For the last many decades, every year, before the preparation of the finance bill along with the annual federal budget, suggestions surfaced in the media for comprehensive structural reforms in the tax system. In April 2021, the Pakistan Institute of Development Economics (PIDE), under the dynamic leadership of then Vice Chancellor, Nadeem Ul Haque, presented the PIDE Reform Agenda for Accelerated and Sustained Growth, to achieve higher sustainable economic growth. It could alone have ensured revenue mobilisation leading to fiscal consolidation, but since then two handpicked governments under the hybrid-plus model have presented four budgets ignoring this vital paper.
The incumbent government, shy of growth, is in the process of finalising its second budget, under the dictates of the International Monetary Fund (IMF). It is not going to consider any agenda for rapid and sustainable growth. The conventional proposals by numerous bodies, suggesting changes in the existing tax codes, made every year before the annual budget, have proved futile, even counterproductive. For decades, policymakers of all governments, civil or military, ignored or sidetracked fundamental reforms to make the tax system simple, equitable, and efficient. Since the new dawn of democracy (sic) in 2008, none of the so-called elected governments undertook much-needed and long-delayed reforms in tax policy/administration.
The government of Pakistan Muslim League Nawaz (PMLN) created a record current account deficit, rather fiasco, in the history of Pakistan at the fag end of its tenure of 2013-18. Before coming to power, Pakistan Tehreek-i-Insaf (PTI) made tall claims of having “solutions” for every illness faced by the country. From 2018-2022, the PTI coalition government offered none, but kept on blaming PMLN for everything! This had been their favourite mantra, starting from the Prime Minister to “spokespersons” participating in TV talk shows to workers on social media.
The twin menace of fiscal and current account deficit, coupled with the ever-rising debt burden, is nothing new to Pakistan. Since 2008, successful governments have borrowed billions from international lenders and donors to come out of this menace without any success. Mindless borrowing and reckless spending are at the root of our fiscal mismanagement. Much has been written on it, but those who matter in the Land of Pure are not ready to give up their benefits for which the State has no option but to borrow endlessly! What makes the situation more painful is the incorrigibility of the Federal Board of Revenue (FBR) and the incompetence of provincial tax authorities to harness the real tax potential of a country having the fifth-largest population in the world!
The existing functional system in FBR that replaced the time-tested circle-based one has miserably failed. It has rendered the Inland Revenue Service (IRS) completely ineffective. The other very important issue is the lack of political will to tax the rich and mighty and give them unprecedented tax breaks. The Income Tax Ordinance, 2001 relies overwhelmingly on withholding taxes, presumptive and/or minimum taxes, which in substance are regressive. These are collected at source through dozens of withholding tax provisions. In FBR’s collection, indirect taxes are over 70% if we add those levied under income tax law, hurting growth and the poor.
For determining tax potential at a given point in time, economists in Pakistan usually take into account statistics related to formal and documented economy, but no serious study is available about the size of the parallel economy
The policy of appeasement towards tax evaders has been perpetuated under all governments—civilian and military alike— through amnesties and asset-whitening schemes, waivers, exemptions, and concessions. Since 1979, a free hand to tax evaders to whiten money, tax amnesties, exemptions, credits, and benefits through statutory regulatory orders (SROs), free plots, and perks to the mighty sections, have substantially eroded the income tax base.
For determining tax potential at a given point in time, economists in Pakistan usually take into account statistics related to formal and documented economy, but no serious study is available about the size of the parallel economy. The toughest challenge is how to tax the monstrous parallel economy, both legal and illegal. It is evident from the fact that the wholesale and retail sectors contribute about 19% to the GDP but their share in taxes is less than 5% of the total collection.
Rich absentee landowners paid agricultural income tax of only 0.6% of total national tax collection of Rs. 4.75 trillion in the fiscal year 2019-20 (11.4% of GDP) and this ratio has further declined during the last five years. In 2023-24, the total tax collection was Rs. 10.085 trillion (9.5% of GDP) and the share of agricultural tax was as low as 0.45% of GDP!
