One of the more controversial parts of the Federal Budget for 2025–26 unveiled by Finance Minister Muhammad Aurangzeb before Parliament on 10 June is a proposal to grant extraordinary powers of enforcement to officers of the Federal Board of Revenue.
The measures are designed, the finance minister claimed, to increase tax collection. As for tax collection, those who earn a salary paid the country’s highest ever income tax amount in 2024–25 – and this was Rs 314 billion more than the FBR’s own target for that year. However, the FBR’s collection as far as indirect taxes is concerned was far short of its own target. For instance, sales tax collection in 2024–25 was a staggering Rs 935 billion short of the target set by the federal government.
The shortfall in the collection of sales necessarily means that the deficit will have to be made up from that segment of the working population which is already in the tax net – and this is Pakistan’s already-overburdened salaried class. As expected, the various industry and business associations have immediately spoken out against the measures being proposed by the finance minister. Several leading trade bodies have come out and said that the measures which seek to permit FBR officials being posted inside factories producing goods and offices of accounting and tax firms to ensure that they don’t engage in any hanky-panky are “unlawful” and “unconstitutional”. Some associations also used the phrase “at gunpoint” to press home what they think the government intends to do with business and industry in an effort to meet its tax collection target for 2025–26.
The measures, all part of government plans to increase tax revenue, will allow the FBR to freeze bank accounts; deploy its officers on the ground inside factories to check stocks and sales, and do not provide a forum of appeal to taxpayers who are found to violate tax laws under the legislation. The scepticism expressed by business and trade associations is perfectly understandable given that in the past successive governments have used tax-collecting agencies as tools to harass citizens and in particular those who dissent against government policies.
The FBR has also been granted access to the offices of tax advisers and companies that advise corporations and individuals on tax matters
In addition, the FBR itself has often been accused of concentrating too much on being a policeman and an enforcer instead of focusing on one of its primary responsibilities, which is to expand the tax net so that the tax burden can be spread out fairly and equitably and so that tax revenue can increase to meet the government’s ever-increasing collection targets.
Furthermore, why doesn’t the government also widen the tax net to include the actual income from the real estate sector and why is income from agriculture still left untouched? What kind of signal is the government sending to business and industry by giving the powers of a police to FBR officials? Is that supposed to instil any confidence in our trade, business and commerce sectors especially given that the image of a police is not seen as something positive in public perception?
The Karachi and Rawalpindi chambers of commerce and industry have both rejected these proposals as well, saying that the planned proposals and empowering of the FBR would lead to an “environment of harassment and uncertainty”.
The Pakistan Business Council (PBC) has also been vocal in its opposition to the government’s proposals on tax collection and seeking an enhanced and more powerful role for the FBR. It wrote to the finance minister saying that the proposals were “anti-business” and not what was needed for boosting confidence among industry and commerce.
An important observation that the PBC pointed out to the finance minister was that the powers that were now being given to the FBR did not differentiate in any way between entities and individuals in the informal sector who were not paying any tax (because they were not documented) and major corporate and individual taxpayers.
Indeed, the PBC as well as the Karachi and Rawalpindi chambers of commerce and several other trade bodies and associations, are correct in their assessment and apprehensions that such powers given to a federal agency, like many instances in the past – would most likely end up being misused to harass taxpaying companies and individuals.
Giving the FBR the power to assess tax and demand recovery of such assessed tax based on suspicion and without a proper investigation, and making arrests without a warrant on mere suspicion, are indeed draconian, if not extra-legal, measures. The FBR has also been granted access to the offices of tax advisers and companies that advise corporations and individuals on tax matters. This would also ride roughshod over the client/tax adviser relationship.
The general point being made by the trade and business bodies and associations – and it is a completely sound one – is that the government and in particular the finance ministry need to focus their attention on widening the tax net and not on making life hard for those who are already part of the documented and tax-paying sector.
After all, it was the finance minister himself who said recently that Pakistan’s informal economy is at least 70% of its formal economy. It’s now time to start documenting that informal economy so that tax collection targets can be achieved in a realistic and equitable manner.