Reforms failed to stop tax evasion

LAHORE: Tax reforms have failed to stop tax evasion as checks put in place seem to have encouraged corrupt practices evident from the steep decline in the tax-to-GDP ratio.

A study by The News reveals in the 80s tax revenue increased more in case of higher inflation besides the natural growth in taxes. Depreciation of the rupee increases customs revenue and also impacts inflation.

However, in the last fiscal year nothing worked according to the norm. Tax revenue declined despite a record high inflation and a massive depreciation of the rupee, leading to a fall in the tax-to-gross domestic product ratio to around 9 per cent, the lowest in two decades.

In 1996-97, the ratio peaked to 14.4 per cent, though the economy was in doldrums. That year, in terms of GDP, budget deficit was 6.5 per cent, growth 6.6 per cent and inflation 11.8 per cent.

In 1997-98, the tax-to-GDP ratio dropped to 13.4 per cent, budget deficit fell to 6.4 per cent, inflation to 7.8 per cent and growth to 1.7 per cent. In 1998-99, the tax-to-GDP ratio declined to 13.2 per cent while budget deficit was 7.7 per cent, inflation 7.8 per cent and growth 3.5 per cent.

In 1999-00, the ratio stood at 13.3 per cent, budget deficit was 6.1 per cent, inflation 5.7 per cent and growth 4.2 per cent.

In 2000-01, the ratio dropped sharply to 10.7 per cent while budget deficit was recorded at 6.1 per cent, inflation 3.58 per cent and growth 3.9 per cent. The ratio dipped at a time when tax reforms were accelerated.

In 2001-02, the tax-to-GDP ratio fell slightly to 10.6 per cent while budget deficit was 4.3 per cent, inflation 4.4 per cent and growth 1.8 per cent.

In 2002-03, the tax-to-GDP ratio increased to 10.9 per cent while budget deficit stood at 4.54 per cent, inflation 3.41 per cent and growth 3.1 per cent. Next year, the ratio rose to 11.5 per cent though budget deficit fell to 3.7 per cent, inflation dropped to 3.10 per cent and growth increased to 4.5 per cent.

Pakistan entered an accelerated growth phase in 2004-05 but the tax-to-GDP ratio fell to 11 per cent. That year, budget deficit was 2.4 per cent, inflation 4.57 per cent and growth 7.5 per cent. In the same year, tax authorities started squeezing already registered taxpayers but ignored widening of the tax base.

In 2005-06, the country achieved the highest GDP growth of 8.6 per cent, but the tax-to-GDP ratio dropped to 10.1 per cent, indicating lack of interest of tax collectors and the government in benefiting from the buoyant economy and broadening the tax base.

In 2006-07, the ratio reached 10.4 per cent on GDP growth of 6.6 per cent. Next year, the ratio increased to 11 per cent on GDP growth of seven per cent. Inflation in both these years was just below eight per cent though budget deficit in 2007-08 hit 7.4 per cent. link......