. For achieving a revenue target, a taxing authority may tax a
narrower base at a higher rate or a broader base at a lower rate.
Therefore, a lower tax rate is only possible through an increase in
the tax base (number of taxpayers and proportionate direct tax
compared to indirect taxation).
10

11. Tax-to-GDP Ratio
1. The Tax-to-GDP ratio signifies the size of a
country's tax pool proportionate to its GDP. It
represents the size of the tax revenue expressed
as a percentage of the GDP.
2. The lower Tax-to-GDP ratio has circular
relationship with tax base. Narrow tax base
results into lower ratio and over the time, lower
ratio further deteriorates the tax base. It is a
vicious cycle and requires political and popular
support to break the vicious cycle.
3. The countries with higher tax to GDP ratio are
less dependent on borrowings and have fiscal
space for public expenditures, budgetary
allocations for the social sector, debt servicing,
and other expenditures. Higher ratio also leads
to broadening the tax base in the long run.
11

12. 12
Tax-to-GDP Ratio in Pakistan
Year Tax GDP Ratio
2015 9.4
2016 10.7
2017 10.6
2018 11.1
2019 10.1
2020
2021
11.6
10.9
Source: Economic Survey 2019-20, 2020-21.

13. TAX TO GDP RATIO – WORLD COMPARISON
25.4
32.9
30.3
11.6
16.7
9
11.1
0
5
10
15
20
25
30
35
USA UK Japan Sri Lanka India Bangladesh Pakistan
Source: Heritage Foundation- 2018 Index of Economic Freedom http:/www.heritage.org/index/ranking
13

14. Fiscal Deficit and LowTax to GDP Ratio in Pakistan
Year Fiscal Deficit
2017 5.8
2018 6.5
2019 9.1
2020 7.5
2021 7.1
14
Source: Economic Survey 2019-20, 2020-21.

15. 15

16. • Total No of NTN holders 6.2m in a nation of 220 million people.
• For tax year 2020, the return filers were 2.74m which is 4.1% of the
labour force and 1.3% of the total Population.
• 35% of the individual filers pay zero income tax.
• 64% of all income tax is derived from corporate tax.
• 86% percent of income tax is collected from Islamabad, Lahore &
Karachi.
• Total No of salesTax registered persons is 220,042.
• Only 141,106 sale tax registered person filed sales tax returns as per tax
year 2019
• Tax gap stands at 10.4% of GDP
16
Source: Unlocking Pakistan income tax potential by Kashif Ali, https://devpakblog.com.
1. FEWTAX PAYERS

17. • Year wise detail of number of returns filed
Year No. of Returns filed
(m)
2016 1.56
2017 1.89
2018 2.67
2019 2.44
2020 2.74
2021 2.56
17
Source:Tax Reforms in Pakistan Historic & CriticalView by Huzaima Bukhari, Spooks Person FBR ,
https://www.dawn.com. Assessed on 01-12-2021
Increase inTax Returns

18. 18
Tax Year No. of Returns Filed till
October 15, 2021
(Excluding Corporate)
Tax Deposited With
Returns
(Amount in Billion)
2020 1.778 29.5
2021 2.562 47
EFFORTS OF FBR REGARDING BTB
Growth in Returns Filed: 44.4%
Growth in Tax Collection: 64%
Source: www.fbr.gov.pk, https://www.dawn.com.

19. • Proportion of ActiveTaxpayers to the Population ofTax year
2020
88%
81%
76%
47%
44%
39%
10%
5%
2% 1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Australia Canada France United
Kingdom
United States Japan Indonesia India Argentina Pakistan
%
19
Source: CDPR Newsletter 2021 Edition

20. 2. Reluctance of Retail Sector to PayTaxes
MARKET NO. OF
SHOPS
NO. OF PERSONS
IN TAX NET
ENROLLED
ON POS
Shahalam Market Lahore* 6380 3654 53
Azam Cloth Market
Lahore**
3560 2900 28
Packages Mall Lahore*** 198 135 65
Sooter Mandi
Faisalabad****
515 318 38
20
* Regional Tax Office (RTO Lahore)
** Ibid
*** Ibid
**** Regional Tax Office Faisalabad

21. 3. Disparity in Contribution to GDP &Tax
Industrial
21%
Agriculture
19%
Services
60%
SECTOR CONTRIBUTION IN
GDP
Industrial
65%
Agriculture
1%
Services
34%
SECTOR CONTRIBUTION IN
TAX REV
21

