Currently Pakistan has one of the world’s lowest ratios of tax to gross domestic product (GDP). The ratio in Pakistan is 9 percent compared to India’s tax to GDP ratio of 16 percent, Indonesia’s ratio of 14 percent, and Malaysia’s 15 percent tax to GDP ratio.
In Pakistan indirect taxes currently make up 78 percent of the country’s total revenue collection, meaning that a disproportionate amount of the tax burden is shifted onto lower income groups. Payment of indirect tax is related to consumption of goods and services and does not therefore take account of the situation of the person paying the tax, though there are some exemptions from indirect tax in respect of basic goods.
In addition to increasing the breadth of the direct tax base, Pakistan needs to enforce the collection of income tax from those with the ability to pay. This may involve a change in the tax culture and the attitude of taxpayers. Many of the wealthier people in Pakistan do not currently file a tax return, and the IMF has therefore made an improvement in tax compliance one of the conditions for its economic stabilization program.
