UNESCO Report Projects Significant Widening of Pakistan's Tax Gap

A recent report by a leading United Nations agency has highlighted a significant tax gap in Pakistan, estimating it at approximately 3% of the Gross Domestic Product (GDP), with potential to rise above 12% against the current level of 9% of GDP. This analysis was part of the United Nations Economic and Social Survey of Asia and Pacific (UNESCAP) 2024, which also provided insights into the macroeconomic outlook for the region.

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The UNESCAP's projections for Pakistan's economy include a GDP growth rate of 2% for the ongoing fiscal year, with inflation expected to hit 26%. The forecast suggests a slight improvement in the GDP growth rate to 2.3% in FY25, alongside a significant reduction in inflation to 12.2%, as reported by The News International.

Despite the low tax levels in countries like Bangladesh, Pakistan, and Sri Lanka, the report identifies their tax gaps as moderate. However, it emphasizes that these gaps are not negligible when considered as a share of current tax revenues instead of GDP. The UNESCAP suggests that addressing these gaps requires more than just enhancements in tax policies and administration. It calls for comprehensive improvements in socioeconomic development and public governance alongside larger-scale tax revenue enhancement efforts.

The Federal Board of Revenue’s (FBR) tax-to-GDP ratio is currently around 9% of GDP, based on the projected annual tax collection target of Rs 9,415 billion for the current fiscal year. The UNESCAP estimates that this ratio could increase to 12% of GDP.

Pakistan's economy has been affected by political unrest and a massive flood that disrupted agricultural production. Nevertheless, the country secured an agreement with the International Monetary Fund (IMF) in mid-2023, which is expected to facilitate further assistance from bilateral partners such as China, Saudi Arabia, and the United Arab Emirates. The economy is undergoing fiscal adjustments aimed at restoring fiscal sustainability, including measures like removing subsidies for the power sector.

The report reiterates that while tax gaps in countries like Bangladesh, Pakistan, and Sri Lanka are moderate due to their low tax levels, these gaps are significant when measured against current tax revenues rather than GDP. It underscores the necessity for broader improvements in socioeconomic development and public governance to bridge the vast development financing gaps in low-tax countries effectively.