The tax-to-GDP ratio is extremely low and the incidence of taxation is non-uniform and discriminatory. An equitable, simple and transparent tax system is needed. A broad-based tax system administrated efficiently can help develop a strong domestic revenue base.

The problems of tax avoidance and evasion can only be overcome when all eligible incomes are brought into the tax-net.

Tax mobilisation is only 9.6 per cent of GDP compared to 18 per cent in the countries with comparable level of development, because of the non-documentation of the economy.

While the Federal Board of Revenue (FBR) has brought about some reforms including the introduction of Self-Assessment Scheme (SAS), a series of policy reversals has neutralised many gains of reforms. For example, the Universal Self-Assessment Scheme without the complimentary provision of random audit for true assessment of the income of taxpayers, has not helped.

The revenue collection needs to be improved to enable the public sector to extend social welfare and infrastructure services.

The integration of general sales and income taxes can reduce the cost of administration. Income tax and sales tax liability of a taxpayer can be assessed from a single return. Presently, taxpayers are filing returns separately with the sales tax department and income tax department which is not the norm in the developed and many developing countries.

For this purpose, there should be a single tax identifier number applicable on both the taxes. Tax administration should be based on functional lines and there should be complete interface between the administrations of the two taxes. There is a need to adopt participatory approach in tax policy and administration.

To mobilise taxes, it is imperative to levy excise duty on services and expand provisional sales tax on services. The SAS needs to be reinforced with random audit and improved compliance of corporate income tax.

The main thrust of the FBR is to increase the number of active income taxpayers. The board has targeted active income taxpayers at Rs2.985 million by December 31, 2009. It estimates Rs1.94 million as average amount of income tax per return filed by each taxpayer.

There is a need to reform the tax policy and the system on the basis of the best international practices, with due allowance for legitimate peculiarities that might be specific to the current domestic environment. Such a move would help make a breakthrough in revenue mobilisation.

The narrow tax base is attributed to informal economy. In a country of more than 20 million households, less than two million returns are filed and within these, less than half of the returns make meaningful contribution. A significant part of both income and sales are mostly outside the ambit of taxation.

Apart from the constitutional issues relating to agriculture sector, wholesale and retail trade sectors, contributing 17.1 per cent of value-added, pay little or no taxes. The contribution of professional services, traditional as well as modern, to taxation remains much less than what is fairly due from them. There is no effective way of taxing the capital gains on property, and capital markets gains are not being taxed.

The rates of sales tax and marginal income tax rates are much higher. And burdening a narrower tax base with more taxes is definitely a source of inequity. Such characteristics of the tax system promote non-compliance and provide incentives for evasion.

The distortions in the income tax such as withholding and presumptive taxes, (many not adjustable or considered full and final payment of tax liability under final assessment) need to be eliminated.

Numerous tax exemptions are also contributing to a low tax base. These exemptions should be removed to mobilise revenue, barring items such as foodstuff from sales tax or incomes of charitable organistions.

However, the principle of equity requires that all those engaged in economic activities with commercial objectives must share the cost of economic development. Providing huge subsidies to domestic consumers of electricity but burdening other users of electricity is an example of implicit taxation of one group and its appropriation by another and is against the principle of fair taxation.

Last but not the least, the government has to focus on provincial taxes for raising the tax-to-GDP ratio because effective implementation of taxes at the provincial level is a must for revenue mobilisation.

In spite of all efforts, a substantial part of the revenue potential remains untapped. Direct taxes are only four per cent of the GDP. Indirect taxes currently contribute about 62 per cent of the total revenues and sales tax nearly 39 per cent. Tax compliance remains poor.

The tax base is narrow and small, with the manufacturing sector contributing about 65 per cent of the tax, with only about 18 per cent share in GDP. The services sector contributes 33 per cent with its share in the GDP at 54 per cent. A heavy reliance on indirect taxes is essentially regressive.