ByThe Federal Board of Revenue (FBR) Chairman recently acknowledged that current tax rates in Pakistan, particularly sales tax, corporate tax, and income tax, are excessively high. However, he emphasized that reducing these rates is contingent upon broadening the tax base and capturing revenue from all segments of society.
While the FBR and the Finance Ministry have repeatedly stressed the need for tax reforms, the reality on the ground tells a different story. Successive budgets have relied heavily on existing tax sources, particularly indirect taxes, which disproportionately burden the poor. Furthermore, the focus has been on increasing the tax burden on existing taxpayers rather than bringing new taxpayers into the fold.
Challenges and Concerns:
- Over-reliance on Indirect Taxes: Indirect taxes, which account for 75-80% of total tax revenue, have a greater impact on low-income households. The FBR’s continued reliance on these taxes exacerbates income inequality.
- Neglect of Direct Taxes: The government has failed to effectively broaden the tax base by bringing more individuals and businesses into the direct tax net. The Tajir Dost Scheme, aimed at bringing small and medium-sized enterprises into the tax net, has faced significant implementation challenges.
- Unrealistic Revenue Targets: The ambitious revenue targets set in the budget, often with IMF concurrence, are unrealistic and put immense pressure on the FBR to achieve unrealistic collection figures.
- Dependence on External Resources: The government’s reliance on external resources to finance its budget deficit is unsustainable and poses significant risks.
- Erosion of Taxpayer Confidence: The FBR’s aggressive tactics, including the use of coercive measures such as bank account freezes and mobile phone restrictions, are eroding taxpayer confidence and creating a hostile environment for businesses.
- Inadequate Tax Reforms: Despite acknowledging the need for tax reforms, the government has failed to implement meaningful reforms that address the underlying issues and broaden the tax base.
Way Forward:
- Broadening the Tax Base: The FBR must focus on bringing more taxpayers into the formal economy, particularly in the agricultural and informal sectors.
- Reforming the Tax Structure: Shifting the tax burden from indirect to direct taxes is crucial for ensuring equitable and sustainable revenue generation.
- Improving Tax Administration: Strengthening tax administration, improving taxpayer services, and enhancing transparency are essential for building trust and improving compliance.
- Addressing Tax Evasion: The government must effectively address tax evasion and ensure that all taxpayers contribute their fair share.
- Focusing on Economic Growth: Creating a conducive environment for economic growth and job creation will lead to higher incomes and increased tax revenues.
In conclusion, achieving sustainable revenue growth requires a comprehensive approach to tax reform that focuses on broadening the tax base, reducing reliance on indirect taxes, and improving tax administration. The government must prioritize these reforms to ensure long-term fiscal sustainability and economic growth.
