South Asia: Mobilizing Tax Revenue Crucial for Economic Growth

Taxing Times: Mobilizing Revenues for South Asia’s Fiscal Resilience

Washington D.C. – Amidst a challenging global economic environment, South Asia faces an urgent imperative to bolster its fiscal resilience through enhanced domestic revenue mobilization (DRM). A recent World Bank event, “Taxing Times: Mobilizing Revenues in South Asia,” underscored the region’s unique fiscal vulnerabilities and explored comprehensive strategies for sustainable revenue generation. Experts from the World Bank and regional thought leaders converged to discuss the critical need for reform in tax policy and administration across South Asian economies.

The South Asian Revenue Conundrum

Franziska Ohnsorge, Chief Economist for the South Asia region at the World Bank, highlighted the dire state of the region’s fiscal health. South Asia bears the highest government debt-to-GDP ratio and interest spending among emerging market and developing economies (EMDEs), making it acutely vulnerable to global financing shocks. At the core of this vulnerability are alarmingly low revenue collections, averaging less than 18% of GDP in taxes, significantly below the 24% average seen in other EMDEs. Pakistan, for instance, collects a mere 9% of GDP in taxes.

This paradox of “high tax rates but low revenues” signals a systemic issue: too few individuals and entities bear a disproportionately high tax burden, while vast segments of the economy remain outside the tax net. Revenue shortfalls, relative to expectations based on existing tax rates, range between 1% and 7% of GDP, with consumption and corporate income taxes showing the largest gaps. While structural features like a large agricultural sector (42% of the population) and high informality (80-90% of employment) contribute to collection challenges, they explain less than half of this shortfall. The primary culprits, according to Dr. Ohnsorge, are extensive exemptions, loopholes, and inefficient tax administration.

Pakistan’s Ambitious Reform Journey

Muhammad Aurangzeb, Federal Minister for Finance and Revenue, Government of Pakistan, articulated his nation’s determined effort to address its long-standing fiscal imbalances. Targeting an increase in the tax-to-GDP ratio from 9% to 13.5% during the current program, Pakistan has already achieved a commendable 1.6-1.7 percentage point increase, reaching approximately 10.6%. Minister Aurangzeb emphasized a dual-track approach:

1. Broadening the Tax Base: Critically, Pakistan is focused on bringing significant economic sectors that contribute to GDP but evade taxation into the net. This includes real estate, wholesale, retail, and agriculture. A historic breakthrough has been achieved with the provincial legislation of agriculture income tax, a long-stalled reform.
2. Transforming Tax Authority: Recognizing the severe lack of public trust in tax authorities, Pakistan is undertaking a comprehensive overhaul focusing on “people, process, and technology.” This involves changing personnel, revamping incentivization structures, simplifying tax processes (e.g., reducing income tax filing forms from 150 fields to 9-10), and implementing end-to-end digitalization. Initiatives like AI-led audits, digital enforcement, and “faceless customs” (which reduced goods clearance time by 80% and increased customs revenue by 16%) aim to reduce human intervention, enhance transparency, and curb corruption.

A significant structural shift involves moving the tax policy office from the Federal Board of Revenue (FBR) to the Finance Division, ensuring that tax policy is guided by economic value considerations rather than immediate revenue targets or political expediency. The reactivation of the National Tax Council, chaired by the Finance Minister with provincial finance ministers as members, aims to foster alignment and consultative decision-making on taxation between federal and provincial governments, particularly on shared tax bases like real estate.

Sri Lanka’s Recovery and the Quest for Sustainability

Shiran Fernando, Chief Economic Policy Advisor of the Ceylon Chamber of Commerce, provided insights into Sri Lanka’s recent tax reforms, undertaken amidst its external debt restructuring. After a precipitous decline in tax-to-GDP ratios from 15-20% (1980s-2000s) to a low of 8%, Sri Lanka has seen a recovery to 13-14% through measures such as increased corporate income tax and higher VAT rates. This recovery has enabled the country to meet primary surplus targets, but Mr. Fernando stressed the crucial need for sustained reform to break the cycle of fiscal instability.

