We are now quite used to hearing the rhetoric by the government and bureaucracy on how Pakistan has one of the worlds lowest tax to GDP ratios since long (by their account it has stood between 9.50 and 10.40 percent in recent years), which (in their opinion) also happens to be extremely low when compared to its neighbouring countries and similar economies According to the FBR Yearbook 07-08, over the years, indirect taxation has increased on average by 22 percent, whereas, direct taxes have been reduced to an abysmal 4.0 percent - true welfare states like Norway and Sweden tout tax to GDP ratios of as high as 43.60 and 49.70 percent respectively. However, it is noteworthy that the Nordic States when computing their tax to GDP ratio use a coefficient by which they factor in private sector and individual support to the states welfare cum public support activities/responsibilities. Pakistan as we know falls amongst the list of leading countries rated for their high levels of corporate and personal philanthropy and strong socio-communal support networks, yet FBR in its calculations has no mechanism to take this or the directly paid out Zakat into account. The chorus of allegations, sung in tandem by our economic managers and the international financial institutions, invariably boils down to Pakistanis being tax cheats and by nature averse to assuming their responsibility for contributing to the national exchequer. Without going into the weaknesses of the FBR, prevalent tax laws, and the all important linkage of revenue collection to the reciprocity by the state, lets just instead simply look at how our regional neighbours fare in this department. Bhutan: Tax revenues have increased gradually in recent years, largely due to improved administration. No new taxes have been introduced in the last four years and the tax to GDP ratio stands at 8 percent. The budget deficit is about 5 percent and the growth rate at a healthy 7 percent. Noticeable comparison being that whereas Bhutans tax to GDP ratio is lower than that of Pakistan, its growth is much higher. Sri Lanka: With budget deficit slightly under 5 percent Sri Lanka continues to maintain a high growth rate of close to 8 percent. However, from 20.40 percent in 1995 and about 14 percent in 2007, its tax to GDP ratio has steadily declined to 12.50 percent in 2010. Anomalies in the tax structure and deficiencies in tax administration have not only led to a steady decline in tax revenues, but also in a poor public perception of tax authorities. Interestingly, Sri Lanka graduated from a turnover tax to GST in 1998, and subsequently graduated to a VAT in 2002 and it is ever since this graduation that their tax revenues began to tumble. To redress the situation, there is now a consensus brewing that 'all export sales need to be zero-rated, lengthy refund procedures have to be abolished, exporters should be entitled to full credits on input VAT paid, and tax structure and rules must closely mirror globally accepted concepts and modern principles. Perhaps, a lesson that Pakistan needs to pick-up on as well. Bangladesh: Tax to GDP ratio in Bangladesh is a little under 9 percent (2008-09 figures). VAT was introduced back in 1991, but the tax revenues remained as low 7.50 percent until 1995. Only as the growth rate picked up the tax revenues started rising. Bangladesh jealously guards its fiscal deficit, which has never exceeded 5 percent and now the government has announced a growth forecast of 7-8 percent in the coming fiscal year of 2011-12. Other than in the area of growth, Pakistan in fact is still faring better in comparison. China: Regardless of what anyone claims it is very difficult to ascertain the actual tax revenues of the Chinese government. Tax revenue figures remain shrouded in mystery due to cross corporate ownership that are primarily government driven, book adjustments and cross subsidies are common, fixed revenue disbursements to the national exchequer are mandatory in quite a few sectors and areas, tax credits and levies are still considered to be short-term policy instruments, and other than for multinationals it is difficult to fairly determine input costs. With business booming, growth targeted in double digits and the largest balance of trade surplus in the world, revenue does not seem to be an issue for the Chinese government, at least for the moment However, amidst all this hype about the Chinese economy, Victor Shih, a respected economist at Northwestern University, has suggested that Chinas 'hidden borrowing will push government debt up to 96 percent of GDP in 2011 and that due to this a large-scale financial crisis will come to pass in 2012. Shih spent months evaluating over 8,000 local China government borrowing transactions and has published his findings in his book, Factions and Finance in China. For now though, the official debt figure as registered by the Chinese government with the IMF stands at only 22 percent of the GDP. India: Indias overall tax revenue as a percentage of GDP is around 17 percent, but only if budgeted estimates are in advance taken into account. Indias tax GDP ratio has been increasing steadily