Charter of the Economy Figure 9.1: Trends in Federal Tax-to-GDP Ratio FEDERAL TAX-TO-GDP RATIO –(%) Tax-to-GDP Ratio 12.0 10.6 10.6 11.8 10.5 10.8 10.0 9.3 7.6 8.0 6.8 7.3 6.8 7.0 6.0 6.0 4.5 4.0 3.0 3.8 3.3 3.7 3.8 2.0 0.0 2000-01 2007-08 2012-13 2017-18 2018-19 2020-21 Total Federal Taxes Indirect Taxes Direct Taxes Source: FBR Within Federal taxes, the latest share of income tax is 35 percent, with the remainder, 65 percent, being contributed by indirect taxes. The perhaps surprising finding is that the peak in collection of indirect taxes was observed as far back as 2000-01. The process of trade liberalization since then has contributed to the fall in the import duty revenues to GDP ratio. Income tax revenues have shown a rising trend reaching 4.5 percent of the GDP in 2017-18. A comparison of the tax-to-GDP ratio in selected countries, especially those in South Asia, is made in Figure 9.2. Pakistan’s tax-to-GDP ratio is relatively low compared to countries like China, Egypt, India, and Malaysia. However, it is higher than Sri Lanka and Bangladesh. An effort has been to disentangle the causes of the rise in the Federal Tax-to-GDP ratio of 1.2 percent of the GDP from 2007-08 to 2017-18. It appears that the dominant part of the increase was due to a rise in tax rates. For example, the standard rate of the sales tax was increased from 12.5 percent to 17 percent. Also, the maximum rate in personal income tax was raised from 25 percent to 35 percent. Some withholding tax rates have also been enhanced. Regulatory duties have been added to import tariffs to generate more revenues. A fundamental question relates to the distribution of the tax burden. The sectoral burden is very skewed. Almost 70 percent of revenues are contributed by industry, 26 percent by services and only 4 percent by agriculture. In effect, the tax incidence on industrial value­added is as high as 41 percent. It is below 6 percent of the value added in the other two sectors. 90