Key areas for continued focus include:

• Customs and Excise Reform: Beyond income and consumption taxes, significant leakages exist in these areas, offering potential for increased revenue.
• Widening the Tax Net and Simplifying Processes: Echoing Pakistan’s challenge, Sri Lankan businesses express frustration at the burden on compliant taxpayers while the informal sector remains untaxed.
• Improving Tax Culture: A stronger social contract, driven by prudent government expenditure, is vital for fostering willingness to pay taxes.
• Digitalization: Fast-tracking digital services and payment platforms is essential to formalize the economy and improve tax collection.
• Breaking the Cycle of Instability: Moving towards a long-term, predictable tax policy framework, potentially through dedicated tax policy units, is critical to avoid ad hoc measures that disrupt business and investment.

Broadening the Base and Building Trust

Khurram Husain, Business and Economy Journalist at Dawn, articulated the deep-seated issues shaping citizens’ and businesses’ attitudes toward taxation in Pakistan. He identified two primary concerns:

1. Gaps in Social Service Delivery: Citizens question what tangible benefits they receive in return for paying taxes, particularly in health, education, and law and order.
2. Quality of Tax Experience: The tax system is perceived as having excessive discretionary power, leading to abuse, ad hoc policymaking, and an undue burden on existing taxpayers. The “non-filer” phenomenon, where individuals prefer to pay a penalty rather than enter the tax net, is a symptom of this distrust.

Mr. Husain stressed that meaningful change requires a shift in tax culture, where citizens and businesses feel that superior governance is delivered in exchange for their taxes. This means avoiding tax breaks for specific industries (often perceived as rent-seeking), investing in public services, and ensuring transparent spending. While digitalization, streamlining policies, and rationalizing exemptions are important, he urged for concrete action and measurable results, particularly in bringing the services sector into the tax net and effectively implementing agricultural taxes.

Policy Pathways for Sustainable Revenue Growth

The discussion converged on several critical policy options:

• Rationalizing Exemptions: Dr. Ohnsorge pointed out that South Asian countries have exceptionally high personal income tax exemption thresholds, far exceeding EMDE averages. Reevaluating these fundamental exemptions could significantly broaden the base.
• Enhancing Tax Administration: Academic literature suggests that while measures like e-filing are important for ease, the biggest revenue gains come from enforcement, especially after taxpayers have been identified and payment made easy. A combination of “carrot and stick” is most effective.
• Predictability and Consistency: All panelists underscored the need for stable, predictable tax policies, free from arbitrary, ad hoc changes. This fosters investor confidence and reduces the “uncertainty tax” on businesses.
• Beyond Tax Exemptions for FDI: While incentives can be the “cream on top,” a sound investment climate characterized by policy consistency, ease of doing business, and robust trade facilitation (e.g., customs reform) is far more crucial for attracting foreign direct investment. Over-reliance on tax holidays often proves less effective and erodes the tax base.
• Trade Policy Reform: South Asian countries rely heavily on trade-related taxes and maintain high tariffs, often in the top quartile globally. Embracing trade through tariff rationalization, as being explored in Sri Lanka, can improve the business climate and potentially unlock new revenue streams by fostering economic growth and formalization.

In conclusion, the path to fiscal resilience in South Asia requires a multi-pronged, sustained approach. It demands political will to broaden the tax base by targeting under-taxed sectors and streamlining exemptions, a commitment to modernizing and professionalizing tax administration through digitalization and reduced human intervention, and a fundamental shift towards predictable, economically rational tax policy. Crucially, building trust between citizens, businesses, and the state through transparent spending and improved public service delivery is paramount to fostering a sustainable tax culture and unlocking the region’s full economic potential.

Disclaimer:

This report is based on the content presented during the World Bank event “Taxing Times: Mobilizing Revenues in South Asia” and is intended for educational and informational purposes only. The views, opinions, and statements expressed by the speakers and participants in the original video are their own and do not necessarily reflect the official policy or position of the World Bank, its Executive Directors, or the countries they represent. This report does not constitute legal, financial, or investment advice. Readers should not rely on this information for making any financial or policy decisions. Specific policy recommendations or actions should be based on independent professional advice and a thorough analysis of local conditions and legal frameworks. The platform hosting this report accepts no liability for any actions taken or not taken based on the information provided herein.

Disclosure:

This report was generated with the assistance of an Artificial Intelligence model based on the provided video transcript. While the AI aimed for accuracy, neutrality, and expert-level editorial quality, and the output has been reviewed by a human editor, there may still be inadvertent errors or omissions. The human editor has exercised professional judgment to ensure the report accurately reflects the key themes and perspectives from the original discussion.