Managing the Public Finances 2014-15 3.4 3.6 1.0 0.5 8.5 0.4 0.3 0.7 9.2 2019-20 3.2 3.3 1.3 0.5 8.3 0.5 0.4 0.9 9.2* 2020-21 3.1 3.6 1.4 0.5 8.6 0.5 0.4 0.9 9.5 2021-22 3.4 3.8 1.5 0.5 9.2 0.5 0.4 0.9 10.1 *Petroleum levy transferred to non-taxes Source: MOF 16.1 Low Tax-To-GDP Ratio As highlighted above, the tax-to-GDP ratio of Pakistan is relatively low. It currently stands at close to 10 percent of the GDP. As compared to this, the tax-to-GDP ratio of India is 18 percent. Results of research on the magnitude of the‘tax potential’ of Pakistan is that it is close to 15 percent of the GDP. The other structural problem with Pakistan’s tax system is that it is heavily tilted towards indirect taxes, implying greater regressivity. Almost two-thirds of the revenue is from indirect taxes. A further complication is the reliance on withholding collections in the income tax regime, many of which are in the nature of indirect levies. Table 16.4 demonstrates the regressivity of the federal tax regime. Table 16.4: Incidence of Federal Taxes, 2020-21 Bottom Quintile 2 nd , 3 rd and 4 th Quintile Income Tax 5.6 30.4 Import Sales Tax 9.4 49.0 Domestic Sales Tax 8.3 49.5 Customs Duty 7.8 46.7 Excise Duty 9.0 50.9 TOTAL TAX REVENUE 7.6 42.5 TOTAL INCOME 6.3 42.2 Ratio 1.206 1.007 Therefore, REGRESSIVE INCIDENCE *Ratio of share of top quintile to bottom quintile Source: Pasha(2022) % of the Tax Revenue Top Quintile PALMA Ratio* 64.0 41.6 42.2 45.5 40.1 49.9 51.5 0.968 11.42 4.42 5.08 5.83 4.45 6.56 8.17 The tax gap of 5 percent of the GDP is partly explained by the widespread‘tax expenditures’ in the tax system. These are revenues foregone due to tax exemptions, reliefs and concessions. According to the FBR, the total tax expenditure was Rs 1482 billion in 2021­22, equivalent to 2.7 percent of the GDP. Therefore, even if these tax expenditures largely 159