22. 66.7% of the sales tax collected from 10 major items only.
• HighTax Expenditures due to excessive tax exemptions
Source: FBR Data published in FBRYear Book 2018-19.
Type Amount (bn)
IncomeTax 378.03
SalesTax 518.81
Custom Duty 253.11
TOTAL 1149.95
22
4. Dependence on few revenue spinners

23. Pakistan ranks 172nd in ease of paying taxes.
Tax Compliance Order
Indicators Pakistan South Asia
Organization for Economic
Cooperation and
Development Countries
Payments (number per
year)
47 30 12
Time (hours per year) 560 311 176
Total tax rate 35.3 40.2 42.7
23
Source: Report no 79583-WB Mobilizing Revenue by Jose, Calix andTouqeer
https://asiafoundation.org/2019/01/30/pakistan-tax-reform/
5. High Compliance Cost

24. 24
Source: FBRQuarterly Review June, 2021
6. HEAVY RELIANCE (85%) ON WITHHOLDINGTAXES

25. 1. A total of 139,620 have now been registered with the SECP.
2. 118,280 companies were active
3. 85 percent of the total companies are filing their annual
returns.
4. Almost 70% of tax is collected as withholding tax. The overreliance
on withholding taxes can become counterproductive as instead of
bringing more people in the tax net, it may actually reduce them.*
25
Source: https://www.thenews.com, Unlocking Pakistan IncomeTax Potential by Kashif Ali.*

26. CONCLUSION
• The narrow tax base and low tax to GDP ratio is a main hindrance in
economic growth of Pakistan. The tax system is not generating resources
to meet the current and development needs of the government. Poor
resource mobilization from domestic sources has rendered the investment
in projects of social welfare and economic growth impossible. This state
of affairs has not only overburdened the taxpayers in terms of higher
taxes but has make it difficult to compete with informal sector in terms of
prices, which in turn has promoted tax evasion and tax avoidance.
26

27. CONCLUSION
Tax to GDP ratio is very low indicating that the actual potential
of tax collection has not been realized due to narrow tax base
resulting into massive tax evasion in Pakistan. Narrow tax base
is the outcome of large tax exemptions and low tax compliance
through weak enforcement. Only 25 percent of the economy is
taxed if the undocumented sector is taken into account. It
means that tax gap in Pakistan is 75%.
27
Source: Tax Reforms in Pakistan Historic & Critical View by Huzaima Bukhari

28. WAY FORWARD
• Focus should be given to reduce most exemptions and reduced rates
as well as preferential treatment for specified taxpayers, in order to
justify the sector wise contribution.
• Establishment of track and trace system for specified goods like
tobacco, cements, sugar, Beverages and Fertilizers in order to
register the dealers/ distributors of the set items of trade.
28

29. WAY FORWARD
• Enforcement of law through specialized trained workforce.
• Public awareness through media and advertisements.
• Collection of third party data i.e track and trace system by obtaining
information from public and private sectors :
NADRA
MOTOR Registration Authorities
Land Registration Authorities
Hospitals and Educational institutions in posh areas
29

30. • Physical verification of business units through use of ICT techniques
• Lowering rates encourages voluntary compliance and reduces the
incentives for tax evasion.
• Simplification of the process of tax filling.
• Strict penalizing tax evaders.
• Improving tax administration
• Data of bank accounts holders above the threshold of Rs. 500,000/- be
examined with the assistance of State Bank of Pakistan
30
Source:Yuda Julins Chatama, 2013

31. • Data of all industrial & commercial power connections be obtained
from DISCOS and meaningfully extrapolated to ensure filing of tax
returns of all concerned.
• Information about all owners/ tenants living in house of two kanals or
more be obtained.
• Information about all persons owning luxury vehicles of 2400cc and
above be scrutinized objectively.
• Information about frequent foreign travellers be analysed.
31

32. • Plaza mapping at major cities in order to register retailer and
wholesaler outlets existing there.
• Maintaining complete liaison with development authorities of major
cities to check the frequent transaction of immovable properties.
32

33. A Noted nineteenth century American Economist Henry George who
wrote in his book, “Progress and Poverty” (1879):
“The mode of taxation is, in fact, quite as important as the
amount. As a small burden badly placed may distress a horse that
could carry with ease a much larger one properly adjusted, so a
people may be impoverished and their power of producing wealth
destroyed by taxation, which, if levied in any other way, could be
borne with ease.”
33
Source:Tax Reforms in Pakistan Historic & CriticalView by Huzaima Bukhari

34. Bibliography
34
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Freedom, Index of Economic. Heritage Foundation. 2018. www.heritage.org.
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Touqeer, Jose R. Lopez-Calix and Irum. Report no 79583-WB Mobilizing Revenue . Working Paper, Washington DC:
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