since the last couple of years only, largely as a result of an expansion of the tax base and improvement in their economic climate. Ironically, this does not mean that all is well, because like Pakistan, there remains a glaring difference in the sectors that contribute to the GDP and those that contribute to the centres tax kitty. For instance, services in India account for more than half of its GDP, while service tax contributes barely 8 percent of the gross tax revenues of the centre. Further, for the centre on its own, its tax revenues account for only around 11 percent of GDP Fortunately for India, its states are fast gaining maturity and already they not only account for 6 percent to GDP tax revenues, but also the states direct taxes are growing faster than the states indirect taxes - a very healthy sign indeed. The real good news for India being that it expects to continue to grow at more than 8 percent and that its rate of collection of direct taxes, also side by side registering a healthy double-digit growth. The not so good news being that when compared with countries outside the SAARC region its tax to GDP ratio tends to be quite low. India after all harbours ambitions for global grandeur. So from Pakistans context, what does all this tell us and what exactly are the inferences that we or our government need to draw from it? i The foremost being, that regardless of what anyone tells us, the fact remains that from a regional perspective, we are not much different from our neighbours including India. Therefore, when the international lending institutions force upon us certain benchmarks and targets of tax collection and fiscal deficit, we actually should be very careful in accepting only those that have a track record of success from our regions perspective. Instead, we appear to be behaving contrarily by making our own life difficult by committing to even more than what is being asked for? For example, World Banks projection under the CPS (Country Partnership Strategy) has made a projection for us to achieve a tax to GDP target of 12.70 percent by 2013, whereas, our own development agenda is putting it at 15 percent - Why? i Further, the experiences of Sri Lanka and Bangladesh tell us that Sales Tax or VAT are no magic formulas and not only can they fail, as a tax collection lifting measure, they can also tend to be counterproductive at times. i Pakistans tax to GDP ratio is no different to that of its neighbours and follows the same cyclical pattern. i Regional data tells us that in our neighbouring countries, the Direct Tax to GDP ratio enjoys an inverse correlation with the following: governmental borrowing, both internal and external. The higher the borrowings, the lower the direct tax ratio. Governments need to be very careful on this since amidst higher borrowings they hope for the opposite to come true, which invariably does not take place; and fiscal deficit - tax revenues fall with rising fiscal deficits. However, on the other hand, it enjoys a positive correlation with public perception of its government and growth - the higher the growth, the higher the collection of direct taxes. i Drop in Pakistans tax to GDP ratio cannot be simplistically blamed on publics decaying moral and ethical commitment to the state, but instead needs to be computed in the light of declining customs duty tariffs as Pakistan moves towards increased WTO compliance, and a deteriorating bureaucracy. i FBR when calculating indirect taxes does not take into account various forms of underlying revenue support extended by the registered or the potential taxpayer that supplements its national fiscal responsibility: No comprehensive mechanism to account for the full value of Zakat paid out as a percentage of GDP; the missing Nordic coefficient; the government of Pakistan by selling state produced utilities at a much higher rate than its regional counterparts in a way extracts an excess of Rs 400 billion or 2.25 percent of GDP; and subsidising governments domestic internal borrowing by allowing it extra fiscal space. i Provinces need to play their due role in raising tax revenues. To sum it up: While there is surely a strong case for raising Pakistans tax to GDP ratio, the current figures cannot be looked at in isolation from regional realities and the other elements of indirect taxation. That perhaps the real figure of indirect taxes is about 8.50 percent and not 5.90 to 6 percent, as being presently calculated by the revenue managers. People will only entrust the government as via mediary of their societal responsibilities provided it can be seen to act in a transparent and prudent manner. Sales Tax or VAT may well turn out to be counterproductive. Finally, what the government needs to be careful about is that given its low credibility, it should try and find innovative ways and means to increase tax revenues by remaining within the current framework rather than disturbing the apple cart, because we all know that while dismantling systems can be easy, it is the creation that gets to be the most difficult part n The writer is an entrepreneur and economic analyst. Email: kamalmannoo@hotmail.com.