No agenda for tax reforms by the IMF or World Bank or for simplification of the tax system can improve tax compliance, unless there is efficiency, technical competence, integrity, and ability of the tax machinery to relentlessly pursue and punish tax evaders without any political interference and ill-motives. The functional structure of the IRS has failed to achieve these objectives.
Nobody has ever emphasised improving the overall working conditions of FBR and improving the training, and professional skills of officers and staff. Does it really need enormous amounts of money to extend respect and courtesy to taxpayers? Does this issue relate to market wages foreign funding or advice? In articles, books, webinars, seminars, etc., nobody raises these vital issues but keeps on suggesting proposals that have failed to produce desirable results.
The existing tax system is not taxing the hidden economy, but collecting advance/adjustable income tax of 15/75 percent from 196 million mobile users including 145 million broadband users
The fundamental element of tax reforms is providing an efficient and competent administration, which is nowhere visible in Pakistan. Tax administrations, both at federal and provincial levels, lack the requisite level of digitisation, professionalism, and human skills. Any exercise relating to comprehensive tax reforms cannot be a time-bound affair and does not mean merely altering tax laws or suggesting cosmetic changes here and there. Reforms can only be successful if a comprehensive analysis is made of the whole system, which includes tax codes, tax administration, state of the economy, taxpayers’ attitude, revenue needs of the country, and all other allied aspects.
We desire tax reforms without first establishing an efficient, workable structure. One may give the example of Sweden’s tax agency, Skatteverket. It maintains data of every person, natural or juridical. Skatteverket is accountable to the government but operates as an autonomous public authority. We need to establish a ‘National Tax Authority’—the idea was elaborated on in ‘Need for National Tax Authority’, back in 2017 and a blueprint was presented in 2024 to the Senate of Pakistan. This innovation alone can counter massive pilferages in collections that were estimated at Rs. 3 trillion by the IMF in its country report of 2016 (Unlocking Pakistan’s Revenue Potential) and presently the number is as high as Rs. 15 trillion.
Successive governments, military and civilian alike, have failed to tackle the twin menaces of hidden economy and fiscal deficit. The study, What is hidden, in the hidden economy of Pakistan? Size, causes, issues, and Implications, by Ahmed Gulzar, Novaira Junaid, and Adnan Haider, shows that corruption and tax evasion are not only causing an expansion in the size of the informal economy but also hampering the growth rate, thereby adding more to economic uncertainty, income inequality, and poverty. This study by PIDE needs updation and determination of the actual size of the hidden economy and its impact on the economy and growth.
The existing tax system is not taxing the hidden economy, but collecting advance/adjustable income tax of 15/75 percent from 196 million mobile users including 145 million broadband users. As a result, income and wealth distribution disparities are rapidly widening. Under the given scenario, efforts are needed both at federal and provincial levels to enhance the size of the pie by shifting to growth-oriented taxation (There’s a need for a new tax model, Business Recorder, February 26, 2021).
As to innovative tax reforms, the incumbent government in the coming budget must provide a simplified tax system for which a comprehensive model is available online. It provides for revenue collection of Rs. 30 trillion at the federal level, along with maximising economic growth. Our legislators must come forward and resolve to achieve a sensible balance between income, capital, and consumption taxes. They must favour spending not on ill-designed social programmes to bank more votes than social returns, but on important investments in creating human capital (e.g. education, training, and health), and necessary public infrastructure to increase productivity and growth.
The poor, unemployed, and hapless masses, crushed by higher prices of items of daily use, seek an explanation from all those who have been in power:
- Why the privileged are continuously favoured and thriving on the money collected as “tax” from their own poorer brethren?
- Why is it that all taxpayers, irrespective of quantum of income, are required to submit wealth statements with returns, whereas rich and mighty, holding key positions in various state institutions, having colossal assets/incomes, are not required to make public, declarations of their assets/liabilities?
- Why do they resist the imposition of progressive taxes like inheritance tax, gift tax, wealth tax, etc. but not feel ashamed in imposing exorbitant taxes on petroleum products and utilities, and many items of daily use, knowing very well that these are consumed by the general masses?
- Why not subsidise the poor and make good the loss by levying of wealth tax on the rich?
