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TAX Evasion and Economic Growth

TAX Evasion and Economic Growth

Finding the correlation

Tax evasion is among the biggest problems Pakistan is faced with today. The fiscal deficit of the country has increased from 4.6 percent of GDP in 2015-16 to 6.8 percent in 2017-18. Increase in the fiscal deficit is due, mainly, to excessive expenditures and extremely low tax-to-GDP ratio, which remained within a narrow band of 9.8 percent in 2012-13 to 12.4 percent in 2016-17 (Table 1). Similarly, non-tax revenue-to-GDP ratio has also decreased from 3.5 percent in 2012-13 to 3.0 percent in 2016-17.

TAX Evasion and Economic GrowthIn view of extremely low and further dwindling non-tax revenue, tax revenue remains the leading source of income for the government to balance the budgets. However, tax-to-GDP ratio remains low despite increase in real GDP growth in the recent years mainly because of wide tax gap, which is as large as 9.8 percent of GDP – equivalent to nearly Rs 3,200 billion. In other words, potential tax revenue is much more than actual tax collection.

Given the same level of tax enforcement, the tax gap will further enlarge in the coming years due to substantial increase in the income tax exemption threshold for the individuals, including salaried persons from Rs 4,00,000 to Rs 12,00,000, effective from current tax year (Tax Year 2019). With this enhanced threshold, about 521,597 income tax return filers will be out of the tax net in the current tax year and it will cause reduction in tax revenue by around Rs 35.2 billion.

Furthermore, reduction in corporate income tax rates will result in a greater decline in tax collection as income tax rate for companies, excluding banking and small companies, for the tax year 2019 has been reduced to 29 percent from 30 percent, which will be further reduced by 1 percent for each of the following years until the tax year 2023 (Table 2).

In view of the increasing trend in fiscal deficits, it is indispensable to mobilize additional tax revenue and it is possible only by reducing the tax gap, which is the difference between anticipated tax revenue and actual tax revenue. For bridging the tax gap, strict enforcement through audits and penalties is recommended.

Read More: Causes for failure to achieve tax revenue target

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About Bilal Hassan

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The writer is a graduate in Taxation Policy & Management from Keio University Japan and has certification in International Economics and Law & Economics from Faculty of Economics Keio University, JAPAN. He can be accessed at bilalhassan70@yahoo.com

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