Fiscal consolidation should be as growth-friendly as possible. In general, tax base-broadening reforms are identified as growth-oriented reforms. To the extent that they reduce distortions to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare — Choosing a Broad Base–Low Rate Approach to Taxation, OECD Tax Policy Studies No. 19.
It is a matter of great tragedy that economic managers of successive governments in Pakistan, since independence, civil and military alike, never thought of using tax policy as a tool of economic development, and their sole stress on revenue targets at the time of making annual budgets has resulted in economic chaos and income/wealth disparities.
The Federal Government, with the approval of the Federal Cabinet, notified on February 13, 2025, on the dictates of the International Monetary Fund (IMF), the establishment of the Tax Policy Office (TPO) in the Ministry of Finance to purportedly “build on the Government’s economic reform agenda”.
With the responsibility of directly reporting to the Minister of Finance & Revenue, the TPO is assigned the task “to lend support to the analysis of tax policies and proposals through data modelling, revenue and economic forecasting as well as the country’s international tax treaties and obligations”. A blog says an IMF technical mission is scheduled to assist the office in becoming fully operational. The mission will guide defining functions, developing standardised evaluation methods, and improving coordination between the TPO and the FBR.
The TPO remained dormant for a little over seven months, until the appointment of its first Director General on October 24, 2025, by the Prime Minister under the Special Professional Pay Scale (SPPS-1) for a two-year term. The delay confirms reluctance and resistance on the part of the Revenuecracy and its protectors to separate tax policy from revenue administration.
The appointments of directors made so far in the TPO, except for two from outside the revenue bureaucracy, hint that only the reporting office has been changed from the Secretary, Revenue Division to the Minister of Revenue. Yet, it is claimed, “The TPO will also collaborate closely with the FBR’s International Centre of Tax Excellence (ICTE) to ensure coordinated policymaking and implementation.” Neither ICTE nor TPO has a website so that the public can know about their structures and work done. The expansion of the revenue bureaucracy is what has been achieved successfully at the expense of taxpayers’ money, a highly lamentable act.
The establishment of the TPO under an executive order is also in violation of Section 6 of the Federal Board of Revenue Act, 2007 [FBR Act 2007], as amended in 2011, aimed at making the revenue administration autonomous and policy independent. It reads as under:
“6. Establishment of Policy Board.– (1) The Federal Government may establish a Policy Board to guide in matters relating to the vision, mission and values of the Board, and to provide policy guidelines in framing fiscal policy and in achieving goals and targets.
(2) The Policy Board shall consist of the following Members, namely:–
(a) Minister for Finance – Chairman
(b) Minister for Commerce – Member
(c) Minister for Industries – Member
(d) Minister for Textile Industry – Member
(e) Minister for Privatisation – Member
(f) Chairman, Senate Standing Committee on Finance and Revenue – Member
(g) Chairma,n National Assembly Standing Committee on Finance and Revenue – Member
(h) Chairman, F.B.R. – Member
(i) One member from the Senate to be nominated by the Chairman, Senate Member
(j) One member from the National Assembly to be nominated by the Speaker, National Assembly – Member
(k) Such other members as the Prime Minister shall nominate, having necessary qualifications, experience and expertise from amongst sectoral specialists and business on an honorary basis.
(3) The Chairman of the Federal Board of Revenue shall act as Secretary for the Policy Board.
(4) The Policy Board shall hold a meeting at least once in each quarter of a financial year.
(5) The nominated members other than ex officio members shall be subject to ratification by the Standing Committees on Finance and Revenue of the Senate and National Assembly.”
The establishment of the TPO, ignoring the above-quoted Section 6 of the FBR Act 2007, once again testifies to the persistent failure of our legislators to directly control or supervise tax policy and reforms, fiscal planning, and budget-making. Leaving these with the revenue bureaucracy and so-called economic experts has resulted in a burgeoning fiscal deficit and fiscal imbalances. This has created a situation of inescapable dependence on foreign and domestic loans, coupled with twenty-five programmes under the IMF an unprecedented subjugation of any country.
Lack of consistency in tax policies and excessive tax rates have forced the business community to move towards safer havens, depriving the country of invaluable capital
Our economic survival from a long-term perspective lies in inducing local and foreign investment, accelerated, inclusive and export-oriented growth, creating much-needed jobs and collecting taxes wherever due by abandoning the policy of appeasement towards the powerful and the rich. An unshakable determination, consistency and political will are required to curb the 78-year-old habit of defying tax laws, along with the complete reconstruction of tax machinery and a paradigm shift in tax policy.
The role of taxation and fiscal policy in development strategy has to be viewed against the background of the functions it performs. The main functions of a tax system in relation to economic development are:
The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. Therefore, the first goal in the development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of Pakistani tax managers is highly disappointing as the fiscal deficit has remained high during the last many decades, and the revenue targets fixed annually were revised downwards many times, yet rarely achieved.
To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan, there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive, minimum, and easily collectable taxes has destroyed the entire philosophy of taxation. This deviation has transferred the burden of taxes from the rich to the poor.
The equity principle in taxation implies that taxes should be imposed in accordance with the ability to pay. This has two dimensions: (i) horizontal equity, i.e. similar treatment of persons in similar circumstances; and (ii) vertical equity, i.e. different treatment of persons with different taxable capacities.
The equity principle can be held to be satisfied when the overall classification of individuals into categories is reasonable and broad enough to contain many individuals within each category, and there is equal treatment within each category.
For social purposes, such as discouraging certain activities which are considered undesirable, for example, excise duties on tobacco and gambling and special excises on luxury and semi-luxury goods. Such measures act as deterrents in avoiding a spillover of these items and creating disturbance in society as a consequence.
To achieve economic goals through the ability of the taxation system to influence the allocation of resources. This includes transferring resources from the private sector to the government to finance public investment programmes; directing private investment into desired channels through such measures as regulation of tax rates and the grant of tax incentives. This includes investment activities to attract foreign direct investment into the country, and influencing relative factor prices for enhanced use of labour and economising the use of capital and foreign exchange.
To increase the level of savings and capital formation in the private sector, partly for borrowing by the government and partly for enhancing investment resources within the private sector for economic development.
In Pakistan, we find a reversal of this principle. Recent years have experienced a flight of capital, closure of large industries and recession in the trade market. Lack of consistency in tax policies and excessive tax rates have forced the business community to move towards safer havens, depriving the country of invaluable capital. Similarly, foreign investors feel shy to make use of the tremendous Pakistani talent that goes to waste due to a lack of proper funding.
To protect local industries from foreign competition through the use of import duties, turnover taxes/VAT and excises. This has the effect of transferring a certain amount of demand from imported goods to domestically produced goods. Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for almost any activity throughout the year. However, unfortunately, and thanks to our economic wizards, our dependence on imported products has increased sharply in recent years.
Due to the introduction of harsh tax measures and misadministration, turnover and supertax, and non-issuance of refunds, both our agricultural and industrial sectors have suffered so badly that, instead of being able to export our goods, we are forced to import in order to cater to the demands of the nation.
To stabilise national income by using taxation as an instrument of demand management. Taxation levels could be used to eliminate an inflationary gap or deflationary gap in the economy. Taxation reduces the effect of the multiplier and so can be used to dampen upswings in a trade cycle.
Taxes affect growth in two ways. First, by influencing the aggregate supply of the main factors of production by raising or lowering their net (after-tax) returns, and second, by influencing the efficiency of resource utilisation (total factor productivity). Some of the main factors in this process will be discussed in the next part of this four-part series.