- Why not monetise all the perks and perquisites of government employees, judges, and those working in state-owned corporations and ask them to live amongst the common people rather than in fortified, cordoned-off Government Officer's Residences (GORs) and palatial houses situated in the most expensive areas?
- Why not curtail unnecessary and extravagant expenses of privileged classes to fill up the fiscal void?
- Why not reduce the number of ministers/state ministers/advisers instead of following the policy of appeasement and doling out public offices as if this nation was not burdened enough by worthless and incompetent bureaucrats?
The need of the hour is a complete re-engineering of the system and long due structural reforms, which are deferred year after year in the name of short-term compulsions and/or IMF dictates
FBR and provincial tax authorities are not collecting taxes diligently. There exists huge tax gaps at all levels. According to data prepared by the National Database & Registration Authority (NADRA), there were 3.5 million individuals (ultra-rich) in 2015 having income levels attracting tax of at least 8,000 billion per year. If we take the latest figures and add 5.5 million falling under different income brackets (from Rs. 1.5 million to 6 million per year) the estimated income tax collection should not be less than Rs. 16,000 billion. In the case of corporate bodies and other non-individual taxpayers, the collection should be around Rs. 2000 billion. This means that total income tax collection should not be less than Rs. 18,000 billion.
As for the much-trumpeted extraordinary performance by FBR during the last fiscal year, claiming, “FY2023-24 will be remembered as a landmark year in which federal tax collection reached an unprecedented milestone, surpassing the Rs. 9 trillion mark for the first time in Pakistan's history”, it is pertinent to mention that out of total net collection of income tax of Rs. 4530.7 billion, the contribution of 15 types of withholding taxes alone was Rs. 2183.8 billion. The remaining withholding provisions fetched Rs. 556.275 billion (total of Rs. 2740 billion).
Advance income tax paid was Rs. 1530 billion with returns of Rs. 162 billion. FBR collected only Rs. 126.8 billion (arrears of Rs. 31.8 billion and out of current demand Rs. 95 billion), which is only 2.8% of total income tax collection. The argument by the critics that the huge staff of the IRS contributes negligibly towards total collection with its own efforts is gaining strength each year in the light of numbers contained in the Revenue Division 2024 Year Book and Annual Performance Report (2023-24), discussed in detail in an article published in these columns on January 11, 2025.
The above confirms a negligible share on FBR’s part to tap the actual tax potential as it would have been hurtful to the rich, the majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They pay tax at source as non-filers but are not inclined to file tax returns knowing that amnesties will be there to bail them out. This is the real dilemma faced by Pakistan. The ultra-rich are not sharing the burden of taxes due from them. In the West and the USA, the rich top 10% contribute immensely towards income tax collection. The tax base under indirect taxes (sales tax and excise) in Pakistan is also extremely narrow. About 85 percent of the entire sales tax and federal excise duty comes from the top 100 companies.
We need a paradigm shift in our entire tax system. In our peculiar milieu, a simple, fair, and broad-based tax with lower rates will work provided it has a fool-proof enforcement capacity. There should be a 10% income tax on all kinds of incomes earned by individuals (with an alternate minimum of 2.5% on net wealth exceeding Rs. 50 million), and 20% on companies and other entities. We should impose an 8% sales tax on all goods (for exporters 0% tax). This system will fetch a tax of Rs. 30 trillion from two taxes alone (Rs. 18 trillion in income tax, Rs. 12 trillion as sales tax)! We can further collect Rs. one trillion from customs by levying 5% duty on all items) and Rs. 500 billion from excise duty taxing cigarettes etc.
One hopes that in the coming budget, and second under the present regime, mindless changes in tax codes and procedures will be avoided as these cannot improve tax collection. The real weakness of the tax system lies in poor enforcement which includes inefficiency and corruption. Tax codes are ruthlessly amended each year through the Finance Bill and in between, by way of Supplementary Bills and/or statutory regulatory orders (SROs)—not a solution but part of the problem. The need of the hour is a complete re-engineering of the system and long due structural reforms, which are deferred year after year in the name of short-term compulsions and/or IMF dictates.