Tax base widened as 10% tax-to-GDP ratio unsustainable: Finance Minister

Federal Finance Minister Senator Muhammad Aurangzeb has said that widening the tax base has become essential as the current tax-to-GDP ration was simply unsustainable, reported 24NewsHD TV channel

Addressing post-budget news conference in Islamabad on Thursday, the finance minister said “The under 10 percent tax-to-GDP ratio was simply unsustainable. In three years, we want to enhance this tax-to-GDP ratio to 13%. Name one country that is sustaining itself with a tax-to-GDP ratio under 10pc.”

He added as per the international bench marks, no country could sustain at 9.5 tax to GDP ratio base without external assistance. Hence, there is dire need to enhance tax to GDP ratio, he said.

About increasing petroleum development levy (PDL), which is proposed to be increased from Rs60 to Rs80, Aurangzeb said that the increase would be enforced in phases during the next fiscal year. “The levy will be linked to international oil prices,” he added.

There was no other way but to impose new taxes, Aurangzeb declared.

The minister said “We aim to end the undocumented economy and digitise finances. Talk about the FBR’s performance is also warranted, since the compliance and enforcement was not up to par. End-to-end digitisation tends to reduce human intervention. Corruption will go down, there will be transparency and improved client service.”

On taxing the salaried persons, Aurangzeb said that the government has kept the Rs600,000 annual salaried class exempted. “Similarly, the top slab of 35% has also been kept unchanged. “However, we have changed the salary slabs,” he added.

Aurangzeb said that the salaried class should not be burdened with progressive income tax but added that non-filers will see an increase in “tax in transaction”.

The minister said, the government had introduced progressive taxes in the federal budget for upcoming fiscal year 2024-25 to tax more those having high income. He said, the country needed to move on the direction of broadening tax base to make economy sustainable. Therefore, it was imperative to bring into tax net the retailers and wholesalers to share the burden.

Non-filers

The minister said “The point of our announcements is to deter non-filing. I want to remove this concept of non-filers. I think Pakistan is the only country with non-filers.”

He said it is important to bring the retail and wholesale segment into the tax net, to widen the tax base. “Back in April, we initiated the registration of retailers on a voluntary basis. From July onward we will start imposing taxes,” he added.

On a query regarding bringing retailers and traders into the tax net, the minister said the action should have been taken in 2022, adding, “Retailers are our brothers and sisters. We need to bring them into the [tax] net to ease the burden on them.”

“We have no other option but to ensure that this sector comes into the net. These taxes will come into effect in July,” Aurangzeb said.

He further said the government would relaunch the Point of Sale Price Scheme to “try and document cash transactions as much as possible”. “Cash transactions are linked with digitisation and undocumented economy,” he added.

At present, Aurangzeb said cash to the tune of Rs9 trillion remains in circulation. “This shows the weight of the undocumented economy,” he said. He shared that the Export Refinance Scheme is being shifted from the State Bank of Pakistan (SBP) to EXIM Bank. “We have made it mandatory that a huge chunk of refinance fund shall be provided to the SME sector,” he said.

When questioned about the leakages from the tax base, the minister said that the track and trace system had been rolled out and would be expanded from cigarettes to cement and other sectors. “Sales tax has a big leakage as well. We need to plug all of these through digitisation,” he made it clear.

$5b IT export target

On the IT sector, Aurangzeb said that the country’s IT exports have reached $3.5 billion, which the government aims to take it to $5 billion. “Our focus is to give as much facility to IT sector,” he added.

Inflation rate

On the inflation rate, targeted at 12% for the upcoming fiscal, Secretary of Finance, Imdadullah Bosal said the rate is realistic. “The policy rate remains at 20.5%, which is considerably high leading to demand compression,” he said.

Asked if the target of bringing down inflation to 12pc was realistic, he said, “We should have shut down ministries and sectors that were not contributing. This is how we’ll cut expenditures. There is still work to be done, the prime minister will make decisions around ministries and devolved subjects.”

“The greater the number of things we exclude the government from, the more fiscal space we will get,” he maintained.

PIA privatisation

About privatization, Aurangzeb said that the government is working with all stakeholders. “Two assets namely PIA and Islamabad Airport are already at play,” he said, adding “Both these transactions will be completed by August. As we complete the transaction of Islamabad Airport, the PM has directed us to concurrently prepare the documentation of Karachi and Lahore airports.”

Schemes for youth

When asked about schemes and incentives for the youth, the finance minister termed Pakistan having the “third-largest freelancer population in the world” as the “biggest upside” for the country.

PSDP priorities

Talking about PSDP priorities, Aurangzeb said that government had focused on completing ongoing projects therefore 81 percent allocations were made for these schemes while only 19 percent was allocated for new schemes, which included important projects and those have foreign funding.

He said all the stakeholders including the allied parties are being taken on board on the privatization process.

Relief measures

Regarding relief measures, Minister of State for Finance Ali Pervaiz Malik said significant allocations have been made in this respect under the Benazir Income Support Programme. Similarly, the largest chunk of subsidies will go for power sector to facilitate electricity consumers, including the protected customers using up to 200 units.

He further said additional amount has been reserved for the Utility Stores Corporation to provide essential kitchen items to the deserving people at subsidized rates. He said there is no tax on the employees earning up to Rs50,000.  

Regarding inflation, he said: “We understand the impact of inflation on the common man, but we need to remember that we have made steps in the right direction.”

Citing the example of Argentine as being a huge debtor to the IMF, he said: “If you hand things out, your deficit rises, in which case you print more money, or take a loan and put the burden on future generations — we have done both of these things.”

“Give us time to enforce and impose direct taxation,” he said, stating that there were now punitive measures in place.

On Wednesday, Aurangzeb had presented his first federal budget with a total outlay of Rs18.9 trillion.

The federal budget for the upcoming year aims for a modest 3.6 percent GDP growth, and sets an ambitious Rs13 trillion tax collection target, raising taxes on salaried classes and removing tax exemptions for the rest.