disproportionate burden on good taxpayers and public revenue losses. For example, in Pakistan, a country with a population of 180 million, only 1.2 million individuals and firms file income tax returns, of which half are corporate income tax filers. Some 118,000 entities are enrolled in the sales tax system but only 15,000 actually pay any tax.<sup>54</sup> India has a population of over a billion people yet only about 619,000 companies filed corporate tax returns for FY 12‐13 (of which 46% reported losses or no profits and did not have to pay taxes); the number of non‐corporate firms (e.g. partnerships) filing tax returns was about 849,000.<sup>55</sup> Manufacturing firms bear a disproportionate burden of taxation in India and Pakistan (recent studies were not available for the other two countries). In India, manufacturing contributes less than 20% to GDP but over 60% of federal tax revenue (for direct and indirect taxes).<sup>56</sup> In Pakistan, the respective figures are 23% and 66%.<sup>57</sup> This is because agriculture and high end services (such as software development) enjoy a special status while low end services are typically provided by small firms, which are subject to reduced corporate tax rates. Manufacturing activities are also more visible and easier for revenue authorities to tax. Given that within manufacturing, a number of activities and industrial locations enjoy special privileges, the tax burden falls disproportionally on a few industries and firms.

Revenue productivity of income and VAT taxes is weak in South Asia owing to narrow bases and low compliance. Revenue productivity measures the amount of revenue in percent of GDP collected for each percentage point of the tax rate.<sup>58</sup> It could be used as a proxy for estimating actual vs. potential revenue collection. As could be seen from figures 4 and 5, revenue productivity in South Asia is weaker than the average for low income countries and comparator East Asian economies. Income tax productivity in the four countries ranges from 9 to 17 percent and VAT productivity from 22 to 26 percent. Low revenue productivity points to tax base erosion and weaknesses in tax administration.

**Figure 4. Income Tax Productivity**

**Figure 5. VAT Productivity (GDP‐based)**

<!-- Start of picture text --> 0.35 0.33 0.7<br>0.58<br>0.30 0.6<br>0.25 0.5 0.43<br>0.40<br>0.19<br>0.20 0.17 0.4<br>0.15<br>0.15 0.3 0.26 0.26<br>0.10 0.22 0.22<br>0.09 0.09<br>0.10 0.2<br>0.05 0.1<br>0.00 0.0<br>Source: World Bank. 2012. Creating Fiscal Space through Revenue Source: World Bank.2012. Creating Fiscal Space through Revenue<br>Mobilization Mobilization<br><!-- End of picture text --> _Note: LIC =Low income country_

> 54 IMF.2013. Pakistan 2013 Article IV Consultation and Request for an Extended Arrangement under the Extended Fund Facility. IMF Country Report No 13/287, Washington DC

> 55 India Ministry of Finance. Revenue Foregone under the Central Tax System: Financial Years 2012‐13 and 2013‐14 56 D H Pai Panandiker. 2014. Higher tax revenue from higher growth, June 24, 2014. Reuters

> 57 World Bank. 2009. Pakistan Tax Policy Report

> 58 VAT productivity is calculated as the ratio of VAT revenues to GDP divided by the standard VAT rate; a similar formula applies to calculation of income tax productivity.

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