This blog is written by Mr. M. Nabeel Ahmed, Senior Associate Taxation Advisory. Please read this blog and provide your comments.

Broadening Tax Base

Broadening its tax base is perhaps the most significant economic challenge facing Pakistan. After 70 years of existence, the country has less than two million income tax filers, one of the lowest tax-to-GDP ratios in the world, and a tax system which riddled with inequity and corruption.

But we are not the only country struggling with tax reforms; other have faced this challenge too. Many countries have had success in broadening the tax base. But first, it is important to understand that there are basically three ways to do so

  • Is to get people into the tax system who have been outside of it but are supposed to by law be paying taxes.
  • Reduce tax incentives that allow businesses that are economically active to not pay taxes. These tax breaks or reliefs include measures such as tax holidays that say that, if you invest in such and such area, industry or for export only, you don’t have to pay tax or you can pay a reduced amount.
  • Reduce the number of goods and services that are not taxed or are taxed at a lower rate than others. For instance, basic foodstuffs in some countries are exempt from value-added tax.

This broadening the tax base by eliminating preferential rates coupled with a lower headline rate for all resulted in considerable revenue increases over the subsequent years.

Here are the few key lessons in tax reforms attempting to broaden the tax base.

  • Improve the taxpayer registry to make sure it works well. Make special efforts to identify people who are not registered or paying taxes, including identifying companies hiding in the so-called informal sector.
  • Take a careful look at all the tax incentives, centralize tax incentive authority in the hands of the Ministry of Finance, but impose a rigorous mechanism for their authorization.
  • Report every year on tax expenditures (the revenue lost to these incentives) to add transparency to the system and help build support for reducing tax expenditures and thereby broaden the tax base.

It’s something righteous, but tough. The most powerful interests in any economy tend to be those who benefit from tax incentives and they are not going to release their grip from the throat of the political system easily.

Muhammad Nabeel Ahmed