The World Bank has approved a package of $518 million to help Pakistan raise its tax base and upgrade the Federal Board of Revenue with technology, digital infrastructure and technical skills, the Washington-based agency said in statement on June 13.
Of the total money, $400 million will go to ‘Pakistan Raises Revenue Project’, which is meant to support the FBR effort to increase its tax revenue.
“The project will target raising the tax-to-GDP ratio [tax contribution to the economy as percentage of GDP] to 17% by fiscal year 2024 and widening the tax net from the current 1.2 million to at least 3.5 million active tax payers,” the statement said, quoting the project’s Task Team Leader Muhammad Waheed.
Since FY2012, the country has improved its tax-to-GDP ratio from 9.5% to 12.9% at the end of last FY2018, but this is still lower than the level (15%) needed by developing countries to fund basic government functions and provide services to people.
Revenue collection is essential for Pakistan’s economic sustainability but the country is facing a massive revenue shortfall to meet its expenses. In the year ending June 2020, the government faces a deficit (loss) of Rs3,137 billion and will be spending more than half of its projected tax revenue in interest payments for previous loans. Because of these fiscal constraints, it is left with little money to spend the development of its people and infrastructure.
The WB aid will support Pakistan’s efforts to raise revenue and reduce compliance costs, a high priority for the government. The project will assist in simplifying the tax regime and strengthen tax and customs administrations, the statement said. “This will enable more effective use of taxpayer information and more targeted compliance.”
The remaining $118 million will go to the Khyber Pakhtunkhwa Revenue Mobilization and Public Resource Management Project, which will support the provincial government to increase its capacity to collect revenue and strengthen its Public Financial Management system, the WB said.
Enhancing KP’s revenue collection, which remains low, could help it provide better services to its residents and reduce its dependence on federal transfers [the money Islamabad gives to them], which accounts for 86% of the province’s revenue as of FY2017.
Both projects address the priority areas identified in Pakistan@100: Shaping the Future, a flagship initiative that identifies frontier interventions for Pakistan to become a prosperous country by 2047, the WB said.
The International Development Association (IDA), the concessional financing arm of the World Bank, is financing both projects. The $400 million part of the loan needs to be paid back in 30 years with a grace period of five years.