Despite recent optimism surrounding Pakistan’s economy, the country is facing an “existential crisis” stemming from its woeful tax collection rates and inability to finance itself, a report said Wednesday.
Pakistan’s economy grew at 4.24 percent during the 2014-2015 fiscal year with per capita income rising a significant 9.25 percent, markers that come as investor confidence in the long-under perfoming South Asian nation have also increased. But according to the report by non-profit organization Raftar, funded by Britain’s Department for International Development (DFID), Pakistan’s economy continues to rely heavily on “commercial loans, concessionary donor loans and aid.”
The report found that only 0.3 percent, or 500,000 people, in Pakistan pay income tax, while an additional 400,000 claim they have no taxable income. “To put this further in perspective, there are more people flying globally in airplanes at any point in the air than there are direct tax payers in Pakistan,” it added.
The country’s tax-to-GDP ratio of 9.4 percent is among the lowest in the world, leading to a public debt of Rs. 17 trillion. This is an almost threefold increase since 2008 for the $232 billion economy, with 44 percent of tax revenue going toward interest payments.
The report also noted that international aid was not as substantive as believed. “Over the last eight years, foreign project assistance in the development budget has only been 15 percent. Overall, net external assistance has only financed 4 percent of the budget,” it added.
The report blamed the lack of a “tax culture” on non-revenue sources of funds the country has historically enjoyed in the form of foreign aid and loans. It said 68 percent of tax revenue was being generated through indirect taxes on fuel, food and electricity, which unfairly penalizes the poor, and leads people to believe they are being taxed “a lot” despite not filing any returns for income tax.
The lack of revenue collection also negatively affects infrastructure development including power generation, with the country facing a massive shortfall of up to 4000MW in the summer that shaves about $15 billion off the country’s GDP.
According to the report, the government needs to focus on the next generation to overcome these limitations. By educating children on the importance of taxation, it says, and explaining how the state delivers services to the people, it can build a tax culture.
The Raftar report claims that if Pakistan can improve its tax collection, it could witness a growth of 3.7 percent GDP per capita. “If Pakistan can raise its own revenues to address the energy shortfall in the country, it can stem estimated losses to the economy of Rs. 1.5 trillion (that is more than the annual interest payments the country has to make).”