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State Bank report

The State Bank of Pakistan in its latest report on the state of economy has advised tax authorities to set up a task force to identify causes of low return filings and then utilise motivational methods to nudge people into meeting their tax obligations.

It added that the efforts to enhance tax base through increase in documentation and expansion in the scope of differential taxation did have an impact on raising tax revenue.

According to a report, number of returns filing in Pakistan is abysmally low as compared to country’s burgeoning population of more than 200 million. The apex tax authority Federal Board of Revenue received 1.07 million tax returns during the last fiscal year of 2016/17. SBP said Pakistan’s tax-to-GDP ratio of 2.5 percent was one of the lowest in the region due to overemphasis on traditional approaches and lack of innovative tools such as behavioral approaches in tax policy.

“There is a growing recognition and mainstreaming of behavioral economics around the world, inspired by success stories of utilising behavioral tools to complement tax efforts,” it added. The central bank advised the authorities to learn from countries that are using behavioral tools to nudge people for voluntary tax payments and filing of income tax returns.

It also recommended them to set up a behavioral insight team or nudge unit in the country to perform controlled experiments to draw behavioral insights, much like those established in US, Canada, Germany, Netherlands, France, and Denmark. SBP said generally behavioral approaches take into consideration basic human tendencies to influence taxpayer’s behavior.

The existing economic models simplify assumptions to draw insights into human decision making. Most assume people are rational, unemotional, and self controlled. SBP further said if lack of information or complexity in filing tax returns is identified as the main cause for non-payment or non-filing a specific campaign to disseminate the relevant information or making returns filing easier can make a lot of difference. The LSM received a 10 percent growth due to better energy availability, improved security situation and mounting consumer demand. The State Bank’s report is an objective and fair estimation of the economy together with its projection for the remaining year. Although increase is being witnessed in FBR revenues but tax net is not increasing. FBR revenues are increasing due to increase in the prices of petroleum products and taxes. The government needs to give special attention in this area to fix the problem. The reports indicated that there were significant achievements in export growth but these gains were not enough to contain the balance of payments deficit. The government also needs to take steps to meet challenge of current account deficit which is increasing due to surge in imports.

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