The capacity of a country to repay its domestic debt lies in its ability to raise revenues from different sources.
Pakistan is wrangling with rising domestic debt, which underscores the need to expand the tax base in order to repay the domestic debt.
Talking to WealthPK, Nadeem ul Haque, former chairman of the Planning Commission of Pakistan, said that the narrow tax base in the country had limited the government’s ability to repay its liabilities to domestic creditors.
According to the recent ATL (Active Taxpayers List) released by the Federal Board of Revenue, a total of 3,376,699 taxpayers have successfully submitted their income tax returns by August 2022.
Haque said that out of a population of 241.49 million, the presence of merely 3.37 million taxpayers highlighted the worrying status of the country’s tax base. “The limited tax base requires the government to place additional financial responsibilities on businesses and individuals, who are already part of the tax system.”
A narrow tax base in Pakistan, he explained, often resulted in insufficient revenue collection to cover the various expenditures of the government, including interest payments on domestic debt. “As a result, the government regularly diverts a larger proportion of its limited revenue towards debt servicing, leaving fewer funds available for critical public services, development projects, and other essential government functions.”
In the most recent edition of the World Bank’s “Ease of Doing Business” report, Pakistan secured the 161st position among 190 countries in terms of the “paying taxes” indicator.
Haque emphasised the documentation of the undocumented sectors in order to expand the tax base.
“The undocumented economy constitutes a major part of the overall GDP of Pakistan. Through an effective administrative plan, bringing the undocumented economy into the tax net would bear positive outcomes for the revenue side.”
He highlighted that the taxes were skewed towards certain sectors, while others enjoyed exemptions.
“The manufacturing sector contends with elevated corporate tax rates, while the agricultural and real estate segments experience the advantage of reduced tax burdens,” he pointed out.
To promote fairness and encourage the business community’s tax compliance, it is essential for the government to consider implementing a flat tax system, thereby mitigating perceptions of discrimination and fostering increased tax payment participation, he asserted.
Broadening the tax base is of paramount importance for Pakistan as it serves the dual purpose of servicing domestic debts and achieving equilibrium between revenue and expenditure.